Mazzola v. Myers
| Decision Date | 14 May 1973 |
| Parties | Mary Kelly MAZZOLA v. Frederick M. MYERS, Jr., Executor, et al. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Thomas E. Goode and John J. Sullivan, Boston, for Mary Kelly mazzola.
Thomas C. Cameron, Boston, for Patricia Bilodeau.
Frederick M. Myers, Jr., Pittsfield, for Frederick M. Myers, Jr., executor, and others.
Before TAURO, C.J., and REARDON, QUIRICO, KAPLAN and WILKINS, JJ.
This bill for declaratory relief, which has been presented to us on a case stated, seeks a resolution of a controversy concerning the funding and administration of a purported marital deduction trust provided for under the will of John J. Kelly (Kelly). The case was reserved and reported without decision by the single justice. Kelly died in May, 1970, leaving a widow, their two sons and four daughters, all of whom are of full age. 1
THE KELLY ESTATE.
Kelly left a gross estate which his executor has valued for Federal estate tax purposes at more than $4,280,000. The executor determined the value of the adjusted gross estate for Federal estate tax purposes at approximately $3,788,000 and the value assigned to the marital deduction at approximately.$1,894,000.
Ninety-five per cent of the assets in Killy's gross estate consisted of stock ownership interests in family corporations. These corporations, many of which bore the name Kelly, were engaged in a variety of business activities, principally in Berkshire County. 2 These enterprises included the operation of the Brodie Mountain ski area in New Ashford; the manufacture of wooden pallets used in shipping; the wholesale and retail sale of lumber; the operation of sawmills in Bellows Falls, Vermont, and White Plains, New York; the operation of a bar and of a diner; and the ownership of residential and commercial real estate. In addition, these corporations, speaking collectively, owned substantial tracts of timber land and timbering rights in western Massachusetts, southern and central Vermont and eastern New York. Steps have been taken to merge all the corporations into a single new corporation (Kelly Enterprises, Inc.). The assets proposed to be transferred to the new corporation had a total value (based on values shown in the Federal estate tax return) of approximately ninety-two per cent of Kelly's gross estate. 3
As a group the Kelly corporations have, and continuously have had, substantial bank borrowings under terms which require the various corporations to indorse each other's obligations and prohibit the declaration of dividends. The long-term indebtedness of the Kelly corporations exceeds $1,000,000, requiring annual payments toward principal and interest of over $300,000. None of the Kelly corporations has paid dividends, except for $20,000 and $18,000 paid by one corporation in 1968 and 1969, respectively. 4 The executor believes that 'over a period of years' the new corporation can be so operated as to produce income for its stockholders.
THE KELLY WILL.
Kelly provided in his will, 5 which was executed in June, 1962, that, after payment of debts and expenses, his assets should be divided into two parts. With one part, which he characterized as the 'Wife's Part,' he undertook to create a marital deduction trust (the marital trust). Under the terms of the marital trust the net income is payable to his wife at least quarterly during her life, and principal may be paid to her in the discretion of the trustees. His wife was given 'an unrestricted power of appointment' by will over the principal and accrued and unpaid income in the marital trust. The language of the will describing (a) the method for determining the amount to be placed in the marital trust, (b) the circumstances under which the trustees could make payments of principal to the wife, and (c) the wife's power of appointment is set forth in the margin. 6 All parties concur that the marital trust is a 'pecuniary bequest' 7 and that the will provides for a 'life income with power of appointment' trust.
The Kelly will contains provisions designed to take advantage of the maximum deduction available on his Federal estate tax return with respect to transfers to his surviving spouse. The will excepts the assets of the marital trust from the operation of the will's spendthrift clause. 8 It further provides that in the event of 'simultaneous' death, Kelly's wife should be deemed to have survived him. All estate and inheritance taxes are to be paid from estate assets other than those going to the marital trust. And, most significantly, Article XIII of Kelly's will provides that '(a)nything herein contained to the contrary notwithstanding, no power or authority given to my Trustees or Executors shall be so broad as to prevent my estate from receiving full advantage of the federal estate tax marital deduction, and any power or authority herein granted which would so affect my estate shall be restricted and limited to the extent required to preserve the said marital deduction.'
The will provides that the other part of the residue (called the 'Remainder Part') should be held in trust with the income payable to his wife during her life and that, upon her death, the principal should be divided so that each Kelly son would receive 38.5%; each of his four daughters would receive 5%; and 3% would be divided among certain loyal employees. In default of the exercise of the power of appointment by the wife, the remaining principal in the marital trust is to be distributed as part of the 'remainder' trust.
Kelly made it very clear that he wished to preserve the family businesses within the family, most particularly under the control of his executor and trustees during the lifetime of his wife, if she survived him, and following her death under the control of his sons and one daughter. His will provides that '(i)t is my desire that my Executors and Trustees shall continue all of the businesses carried on by me at my death, and that these businesses shall remain in the Kelly family.' In the event of the sale of the stock of any family corporation, the will expresses an 'earnest desire that my children shall be given every opportunity to purchase such stock at a fair price.' On the question of the exercise of the power of appointment given to his wife, Kelly provided, 'I earnestly recommend to, and request of, my said wife, although I do not so require, that in exercising the power of appointment herein granted, she adopt the plan of distribution hereafter set forth in default of appointment.' Other language is set forth in the margin manifesting Kelly's unmistakable confidence in his trustees and his fervent desire that the family businesses be carried on by the trustees, with advice from his sons, as if he were still alive and without disruption. 9 He specifically authorized his executor and trustees to retain all securities and other property owned by him at the time of his death, 'even though such securities or property may not produce any income or may be a wasting asset.'
ADMINISTRATION OF THE ESTATE AND TRUST.
The executor has endeavored to sell the family corporations as a unit, with or without Brodie Mountain, but he has been unsuccessful. He believes that the sale of assets in the Kelly estate sufficient to fund the marital trust with other assets could at this time be made only at values substantially below the values of those assets reported for Federal estate tax purposes. The trustees plan to hold, as part of the corpus of the marital trust, shareholdings in the family corporations (or in the new merged corporation). 10
Using the proceeds of the sale of certain assets and funds borrowed from some of the family corporations, the estate has paid approximately $115,000 toward a Federal estate tax obligation (based on the return as filed) of approximately $586,000 (after a credit for State inheritance taxes of about $92,000). If the estate does qualify for the marital deduction, the Federal estate tax (based on values shown in the estate tax return) will be approximately $1,000,000 less than if the estate does not so qualify. Of the State inheritance tax obligation of about $175,000 on present interests, approximately $85,000 has been paid. 11
No income of significance has been earned by the estate or the trust since Kelly's death. There has, therefore, been no significant income distributed to the plaintiff. The estate has made substantial funds available to the plaintiff by means of payments from family corporations. These payments have been recorded by the corporations as loans to the executor. 12
THE ISSUES FOR DECISION.
The circumstances present the dilemma that it may not be possible to comply both with Kelly's direction that the family enterprises be retained by his fiduciaries and with his direction that the marital trust qualify for the marital deduction.
The plaintiff argues that those provisions of Federal law which set forth the conditions which must exist in order to qualify the marital trust for the Federal marital deduction must be read into the powers and duties of Kelly's executor and trustees. She specifically claims that, although the provisions of the marital trust require income to be paid to the plaintiff, if the marital trust is funded with nonincome producing securities, the estate will not qualify for the marital deduction and that, because the overriding purpose of the Kelly will is to take advantage of the marital deduction, the executor and trustees must take steps to fund the marital trust with income producing assets. The fiduciaries on the other hand, assert that they can comply with lawful Federal requirements by funding the marital trust with stock in the family corporations. They deny that a marital deduction trust must be funded with income producing assets. The fiduciaries contend further that if the choice must be made between preserving the family...
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