Old Kent Bank and Trust Company v. United States

• Citation: 362 F.2d 444
• Decision Date: 15 June 1966
• Docket Number: No. 16438.,16438.
• Parties: OLD KENT BANK AND TRUST COMPANY, Mildred M. Campbell and Charles R. Sligh, Jr., co-executors of the estate of Kenneth H. Campbell, deceased, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant,
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

362 F.2d 444 (1966)

OLD KENT BANK AND TRUST COMPANY, Mildred M. Campbell and Charles R. Sligh, Jr., co-executors of the estate of Kenneth H. Campbell, deceased, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant,

No. 16438.

United States Court of Appeals Sixth Circuit.

June 15, 1966.

Benjamin M. Parker, Dept. of Justice, Washington, D. C., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Attys., Dept. of Justice, Washington, D. C., on brief; Harold D. Beaton, U. S. Atty., Grand Rapids, Mich., of counsel, for appellant.

Peter Van Domelen, Grand Rapids, Mich., Warner, Norcross & Judd, Grand Rapids, Mich., on brief, for appellees.

Before PHILLIPS and EDWARDS, Circuit Judges, and WILSON, District Judge.^*

PHILLIPS, Circuit Judge.

This appeal presents two questions:

(1) Is a federal court, in determining the marital deduction to which the estate of a decedent is entitled for federal estate tax purposes, conclusively bound by the construction of decedent's will adopted by a Michigan Probate Court in a decision from which no appeal was taken?

(2) If not, what is the correct construction of the will here involved?

A deficiency was asserted against the co-executors ("executors") on the ground that the marital deduction claimed on the federal estate tax return was excessive under § 812(e) of the Internal Revenue Code of 1939, as amended.¹ The case was tried in the District Court upon a written stipulation of facts without oral testimony. The District Court disagreed with the Commissioner and entered judgment in favor of the executors in the sum of $38,358.40, plus $6,923.42 interest.

The District Court held that the construction of the will adopted by the Probate Court is conclusively binding in determining the marital deduction. For a detailed statement of the facts, including the complete texts of the will and the two codicils thereto, and pertinent parts of the trust instrument involved, reference is made to the opinion of the District Court, which is reported at 232 F.Supp. 970.

Kenneth H. Campbell, a resident of Ottawa County, Michigan, died testate May 18, 1954. His widow survived him.

Paragraph V of his will provided:

"If my wife, MILDRED M. CAMPBELL, shall survive me, I give, devise and bequeath to her outright so much of the rest, residue and remainder of my estate, whether real, personal or mixed, of which I shall die seized or possessed, or to which I may be entitled in any manner at my death, or over which I may have any power of appointment, and wherever the same may be situated, as will equal forty per cent (40%) thereof before deduction of taxes, claims and administration expenses."

At the time of the death of the testator, there was in effect an inter vivos trust established by the decedent under a trust agreement executed June 8, 1943. The provisions of the trust agreement reserved the life income to the decedent so long as he lived and also gave decedent the right to withdraw any part of the securities of the trust at any time or to terminate the trust after one year. Consequently, the trust assets, valued at $341,176.60, were included in the taxable estate of the decedent for federal estate tax purposes. The trust assets were not a part of the probate estate however, since they passed under the provisions of the trust instrument and not under the will.

Under Paragraph V of the will, the widow was entitled to forty per cent of the "estate." It is undisputed that forty per cent of the "estate" qualifies for the marital deduction. The problem for construction is whether the word "estate" as used in Paragraph V refers only to the probate estate or whether it also includes trust assets which passed under the inter vivos trust and not under the provisions of the will.

The Probate Court construed the word "estate" in Paragraph V to include the trust assets.

The District Court said:

"The provisions of Paragraph V, as the plaintiffs admit in their brief, may conceivably be subject to more than one interpretation. For although the widow\'s legacy is to be satisfied out of the probate assets, the question arises as to whether the amount of the legacy is to be computed by reference to the probate assets alone, or by reference to other assets of the decedent as well. If the amount of the bequest is computed by reference to the probate assets alone, the sum passing to the widow under Paragraph V is $117,688.85. If the amount of the widow\'s legacy is computed by reference to both the probate assets and the trust assets, the sum passing to the widow under Paragraph V is $254,159.49.

"The construction placed upon Paragraph V, therefore, makes an enormous difference not only in the amount of the probate assets passing to the widow, but also in the amount of the residue, if any, available for distribution to the residual beneficiaries under Paragraph VI of the decedent\'s will.

* * * * * *

"The Ottawa County Probate Court, as I have said in the recitation of facts, construed the will to mean that the word `estate\' as used in Paragraph V of said will, included the trust assets, and, therefore, the sum of $254,159.49 passed to the widow by reason of the legacy of Paragraph V.

"Paragraph V itself merely prescribes a formula by which the amount of a general legacy to the surviving widow can be determined. So, even though the widow\'s legacy is to be satisfied out of the probate assets, there is still a question of whether or not the amount of legacy is to be computed by reference to the amount of the probate assets alone, or by reference to other assets of the decedent as well. This precise question, however, was answered when the Ottawa County Probate Court decided that the word `estate\' as used in Paragraph V of the decedent\'s will should include the non-probate, or trust assets."

The proceedings in the Probate Court were initiated prior to the filing of the claim for refund and subsequent to the filing of the federal estate tax return. The executors submitted to the Probate Court a petition dated August 28, 1956, captioned "Petition for Construction of Will," praying for an order to the effect that the assets of the inter vivos trust should be included in the term "estate" in computing the amount of the bequest to the widow under Paragraph V. The petition for construction contained these averments:

"9. Petitioners are informed and believe that * * * the property constituting said inter vivos trust * * * is a part of his decedent\'s estate, as that term is used, in Paragraph V of said Will.

"10. It is petitioner\'s opinion that in computing the amount of the specific bequest to Mildred M. Campbell under said Paragraph V, the assets of said inter vivos trust should be included."

Waivers of notice and consents to the petition were filed by the three residuary legatees. The waiver filed on behalf of The Kenneth H. Campbell Foundation for Neurological Research, one of the residuary legatees, was executed by a member of the same law firm which represented the executors in the proceedings for construction of the will. The waivers of the other two residuary legatees were signed by them personally, without appearance of counsel. All three consents contained language to the effect that the residuary legatees waived further notice of the proceeding and "do hereby consent to the granting of said petition forthwith."

Without conducting any hearings on the petition, the Probate Court entered an order placing the construction on the will which was sought by the executors and consented to by the residuary legatees. The order is as follows:

"STATE OF MICHIGAN

"THE PROBATE COURT FOR THE COUNTY OF OTTAWA

"At a session of said Court held on the 17th day of October, A.D. 1956.

"Present: Hon. Frederick T. Miles, Probate Judge.

"In the Matter of the Estate of

KENNETH H CAMPBELL, No. 25073 Deceased.

"On reading and filing the petition of The Michigan Trust Company, Mildred M. Campbell, and Charles R. Sligh, Jr., Co-Executors of the Estate of Kenneth H. Campbell, Deceased, praying for construction of the Will of said deceased, and notice of hearing thereon having been waived, and

"It appearing to the Court after examination of said petition and the Will of said deceased that some question exists as to whether the word `estate\' as used in Paragraph V of said Will was intended to include assets held by The Superior National Bank and Trust Company under a trust agreement with said deceased, and

"It further appearing to the Court that if the word `estate\' as used in said Paragraph V is construed to include said trust assets, that nothing will pass under Paragraph VI of said Will to Malcolm G. Campbell, and The Kenneth H. Campbell Foundation For Neurological Research, and

"It further appearing to the Court that the correct construction of said Will, in the light of the circumstances set forth in said petition, requires that the word `estate\' as used in Paragraph V of said will include said trust assets, the Court so finds, and orders that said Will be so construed.

(s) Frederick T. Miles Judge of Probate."

1) Effect of Decision of Probate Court in Determining Amount of Marital Deduction.

It is well settled that:

"The right to succeed to the property of the decedent depends upon and is regulated by state law (Knowlton v. Moore, 178 U.S. 41, 57 20 S.Ct. 747, 44 L.Ed. 969), and it is obvious that a judicial construction of the will by a state court of competent jurisdiction determines not only legally but practically the extent and character of the interests taken by the legatees." Uterhart v. United States, 240 U.S. 598, 603, 36 S.Ct. 417, 418, 60 L.Ed. 819.

To like effect see Helvering v. Stuart, 317 U.S. 154, 161, 63 S.Ct. 140, 87 L.Ed. 154; Blair v. Commissioner of Internal Revenue, 300 U.S. 5, 9, 57 S.Ct. 330, 81 L.Ed. 465; Freuler v. Helvering, 291 U.S. 35, 43-45, 54 S.Ct. 308, 78 L.Ed. 634.

The legislative history of the Revenue Act of 1948 relating to the...