Raoul v. Dunston (In re Dunston)
| Decision Date | 27 February 2020 |
| Docket Number | NO. 5-19-0017,5-19-0017 |
| Citation | 2020 IL App (5th) 190017,439 Ill.Dec. 466,148 N.E.3d 206 |
| Parties | IN RE ESTATE OF James R. DUNSTON, Deceased (Kwame Raoul, in His Official Capacity as Attorney General of the State of Illinois, Plaintiff-Appellant, v. Judith L. Dunston, Individually and as Co-Trustee of the James R. Dunston Trust; Brett A. Dunston, Individually and as Co-Trustee of the James R. Dunston Trust; and Julie A. Ridgeway, Individually and as Co-Trustee of the James R. Dunston Trust, Defendants-Appellees). |
| Court | United States Appellate Court of Illinois |
Kwame Raoul, Attorney General, of Chicago (Jane Elinor Notz, Solicitor General, and Carl J. Elitz, Assistant Attorney General, of counsel), for appellant.
Gregory E. Moredock, of Sorling Northrup, of Springfield, Jonathan E. Strouse, of Harrison & Held, LLP, of Chicago, and Mark J. Ballard, of Black, Ballard, McDonald, P.C., of Mt. Vernon, for appellees.
¶ 1 In this estate case, the plaintiff, Kwame Raoul, in his official capacity as Attorney General of the State of Illinois (Attorney General), appeals the December 10, 2018, order of the circuit court of Williamson County that granted the defendants' motion to dismiss the Attorney General's complaint for unpaid Illinois estate tax. For the following reasons, we affirm.
¶ 3 James R. Dunston passed away on May 2, 2014. Defendant Judith L. Dunston (Judy) is James's surviving spouse. Defendants Brett A. Dunston and Julie A. Ridgeway are James's surviving children. The defendants, collectively, are co-trustees of the James R. Dunston Trust (Trust) that James executed on December 4, 2007. Two additional trusts were established pursuant to the Trust, namely, the "Marital Trust" and the "Family Trust."
¶ 4 A review of the evolution of estate tax law and its application to this case is derived from the pleadings in the record and is as follows. Before 2010, the federal estate tax and the Illinois estate tax had essentially the same exemption amounts. When James executed the Trust in 2007, under both federal law and Illinois law that was in effect at that time, the provisions of the Trust were organized so there would be no estate tax due at the time of James's death. This was the result intended by James and the drafter of the Trust and was a typical estate plan in 2007, as Congress and all states recognized that estate tax should be deferred until the death of the surviving spouse so maximum funds would be available for a surviving spouse to live on. See 26 U.S.C. § 2056 (2006).
¶ 5 However, after 2009, due to changes in the law, the federal exemption amount increased while the Illinois exemption amount remained the same, thereby creating a gap between the two exemptions. Accordingly, part of the Family Trust now needed to qualify for an Illinois marital deduction to create zero Illinois estate tax liability at James's death. Illinois qualified terminable interest property (QTIP) legislation was created to alleviate the dilemmas that were faced by Illinois estate planners due to the differing exemption amounts. When James executed the Trust in 2007, no QTIP election would have been needed to defer Illinois estate tax during Judy's lifetime because an amount equal to the federal exemption was placed in the Family Trust and at that time the federal and Illinois exemption amounts matched. However, because the changes in the law that came into effect before James passed away in 2014 created the divergence between the federal and Illinois exemption amounts, an Illinois QTIP election was needed at the time of James's death in order to achieve the same result of Illinois estate tax being deferred until Judy's death.
¶ 6 When the Trust was executed, the Family Trust contained a provision, specifically a "Lifetime Power of Appointment" exercisable by Judy during her lifetime to distribute the Family Trust to James's children and their spouses (Power). The existence of the Power was without consequence when the Trust was executed in 2007. However, it posed a problem by the time James passed away in 2014 because of the above-cited amendments to the law. As indicated, when James passed away there was a deviation between the federal and Illinois exemption amounts that did not exist when the Trust was executed. Accordingly, an Illinois QTIP election was now needed in order to defer Illinois estate taxes until Judy's death. The law governing QTIP imposed certain conditions that were mandated for a QTIP election to be valid. The Power offended those conditions, thereby rendering invalid the QTIP election that was made on the Illinois estate tax return.
¶ 7 As with many estate documents drafted before the changes in the law, the Trust was not modified or amended after the law changed and before James's death. However, both federal law and Illinois law recognize that corrections to drafting in such documents are often needed, postmortem, to address various estate tax issues. Accordingly, both federal and Illinois law allow disclaimers of offending provisions to correct any deficiencies, thereby bringing documents into compliance with the law while upholding the wishes of decedents.
¶ 8 After James passed away on May 2, 2014, an Illinois estate tax return was prepared on behalf of James's estate (Estate), signed by Judy on May 15, 2015, in her capacity as executor of the Estate, and marked as received by the Attorney General on June 26, 2015. The Illinois return reported a "tentative taxable estate" from the federal return in the amount of $5,050,687.84 and elected a QTIP deduction in the amount of $1,050,687.84. Attached to the return was an "Affidavit [t]o Substantiate [QTIP] Election [f]or Illinois Estate Tax Purposes." The affidavit itemized various assets of the Estate and assigned a value to each, thereby substantiating the QTIP election total of $1,050,687.84. This Illinois QTIP election on the Estate's tax return, if valid, would result in a tentative Illinois taxable estate in the amount of $4 million and no Illinois estate tax being due until Judy's death.
¶ 9 Following an audit, the Attorney General determined that the Estate's Illinois QTIP election did not satisfy the QTIP requirements because the provision in the Family Trust created the Power to appoint property to individuals other than Judy as the surviving spouse. Accordingly, the Attorney General denied the Illinois QTIP election and assessed unpaid Illinois estate tax as of February 2, 2015. On June 20, 2018, the Attorney General filed a four-count complaint against the defendants, claiming personal liability for estate tax trustees, personal liability for estate tax intestate heirs, personal liability for estate tax surviving joint tenant, and personal liability for assets payable on death. The complaint alleged, inter alia , that the Illinois QTIP election made by Judy was invalid and cited section 2056(b)(7)(B)(ii)(II) of the Internal Revenue Code (Federal Code) in support of the contention that, for the Illinois QTIP election to be valid, no person may have the power to appoint any property to any person other than the surviving spouse. 26 U.S.C. § 2056(b)(7)(B)(ii)(II) (2018).
¶ 10 The complaint contended that the prohibition of power of appointment set forth in section 2056(b)(7)(B)(ii)(II) of the Federal Code (id. ) was violated by the following provision of the Family Trust: Accordingly, the complaint alleged that the Illinois QTIP election on the tax return was invalid because of the Power created by this provision. The Attorney General requested the circuit court to, inter alia , find Judy liable for $398,516, which consisted of unpaid Illinois estate tax and the statutory interest accrued thereon through June 22, 2018.
¶ 11 Again, both federal law and Illinois law recognize that corrections to drafting in estate documents are often needed after a decedent dies to address various estate tax issues. To that regard, both federal and Illinois law allow disclaimers of offending provisions to correct any deficiencies. On July 19, 2018, pursuant to section 2-7 of the Probate Act of 1975 (Illinois Probate Act) ( 755 ILCS 5/2-7 (West 2018) ), Judy executed a written disclaimer of the above-referenced Power that had caused the Illinois QTIP election to be denied (Disclaimer). The Disclaimer was effective retroactively to May 2, 2014, the date of James's death.
¶ 12 On July 27, 2018, the defendants filed a motion to dismiss the Attorney General's complaint, in which they alleged, inter alia , that Judy filed the Disclaimer in the circuit court, pursuant to section 2-7(d) of the Illinois Probate Act. Id. § 2-7(d). The motion alleged that the Trust made no other powers of appointment other than that which Judy disclaimed. The motion further alleged that the effect of the Disclaimer is that the Power ceased to exist, thereby bringing the Trust into compliance with Illinois QTIP requirements in that the Trust no longer granted Judy the Power to appoint any part of the property to a person other than the surviving spouse. See 26 U.S.C. § 2056(b)(7)(B)(ii)(II) (2018). Accordingly, the defendants requested the circuit court to, inter alia , dismiss the Attorney General's complaint with prejudice.
¶ 13 On August 8, 2018, the Attorney General filed a motion for leave to file a response instanter to the defendants' motion to dismiss, which the circuit court granted. In its response, the Attorney General contended, inter alia , that the Disclaimer Judy filed was ineffective for Illinois estate tax purposes. The Attorney General indicated that the Illinois Estate and Generation-Skipping Transfer Tax Act (Illinois Estate Act) allows taxpayers to claim a QTIP election for Illinois estate tax purposes. See ...
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Providence Bank & Trust Co. v. Raoul
...value below the Illinois estate taxation threshold ($4 million or less) by making a timely QTIP election. See, e.g. , In re Estate of Dunston , 2020 IL App (5th) 190017, ¶¶ 4-6, 439 Ill.Dec. 466, 148 N.E.3d 206 (describing how changes in the law created a gap between the federal and Illinoi......