Reynolds v. Reynolds

• Decision Date: 01 February 2002
• Citation: Reynolds v. Reynolds, 837 So.2d 847 (Ala. Civ. App. 2002)
• Parties: John P. REYNOLDS, Jr.; Virginia Yvonne Reynolds; Peggy R. Watler; and Polly Gilley v. Roberta REYNOLDS.
• Court: Alabama Court of Civil Appeals

837 So.2d 847

John P. REYNOLDS, Jr.; Virginia Yvonne Reynolds; Peggy R. Watler; and Polly Gilley v.Roberta REYNOLDS.

2000622.

Court of Civil Appeals of Alabama.

February 1, 2002.

Certiorari Denied June 14, 2002.

M. Mort Swaim, Foley, for appellantsPeggy R. Watler and John P. Reynolds, Jr.

Gregory L. Leatherbury, Jr., Bryan A. Thames, and Christopher M. Gill of Hand

Arendall, L.L.C., Foley, for appellant the estate of John P. Reynolds, Sr., deceased.

John Earle Chason of Chason & Chason, P.C., Bay Minette, for appellee.

Alabama Supreme Court 1010954.

PER CURIAM.

John P. Reynolds, Sr., died on November 22, 1999, leaving four children—John P. Reynolds, Jr., Virginia Yvonne Reynolds, Peggy R. Watler, and Polly Ann Gilley(hereinafter collectively referred to as "the children")—and a surviving spouse, Roberta Reynolds.

On December 15, 1999, Reynolds's last will and testament was admitted to probate.The will provided, in pertinent part, that after specific bequests and administration expenses and claims had been paid, the remaining estate passed through the residuary portions of the will.The will provided for the creation of a qualified-terminable-interest-property trust ("QTIP trust"), with Roberta as the income beneficiary.The QTIP trust was to be funded with one-half of Reynolds's estate.The other one-half of Reynolds's estate was to be divided among the children.Upon Roberta's death, the remainder of the assets funding the QTIP trust are to be divided among the children.

A QTIP trust is an estate-planning device that defers, rather than forgives, tax.Section 2056(a) of the Internal Revenue Code provides that the estate is allowed an estate-tax deduction for the value of any interest in property that passes or has passed from the decedent to the surviving spouse, commonly known as the marital deduction.For a QTIP trust to qualify for the marital deduction, the surviving spouse must be entitled to the entire income of the trust for life, the income must be paid at least annually, no person can have the power to appoint any part of the property to any person other than to the surviving spouse, and the executor must elect to qualify the property for the estate-tax marital deduction.§ 2056(b), I.R.C.The QTIP trust established in Reynolds's will met these requirements, and his executor made an election to qualify Roberta's QTIP trust for the marital deduction.

A QTIP trust is useful in second marriages, as in the instant case, where the testator wants to provide the surviving spouse with an income for life, while paying as little tax as possible so as to maximize the assets available to support the surviving spouse, with the remainder to go to the testator's children from the first marriage upon the surviving spouse's death.The remainder beneficiaries will be assured of receiving the trust property at the death of the surviving spouse rather than having to rely on the surviving spouse to give the property to the remaindermen.

On February 14, 2000, Roberta petitioned for an elective share, pursuant to § 43-8-70(a),Ala.Code 1975.The elective share statute allows a surviving spouse to choose between taking that which is provided in his or her spouse's will or, instead, to elect to take the statutory amount, not to exceed one-third of the deceased's estate.Roberta moved that the case be removed from the probate court to the Circuit Court of Baldwin County, and her motion was granted.

After conducting a hearing, the trial court determined that the value of Reynolds's gross estate, before deducting any specific bequests, administrative expenses, or claims, was $6,564,589.Specific bequests amounted to $240,674.Administrative expenses and claims amounted to $354,920.The trial court refused to deduct estate tax in determining the net value of Reynolds's estate for purposes of computing Roberta's elective share.The court determined that Roberta's elective share was $2,065,703.67, i.e., one-third of Reynolds's net estate.The court determined that the QTIP trust was to be funded with $2,978,755.50, which was one-half of Reynolds's residuary estate (i.e., that portion of the estate remaining after the deduction of certain administrative expenses, claims, and the specific bequests set out in the will).For purposes of valuing the property to be used to satisfy Roberta's elective share, the court also accepted the one-half valuation factor set out in § 43-8-75 in valuing Roberta's present interest in the QTIP trust and valued her interest at $1,489,377.75.The court held that because the present value of the QTIP trust ($1,489,377.75) was less than the elective share ($2,065,703.67), then Roberta should receive the benefits of the QTIP trust plus the amount by which the amount of the elective share exceeded the amount of the QTIP trust.The children appealed.The supreme court transferred the case to this court pursuant to § 12-2-7(6),Ala.Code 1975.

The children argue that the trial court erred in calculating Roberta's elective share by failing to deduct estate taxes from Reynolds's gross estate before calculating the elective share.They also argue that the trial court improperly refused to vary from the rebuttable presumption of "one-half" in § 43-8-75 in valuing Roberta's interest in the QTIP trust.

The parties agree that the exact amount of Roberta's elective share and her interest in the QTIP trust cannot be precisely calculated, because of uncontrollable factors, such as the expenses of the estate and controversies unrelated to this appeal.However, it is the method of determining those amounts that is at issue.

Section 43-8-70 provides:

"(a) If a married person domiciled in this state dies, the surviving spouse has a right of election to take an elective share of the estate.The elective share shall be the lesser of:

"(1) All of the estate of the deceased reduced by the value of the surviving spouse's separate estate; or

"(2) One-third of the estate of the deceased.

"(b) The `separate estate' of the surviving spouse shall include:

"(1) All property which immediately after the death of the decedent is owned by the spouse outright or in fee simple absolute;

"(2) All legal and equitable interests in property the possession or enjoyment of which are acquired only by surviving the decedent; and

"(3) All income and other beneficial interests:

"a.Under a trust;

"b.In proceeds of insurance on the life of the decedent; and

"c.Under any broad-based nondiscriminatory pension, profit-sharing, stock bonus, deferred compensation, disability, death benefit or other such plan established by an employer.

"(c) If a married person not domiciled in this state dies, the right, if any, of the surviving spouse to take an elective share in property in this state is governed by the law of the decedent's domicile at death."

The supreme court held in Brakefield v. Hocutt,779 So.2d 1165, 1166(Ala.2000):

"Brakefield argues that in addition to the homestead allowance, exempt property, and family allowance, the circuit court should have deducted the allowable claims against the estate before determining [the widow]'s elective share....As this Court explained in Barksdale v. Barksdale,551 So.2d 1006(Ala.1989), the proper method of calculating the surviving spouse's elective share is to deduct the homestead allowance, exempt property, family allowance, `and allowed claims against the estate' from the decedent's total estate, then divide the remaining amount by three.551 So.2d at 1008.To hold otherwise would exempt the surviving spouse's elective share from, and give it priority over, the claims of creditors and other allowable claims against the estate, notwithstanding that the statute providing for the elective share, unlike the statutes providing for the homestead allowance [§ 43-8-110], exempt property [§ 43-8-111], and family allowance [§ 43-8-112], does not manifest an intention to do so.SeeAla.Code 1975, § 43-8-70(a)."

In Brake-field,the court held that the circuit court had erred in calculating the surviving spouse's elective share, by failing to deduct allowed claims against the estate.The court noted that the Legislature has specifically exempted the homestead allowance, exempt property, and the family allowance from the elective-share calculation.The supreme court held that "allowed claims against the estate"¹ must be subtracted before the elective share is calculated.However, this does not mean that the supreme court intended for a spouse's elective share to be computed after deducting federal estate tax.

The United States Court of Appeals for the Fifth Circuit held that under Alabama law, estate taxes are not a preferred debt of the decedent's estate because they arise only upon the decedent's death and that such taxes do not qualify as debt that should be deducted before the spouse's share on dissent from the will (the precursor to the elective share) is calculated.Cox v. United States,421 F.2d 576(5th Cir.1970).The court in Cox stated:

"[Ala.Code 1940(Recomp.1958), tit. 51, § 449,] has obviously placed Alabama among those states following the general rule that the burden of the estate taxes shall be on the general estate rather than being apportioned among the beneficiaries.

"The government, however, contends that in this case because the wife dissented from the will and took her intestate share she was a residuary legatee and therefore chargeable with her proportionate share of the estate tax.We think this argument is without merit.

"The obvious reason for the general rule of nonapportionment of estate tax burdens is to protect specific legacies from reduction due to estate taxes.Alabama has chosen to follow this rule.Title 51, § 449.Further, under Alabama law the widow's marital share upon dissent from her husband's will is treated with greater protection than specific bequests which lapse if necessary when she elects to take against the will.Merchants' National Bank of

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