West v. Comm'r of Internal Revenue (In re Estate of Manscill)

• Decision Date: 07 April 1992
• Docket Number: Docket No. 32405-86.
• Citation: 98 T.C. 413,98 T.C. No. 30
• Parties: ESTATE OF JOHN D. MANSCILL, DECEASED, FRANCES D. MANSCILL WEST, EXECUTRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

98 T.C. 413

98 T.C. No. 30

ESTATE OF JOHN D. MANSCILL, DECEASED, FRANCES D. MANSCILL WEST, EXECUTRIX, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 32405-86.

United States Tax Court

Filed April 7, 1992.

Decedent died testate.Petitioner claimed the surviving spouse had a qualifying income interest for life in property (QTIP) transferred from the decedent's estate into “Fund B”.Decedent's will provides that the Trustee of Fund B may, with the prior approval of decedent's widow, invade the corpus of Fund B “for the support” of decedent's daughter.

HELD, the Trustee had the power to appoint part of the corpus of Fund B to someone other than the surviving spouse.The surviving spouse does not have a qualifying income interest for life.Petitioner is not entitled to a marital deduction for the property passing to Fund B. Sec. 2056(b)(7)(B)(ii),I.R.C. 1954.Michael W. McGrath and Charles Speed Gray, for petitioner.

Aubrey C. Brown, for respondent.

CHABOT, JUDGE:

Respondent determined a deficiency in Federal estate tax against petitioner in the amount of $302,732.

After a concession by petitioner, the issue for decision is whether “Fund B” established under decedent's will constitutes “qualified terminable interest property”(hereinafter sometimes referred to as QTIP), within the meaning of section 2056(b)(7)(B), ¹ and thus is eligible for the marital deduction.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference.

When the petition was filed in the instant case, Frances Davis Manscill West (hereinafter sometimes referred to as Frances), executrix of the Estate of John Davis Manscill, resided in Mayfield, Kentucky.Decedent's estate was probated in the Probate Court of Graves County, Kentucky.As of the date of his death, decedent was a domiciliary of Mayfield.

John Davis Manscill, decedent, died testate on December 6, 1982.Decedent was survived by his widow, Frances (then 39 years old), and their daughter, Frances Nicole Manscill(hereinafter sometimes referred to as Nicole).Nicole was born on January 25, 1971.

Decedent's will was signed on February 22, 1979.The will was ordered probated by an order dated January 4, 1983.By the January 4, 1983, order, Frances was appointed petitioner's executrix.Sometime after being appointed executrix, Frances remarried and changed her name to Frances Davis Manscill West.

The will designates Nicole as Trustee.The will designates Frances as successor Trustee if Nicole is incapacitated or incapable of serving as Trustee for any reason.

The will (1) directs the payments of the estate's debts, expenses, and taxes, (2) acknowledges Frances' ownership of household furniture, accessories and appliances, and (3) bequeaths to Frances all of decedent's tangible personal property.The will then bequeaths to Nicole, as Trustee, the residue of decedent's estate and directs the Trustee to divide and hold the residue into two separate parts, Fund A and Fund B.The will (article III) states as follows:

(2) The first part shall be an amount equal in value to my adjusted gross estate as finally determined for federal estate tax purposes, less the sum of (a) equivalent exemption as defined below; (b) the amount of any charitable deduction allowed to my estate; (c) the value of all other property interest, included in my gross estate for federal estate tax purposes which pass or have passed to or for the benefit of my wife, FRANCES DAVIS MANSCILL, in such a manner as to qualify for the marital deduction allowed to my estate.Provided, however this amount shall not exceed the maximum marital deduction allowed to my estate as provided in Section 2056 (c) of the Federal Internal Revenue Code, less the amount determined in (c) of the preceding sentence.

(3) The part of my estate as described in (2) above shall be set aside by my Trustee as Fund A.

(4) The second part shall consist of the remaining “Trust Property” or all of the “Trust Property” if the first part is zero (0) or less than zero (0).

(5) The part of my estate described in (4) above shall be known as Fund B.

(6)“Equivalent Exemption” as used in this agreement shall be an amount which would impose a Federal Estate Tax on my estate equal to the sum of (a) the unified credit allowed to my estate as provided in Section 2010 of the Federal Internal Revenue Code, (b) the credit for State death taxes allowed to my estate as provided in Section 2011 of the Federal Internal Revenue Code, and (c) any other credits allowed to my estate.Provided, however this amount shall be reduced by any adjusted taxable gifts made by me, but not to less than zero (0).

FUND A

DISBURSEMENTS OF INCOME

As to Fund A, the will directs the Trustee to pay to Frances, or for her use and benefit if she is under a disability, the entire net income from Fund A in quarterly or more frequent installments.

DISBURSEMENTS OF CORPUS

The will also authorizes Frances, upon giving notice to the Trustee, to withdraw each year from the corpus of Fund A any amount she desires, even to the point of completely exhausting the corpus of Fund A.

FUND B

DISBURSEMENTS OF INCOME

As to Fund B, the will (article III) states as follows:

(17) During her lifetime, the Trustee shall pay to FRANCES DAVIS MANSCILL, or use for her benefit if she should be under any disability, the entire net income from Fund B in quarterly or more frequent installments.Upon the death of FRANCES DAVIS MANSCILL, the remaining unappointed corpus of Fund A and the remaining corpus of Fund B shall be distributed to my daughter, FRANCES NICOLE MANSCILL.

If on Frances's death Nicole is less than 40 years old, then the Trustee is to continue the trust and to use the net income from the trust for the maintenance, support, and education of Nicole.Nicole is to receive partial distributions of the trust assets upon reaching ages 25, 30, and 35, and final distribution at age 40.

DISBURSEMENTS OF CORPUS

The will (article IV) provides as follows:

(1)The Trustee, in her discretion, may disburse from the corpus of Fund B (even to the point of completely exhausting same) such amounts as she deems advisable to support FRANCES DAVIS MANSCILL in substantially the same standard of living to which she was accustomed at the time of my death.It is my desire that the Trustee be liberal in making disbursements from corpus for the benefit of FRANCES DAVIS MANSCILL for my primary concern is for her reasonable support and not for the preservation of the corpus for ultimate distribution to my descendants.

(2) During FRANCES DAVIS MANSCILL's lifetime, the Trustee, with the prior approval of FRANCES DAVIS MANSCILL, may also make disbursements from the corpus of Fund B for the support of my daughter, FRANCES NICOLE MANSCILL.Said disbursements shall be based upon my daughter, FRANCES NICOLE MANSCILL's individual needs.Furthermore, any disbursements from the corpus of Fund B for the benefit of my daughter, FRANCES NICOLE MANSCILL, shall not be taken into account in a subsequent division of corpus.

Frances, in her capacity as executrix, timely filed a Federal estate tax return (Form 706) for petitioner, and elected (on Schedule M) to treat Fund B as a QTIP under section 2056(b)(7).

OPINION

Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.The amount of the tax is determined, in part, by the value of the taxable estate.Sec. 2001(b).Section 2051 defines the value of the taxable estate as the value of the gross estate less deductions provided for in section 2051 through 2056B.Section 2056(a) provides for a “marital deduction” -- the value of the gross estate is to be reduced by the value of, property interests passing to the surviving spouse.Section 2056(b) provides a series of rules generally disqualifying a transfer from eligibility for the marital deduction if the transferred interest is a life estate or other terminable interest.Effective for estates of decedents dying after 1981, section 2056(b)(7)², as added by section 403(d)(1) of the Economic Recovery Tax Act of 1981(hereinafter sometimes referred to as ERTA 1981), Pub. L. 97-34,95 Stat. 302, 305, permits a marital deduction for a QTIP.A QTIP is property in which a decedent transfers to a surviving spouse a “qualifying income interest for life”, if the executor or executrix elects to treat the property as a QTIP.Sec. 2056(b)(7)(B)(i).In general a surviving spouse has a “qualifying income interest for life” if (1) the surviving spouse is entitled to all the income from the property, and (2) no one has a power to appoint any part of the property to any person other than the surviving spouse.Sec. 2056(b)(7)(B)(ii).

Petitioner contends that it is entitled to a marital deduction for the property passing to Fund B. ³Petitioner argues that Fund B is a QTIP as defined in section 2056(b)(7)(B).Petitioner contends Frances has a qualifying income interest for life as defined in section 2056(b)(7)(B)(ii).Petitioner contends that section 2O56(b)(7)(B)(ii)(II), requiring that no person have a power to appoint any part of the property to any person other than the surviving spouse, is met.Petitioner contends that the Trustee does not have the power to appoint the corpus of Fund B to anyone but Frances because the corpus of Fund B can be distributed for the benefit of Nicole only with Frances' prior approval.

Respondent argues that petitioner is not entitled to a marital deduction for the property passing to Fund B, because Fund B is not a QTIP.Respondent contends that Frances does not have a qualifying income interest for life because the Trustee, with the approval of Frances, has the power to appoint the corpus of Fund B to Nicole, and this power violates the requirements of section 2O56(b)(7)(B)(ii)(II).Respondent does not contend that Fund B fails to satisfy any other of...