Bandy v. Clancy
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Opinions
BATTAGLIA, J.
“The avoidance of taxes is the only intellectual pursuit that still carries any reward.” — John Maynard Keynes
“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”1— Justice George Sutherland
Acclaimed author Thomas L. Clancy, Jr., (“Decedent” and “Testator”) died in October of 2013, survived by his second wife, Alexandra M. Clancy (“Mrs. Clancy”) and a minor child by that marriage, as well as four adult children (“The Older Children”) from Mr. Clancy’s first marriage. Mr. Clancy died, [580]*580leaving a will, as well as various amendments; the issue before us involves the interpretation of Mr. Clancy’s Will, as amended by a Second Codicil, with respect to not only the payment of federal estate taxes, but also to the question of upon which beneficiaries the burden of such taxes should be placed at the time of Mr. Clancy’s death.2
Federal estate taxes may be imposed on a decedent’s real and personal property and any property interests3 in excess of five million dollars, an amount adjusted annually since 2011 for the “cost of living”,4 26 U.S.C. § 2010(c)(3); the [581]*581threshold for the imposition.of Federal estate taxes in 2015 was $5,430,000.5 Federal estate tax is calculated on a graduated basis, on the value of the estate above the threshold, starting at 18% for the first ten thousand dollars.6 Which [582]*582beneficiaries, if any, are obligated to pay a portion or all of the federal estate taxes is a matter of State law, Riggs v. Del Drago et al., 317 U.S. 95, 97-98, 63 S.Ct. 109, 110, 87 L.Ed. 106, 110-11 (1942), and, in Maryland, may be provided for under the Will.7 Md. Code Tax Gen. § 7-308(k).
[583]*583Deductions available to reduce the federal estate tax burden include expenses and indebtedness,8 certain uncompensated losses,9 transfers of property for public, charitable and religious uses 10 and the marital deduction,11 all of which reduce the taxable estate by the value of the property allocated to the deduction.12 With respect to the marital deduction, Congress in 1948 enacted a mechanism to reduce taxes on property transferred upon death to a surviving spouse. Revenue Act of 1948, Pub. L. No. 80-471, 62 Stat. 110, 117 (1948). At its inception, the marital deduction essentially excluded the lesser of the value of property transferred to the surviving spouse from the taxable estate or one half of the adjusted gross estate.13 Changes to the computation of the marital deduction occurred over the years but the most significant for our purposes occurred in 1981 through the Economic Recovery Tax Act, under which the marital deduction was increased by enabling the total value of an estate to be transferred to a surviving spouse without adverse federal estate tax consequences. Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172 [584]*584(1981). See also George M. Schain, Marital Trust v. QTIP: Advice for Estate Planners, 49 Mo. L. Rev. 741 (1984).
Essentially, then, an estate can avoid adverse tax consequences upon the death of the testator through the use of the marital deduction, because the marital deduction “reflects a strongly held policy that it is inappropriate to assess transfer taxes on transfers of property between spouses.” William M. McGovern, et al., Wills, Trusts and Estates Including Taxation and Future Interests 719 (4th ed. 2010). Federal estate taxes may be reduced when property is transferred to the surviving spouse upon the death of the decedent, but the value of the property conveyed that remains at the time of the death of the surviving spouse is subject to federal estate tax.14 26 U.S.C. § 2044. See also Angela M. Vallario, The Fundamentals of Estate Planning 251 (2012).
To qualify for the marital deduction, the property must be that which would have been includable in the gross estate of the decedent and which passes, or has passed, to the surviving spouse by operation of law or otherwise.15 26 U.S.C. § 2056(a). [585]*585“Terminable” property interests, interests given to a surviving spouse for a limited time, however, do not qualify for the marital deduction, unless the interest qualifies as one of the exceptions provided in Section 2056 of the Internal Revenue Code,16 including the Qualified Terminable Interest Property (QTIP), 26 U.S.C. § 2056(b)(7), or that property:
(I) which passes from the decedent,
(II) in which the surviving spouse has a qualifying income interest for life, and
(III) to which an election!17] under this paragraph applies.
26 U.S.C. § 2056(b)(7)(B)(i). To constitute a “qualifying income interest for life” the terms of the property transfer must provide that:
(I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct!18] interest for life in the property, and
(II) no person has a power to appoint any part of the property to any person other than the surviving spouse. [586]*586Subclause (II) shall not apply to a power exercisable only at or after the death of the surviving spouse. To the extent provided in regulations, an annuity shall be treated in a manner similar to an income interest in property (regardless of whether the property from which the annuity is payable can be separately identified).
26 U.S.C. § 2056(b)(7)(B)(ii). Treatment of property as QTIP property requires that the executor elect the property for treatment as QTIP property on the federal tax return for the estate, a decision that is irrevocable. 26 U.S.C. § 2056(b)(7)(B)(v).
Property elected for QTIP treatment may qualify for the marital deduction, whether it is transferred outright or placed in a trust. Tax Reg. § 20.2056(a)-l.
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BATTAGLIA, J.
“The avoidance of taxes is the only intellectual pursuit that still carries any reward.” — John Maynard Keynes
“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”1— Justice George Sutherland
Acclaimed author Thomas L. Clancy, Jr., (“Decedent” and “Testator”) died in October of 2013, survived by his second wife, Alexandra M. Clancy (“Mrs. Clancy”) and a minor child by that marriage, as well as four adult children (“The Older Children”) from Mr. Clancy’s first marriage. Mr. Clancy died, [580]*580leaving a will, as well as various amendments; the issue before us involves the interpretation of Mr. Clancy’s Will, as amended by a Second Codicil, with respect to not only the payment of federal estate taxes, but also to the question of upon which beneficiaries the burden of such taxes should be placed at the time of Mr. Clancy’s death.2
Federal estate taxes may be imposed on a decedent’s real and personal property and any property interests3 in excess of five million dollars, an amount adjusted annually since 2011 for the “cost of living”,4 26 U.S.C. § 2010(c)(3); the [581]*581threshold for the imposition.of Federal estate taxes in 2015 was $5,430,000.5 Federal estate tax is calculated on a graduated basis, on the value of the estate above the threshold, starting at 18% for the first ten thousand dollars.6 Which [582]*582beneficiaries, if any, are obligated to pay a portion or all of the federal estate taxes is a matter of State law, Riggs v. Del Drago et al., 317 U.S. 95, 97-98, 63 S.Ct. 109, 110, 87 L.Ed. 106, 110-11 (1942), and, in Maryland, may be provided for under the Will.7 Md. Code Tax Gen. § 7-308(k).
[583]*583Deductions available to reduce the federal estate tax burden include expenses and indebtedness,8 certain uncompensated losses,9 transfers of property for public, charitable and religious uses 10 and the marital deduction,11 all of which reduce the taxable estate by the value of the property allocated to the deduction.12 With respect to the marital deduction, Congress in 1948 enacted a mechanism to reduce taxes on property transferred upon death to a surviving spouse. Revenue Act of 1948, Pub. L. No. 80-471, 62 Stat. 110, 117 (1948). At its inception, the marital deduction essentially excluded the lesser of the value of property transferred to the surviving spouse from the taxable estate or one half of the adjusted gross estate.13 Changes to the computation of the marital deduction occurred over the years but the most significant for our purposes occurred in 1981 through the Economic Recovery Tax Act, under which the marital deduction was increased by enabling the total value of an estate to be transferred to a surviving spouse without adverse federal estate tax consequences. Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172 [584]*584(1981). See also George M. Schain, Marital Trust v. QTIP: Advice for Estate Planners, 49 Mo. L. Rev. 741 (1984).
Essentially, then, an estate can avoid adverse tax consequences upon the death of the testator through the use of the marital deduction, because the marital deduction “reflects a strongly held policy that it is inappropriate to assess transfer taxes on transfers of property between spouses.” William M. McGovern, et al., Wills, Trusts and Estates Including Taxation and Future Interests 719 (4th ed. 2010). Federal estate taxes may be reduced when property is transferred to the surviving spouse upon the death of the decedent, but the value of the property conveyed that remains at the time of the death of the surviving spouse is subject to federal estate tax.14 26 U.S.C. § 2044. See also Angela M. Vallario, The Fundamentals of Estate Planning 251 (2012).
To qualify for the marital deduction, the property must be that which would have been includable in the gross estate of the decedent and which passes, or has passed, to the surviving spouse by operation of law or otherwise.15 26 U.S.C. § 2056(a). [585]*585“Terminable” property interests, interests given to a surviving spouse for a limited time, however, do not qualify for the marital deduction, unless the interest qualifies as one of the exceptions provided in Section 2056 of the Internal Revenue Code,16 including the Qualified Terminable Interest Property (QTIP), 26 U.S.C. § 2056(b)(7), or that property:
(I) which passes from the decedent,
(II) in which the surviving spouse has a qualifying income interest for life, and
(III) to which an election!17] under this paragraph applies.
26 U.S.C. § 2056(b)(7)(B)(i). To constitute a “qualifying income interest for life” the terms of the property transfer must provide that:
(I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct!18] interest for life in the property, and
(II) no person has a power to appoint any part of the property to any person other than the surviving spouse. [586]*586Subclause (II) shall not apply to a power exercisable only at or after the death of the surviving spouse. To the extent provided in regulations, an annuity shall be treated in a manner similar to an income interest in property (regardless of whether the property from which the annuity is payable can be separately identified).
26 U.S.C. § 2056(b)(7)(B)(ii). Treatment of property as QTIP property requires that the executor elect the property for treatment as QTIP property on the federal tax return for the estate, a decision that is irrevocable. 26 U.S.C. § 2056(b)(7)(B)(v).
Property elected for QTIP treatment may qualify for the marital deduction, whether it is transferred outright or placed in a trust. Tax Reg. § 20.2056(a)-l. A properly structured QTIP trust, one that meets the requirements of Section 2056(b)(7)(B), qualifies the property in trust for inclusion in the marital deduction, yet allows the testator to specify a different beneficiary for the remainder of the QTIP trust assets upon the death of the surviving spouse. 26 U.S.C § 2056(b)(7)(B)(i)-(ii). See also Vallario, supra, at 261. The QTIP Trust qualifies for the marital deduction when the surviving spouse is entitled to all of the income of the trust for life, the income is paid to the surviving spouse at least annually and no one has the power to appoint any part of the property to any person other than the surviving spouse.
In addition, unlike a traditional life estate, the surviving spouse, who is the beneficiary of a QTIP Trust, not only receives the income from the Trust but also may request that the trustee disburse principal from the Trust to meet the surviving spouse’s needs.19 Tax Reg. § 20.2056(b)-7(d)(6). It is [587]*587possible, therefore, that distributions of principal for the benefit of the surviving spouse could have depleted the Trust such that only minimal assets are left for the remainderman identified by the testator.20
Any property used to pay federal estate taxes, however, will not qualify for the marital deduction. 26 U.S.C. § 2056(b)(4)(A). If property allocated to the marital deduction is used to pay federal estate tax, the marital deduction is reduced by the amount of the payment made, thereby increasing the federal estate tax imposed on the estate. Id. See also Jerome A. Manning, Manning on Estate Planning 14-18 (7th ed. 2015).
One way to protect the marital deduction from adverse tax consequences and receive the full federal estate tax benefit for property transferred to the surviving spouse is to use a “savings clause” in the will. That type of savings clause, often referred to as an “interpretive aide savings clause”, restricts actions taken by the personal representative that could reduce [588]*588the tax benefit of the marital deduction and assists with the interpretation and explanation of the testator’s intent with respect to preventing adverse tax consequences. See Eugene Lyle Stoler, Savings Clauses, The CPA Journal, 25 (April 1999); Charles A. Redd, What Types of Savings Clauses will Preserve the Marital Deduction?, 14 Est. Plan. 72 (1987). The interpretive aide savings clause “attempts to elucidate the testator’s or grantor’s prevailing intentions with regard to securing the marital deduction,” Redd at 72, and is “a provision that takes away a power or changes a provision that is expressly given elsewhere in the instrument and is, therefore, in direct conflict with that other express power or provision.” Stoler at 25; see also William Parsons, Lifetime and Testamentary Estate Planning, 74 (9th ed. 1983). The interpretive aide savings clause, therefore, can express the testator’s intent that any authority granted to the personal representative is void should it reduce the efficacy of the marital deduction.
The Internal Revenue Service has recognized the validity of an interpretive aide savings clause in Rev. Rui. 75-440 (1975). Addressed in Revenue Ruling 75-440 was a situation in which a will provided for both a marital trust and a residuary trust and granted authority to the trustees to invest trust principal in non-income producing life insurance. The will also included a savings clause that stated:
Notwithstanding anything herein contained to the contrary, any power, duty, or discretionary authority granted to my Fiduciary hereunder shall be absolutely void to the extent that either the right to exercise or the exercise thereof, shall in any way affect, jeopardize or cause my estate to lose all or any part of the tax benefit afforded my estate by the Marital Deduction under either Federal or State Laws.
Id. at 2. Since life insurance policies are not income producing property and often require that premiums be paid, a beneficiary of a marital trust that owned such property would not be entitled to all of the income, thereby eviscerating the marital deduction. Id. The trusts in question permitted such investment, and the question was whether that permission applied to the marital trust and, therefore, disqualified it from inclusion [589]*589in the marital deduction. The Revenue Ruling concluded, however, that the interpretive aide savings clause in the will was helpful to interpret the testator’s intent not to authorize the trustees to invest marital trust assets in non-income producing life insurance in order to qualify for the marital deduction:
The savings clause is not a savings clause in the strict sense of the term, but is an aid in determining the testator’s intent; that is, the existence of a savings clause that would ‘void’ a disqualifying power given to the trustees of the marital deduction trust is relevant here only because it helps indicate the testator’s intent not to give those trustees a disqualifying power.
Id. at 3. As a result, the marital deduction under Section 2056 was allowed with respect to the marital trust.21
Mr. Clancy’s Will, executed June 11, 2007, contained fourteen items that named his personal representative, instructed with respect to the payment of estate taxes, left Mr. Clancy’s personal and real property to Mrs. Clancy and, with respect to the remainder of his estate, created three residuary trusts: a Marital Trust for the benefit of Mrs. Clancy representing one third of the residuary; a Family Trust for the benefit of Mrs. Clancy and their minor child equal to one half of the residue that remained after the creation of the Marital Trust; and the final, two Older Children’s Trusts into which the remaining one half of the residue after the creation of the Marital Trust [590]*590was to be deposited.22
ITEM THIRD
A. All estate, inheritance, legacy, succession and transfer taxes (including any interest and any penalties thereon) lawfully payable with respect to all property includible in my gross estate or taxable in consequence of my death ... shall be paid by my Personal Representative out of my residuary estate, subject, however, to the provisions hereinafter contained in Item SIXTH hereof with respect to the Marital Share therein created ....
ITEM FOURTH
A. I give and bequeath to my Wife, if she survives me for thirty days, all of my tangible personal property of domestic or personal use.
❖ ❖ *
ITEM FIFTH
A. I give and devise to my Wife, if she survives me for thirty days, all of my right, title, and interest in and to my real property in Calvert County, Maryland, known as Peregrine Cliff, which includes my residence and all contiguous parcels of land, whether improved or unimproved, ...
B. I give and devise to my Wife, if she survives me for thirty days, all of my right, title, and interest in and to my real property on Martha’s Vineyard, Dukes County, Massa-chussetts ...
ITEM SIXTH
I give, bequeath, and devise all of the rest and residue of my estate, real and personal, and wheresoever situate (hereinafter referred to as my “residuary estate”), including all property over which I may have any power of appointment, as follows:
[591]*591A. If my Wife survives me, there shall first be set apart and promptly transferred as set out below a separate fund (hereinafter sometimes referred to as the Marital Share) equal to one-third of my net estate, as calculated pursuant to Section 3-20S(c) of the Estates and Trusts Article of the Annotated Code of Maryland.
1....
2. No asset or proceeds of any asset shall be included in the Marital Share as to which a marital deduction would not be allowable if included.
3. The Marital Share shall not be charged with or reduced by any estate, inheritance, succession or other tax of any kind or nature assessed by any State or under the laws of the United States or by any other taxing authority whatsoever.
8. The Marital Share shall be paid over and transferred to and held by my trustee or trustees, hereinafter named and sometimes, for convenience, referred to in the singular neuter, as a separate trust, called the “Marital Trust,” which shall be administered as set out below in Item SEVENTH.
B. I direct that one-half of the remainder of my residuary estate shall be paid over and distributed to my trustee as a separate trust, called the “NonExempt Family Residuary Trust,” which shall be administered as set our below in Item EIGHTH.
C. I direct that the other one-half of the remainder of my residuary estate shall be administered as follows:
1. I direct that an amount equal to the applicable credit amount allowed to my Estate pursuant to Section 2010 of the Internal Revenue Code of 1986, as amended (“IRC”), shall be paid over and distributed to my trustee as a separate trust, called the “Exempt Residuary Trust,” which shall be administered as set out below in Item NINTH.
2. I direct that the balance of my residuary estate, after funding the Exempt Residuary Trust, shall be paid over and distributed to my trustee as a separate trust, called the [592]*592“Non-Exempt Older Children’s Residuary Trust,” which shall be administered as set out below in Item TENTH.
ITEM EIGHTH
A. My trustee shall pay over the entire net income from the Non-Exempt Family Residuary Trust to my Wife, at least quarter-annually, during her lifetime.
B. Upon the exhaustion of the Marital Trust, my trustee shall have full power, in its discretion, to pay to or apply for the benefit of my Wife or my child or children by my Wife who are living from time to time, out of the principal of the Non-Exempt Family Residuary Trust, such amounts and in such proportions as my trustee, in its absolute discretion, from time to time may deem advisable and proper to provide for her or their continued maintenance, support, health, and education (including secondary, college, postgraduate, professional or other education).
C. In determining whether, when, and for whom any such payments pursuant to Paragraph B hereof shall be made, and the amounts thereof, if any, my trustee is hereby requested to take into consideration the respective needs and best interests of the beneficiaries without any duty or obligation with respect to my children to pay over equal amounts to or for all of them. Nevertheless, the decisions of my trustee shall be final and binding on all parties.
D. Upon the death of my Wife, or upon her remarriage, whichever event shall first occur, my trustee shall divide the then remainder of the NonExempt Family Residuary Trust, if any, together with all additions from the Marital Trust, both principal and undistributed net income, into a sufficient number of equal shares, if more than one, so that there shall be set apart one share for each of my children by my Wife who are then living and one such share for the descendants (as a group) of each of my children by my Wife who are not then living, but of whom there shall be one or more then living descendants.
[593]*593Mr. Clancy also included a “Savings Clause” in ITEM TWEL-YETH of his Will, directing that no “payment or distribution by my personal representative or trustee” should be made that would “in any way prevent my estate from receiving the benefit of the marital deduction”:
ITEM TWELVETH
D. Anything in this Will to the contrary notwithstanding, and whether or not any reference is made in any other provision of this Will to the limitations imposed by this Paragraph D, neither my personal representative nor my trustee shall have or exercise any authority, power, or discretion over the Marital Share, or the income thereof, or the property constituting the Marital Share, nor shall any payment or distribution by my personal representative or my trustee be limited or restricted by any provision of this Will that would in any way prevent my estate from receiving the benefit of the marital deduction as hereinbefore set forth.
On September 18, 2007, Mr. Clancy executed a codicil (“First Codicil”) that amended the Older Children’s Trust to include the value of any gifts made to any of the Older Children during Mr. Clancy’s lifetime.23 Six years later, however, on July 25, 2013, Mr. Clancy executed a second codicil (“Second Codicil”), the subject of our review, which contained a series of amendments to the Family Trust as well as explicitly included the Family Trust in the “Savings Clause” designed to protect the benefit of the marital deduction.24 The Second Codicil made the following amendments to ITEM EIGHTH:
... I amend Paragraph B of ITEM EIGHTH of my Will by deleting therefrom the words “or my child or children by [594]*594my Wife who are living from time to time,” and the words “or their” and otherwise leaving said paragraph unchanged.
I amend Paragraph C of ITEM EIGHTH of my Will by deleting its text in its entirety and inserting in place thereof “[Intentionally omitted.]”
I amend Paragraph D of ITEM EIGHTH of my Will by deleting therefrom the words “or upon her remarriage, whichever event shall first occur,” and otherwise leaving said paragraph unchanged.
Which resulted in the reading of ITEM EIGHTH as follows:
ITEM EIGHTH
A. My trustee shall pay over the entire net income from the Non-Exempt Family Residuary Trust to my Wife, at least quarter-annually, during her lifetime.
B. Upon the exhaustion of the Marital Trust, my trustee shall have full power, in its discretion, to pay to or apply for the benefit of my Wife, out of the principal of the NonExempt Family Residuary Trust, such amounts and in such proportions as my trustee, in its absolute discretion, from time to time may deem advisable and proper to provide for her continued maintenance, support, health, and education (including secondary, college, postgraduate, professional or other education).
C. Intentionally omitted.
D. Upon the death of my Wife my trustee shall divide the then remainder of the Non-Exempt Family Residuary Trust, if any, together with all additions from the Marital Trust, both principal and undistributed net income, into a sufficient number of equal shares, if more than one, so that there shall be set apart one share for each of my children by my Wife who are then living and one such share for the descendants (as a group) of each of my children by my Wife who are not then living, but of whom there shall be one or more then living descendants.
[595]*595The Second Codicil also made additions to Paragraph D of Item Twelveth, deleting the former text in its entirety and replacing it with the following:
D. No asset or proceeds of any assets shall he included in the Marital Share or the Non-Exempt Family Residuary Trust as to which a marital deduction would not be allowed if included. Anything in this Will to the contrary notwithstanding, and whether or not any reference is made in any other provision of this Will to the limitations imposed by this Paragraph D, neither my personal representative nor my trustee shall have or exercise any authority, power or discretion over the Marital Share or the Non-Exempt Family Residuary Trust or the income thereof, or the property constituting the Marital Share or the Non-Exempt Family Residuary Trust, nor shall any payment or distribution by my personal representative or my trustee be limited or restricted by any provision of this Will, such that, in any such event, my estate would be prevented from receiving the benefit of the marital deduction as hereinbefore set forth. My Wife shall have the power at any time by written direction to compel my trustee to convert unproductive property held in the Marital Trust into income producing property. Likewise, my Wife shall have the power at any time by written direction to compel my trustee to convert unproductive property held in the Non-Exempt Family Residuary Trust into income producing property.
(emphasis added).
After Mr. Clancy’s death on October 1st, his Will was submitted along with the First and Second Codicils for probate in Baltimore City. In September of 2014, Mrs. Clancy petitioned in the Orphans’ Court for a Declaratory Judgment in which she sought a determination that the Family Trust was not obligated to pay any estate taxes.25 A hearing as to the construction and interpretation of the Will and the Second [596]*596Codicil was held in December of 2014 before Chief Judge Lewyn Scott Garrett of the Orphans’ Court.
Judge Garrett, thereafter, issued a Memorandum and Order in which he determined that the resolution of the issue was dependent upon whether the Savings Clause in ITEM TWEL-VETH, as amended by the Second Codicil, prohibited the personal representative from requiring that the Family Trust contribute to the payment of estate taxes. Judge Garrett determined that the Savings Clause in the Will, as amended by the Second Codicil, constituted a “valid interpretive aid savings clause”:
In my view, the Savings Clause is a valid interpretive aid savings clause. The Savings Clause is applicable to the entire will and is not dependent on a court ruling or IRS determination. Instead, it is a clear expression of the testator’s intent to have the Family Trust qualify for the marital deduction.
He noted that, generally, there are two types of savings clauses designed to preserve the marital deduction, (1) “condition subsequent” savings clauses; and (2) “interpretive aid” savings clauses, and that an interpretive aid savings clause was “designed to stand on its own with the purpose of clarifying the testator’s intent in the event of a perceived ambiguity or contradiction.”
Judge Garrett concluded, as a result of the singular focus of the Second Codicil on qualifying the Family Trust for the marital deduction, that the Savings Clause reflected Mr. Clancy’s predominant intent that the Family Trust be free of any Federal estate tax liability:
In exercise of our jurisdiction to construe a will, incidental to the administration of the Estate, this Court finds that the Will restricts the [Personal Representative] from requiring the Family Trust to contribute to the payment of estate taxes. Although the Tax Clause and division of the residuary trusts provide some evidence that the Testator intended the Family Trust to share in the estate tax liability with the Older Children’s Trust, this Court finds the express lan[597]*597guage of the Savings Clause as the clearest and the predominant evidence of the Testator’s intent, which can only be achieved if the Family Trust is free of estate tax liability. This court also finds that the plain language of the Savings Clause, which prevents the [Personal Representative] from taking any action that would prevent the Family Trust from receiving the benefit of the marital deduction, necessarily includes restricting the payment of estate taxes as each payment of estate tax causes a recalculation of the estate tax and a loss of the marital deduction. ... Furthermore, this court finds that the overwhelming purpose of the Second Codicil is to qualify the Family Trust for the marital deduction and reduce the overall estate tax liability. This Court is also bound by the rule, where if there is a conflict between a will and a codicil, “the codicil as the last expression of the testator’s will and intention must be given effect.” Wiesenfeld v. Rosenfeld, 170 Md. 63, 71, 183 A. 250 (1936).
We review the Orphans’ Court’s conclusions of law under a de novo standard. Pfeufer v. Cyphers, 397 Md. 643, 648, 919 A.2d 641, 644-45 (2007). When construing a will, our emphasis, as well as that of the Orphans’ Court, is ascertaining and effectuating the intent of the testator:
When construing a will, the “paramount concern of the court is to ascertain and effectuate the testator’s expressed intent.” In other words, the search is not for the testator’s “presumed [intention] but for his expressed intention. ” Generally, that intent is “gathered from the four corners of the will with the words of the will given their ‘plain meaning and import.’ ” Words having legal significance, however, “will be construed in that sense unless the will clearly indicates otherwise.”
Id. at 649, 919 A.2d at 645 (internal citations omitted).
Mr. Clancy’s Older Children assert that their father intended that federal estate taxes should be paid out of the residuary estate, including that which was allocated to the Family Trust, when he executed his Will, because ITEM [598]*598THIRD of the Will directed that, “All estate, inheritance, legacy, succession and transfer taxes ... shall be paid by my personal representative out of my residuary estate[.]” They argue that federal estate taxes can be paid out of the Family Trust and still preserve the property allocated to that trust for the marital deduction.
Mrs. Clancy does not dispute that ITEM THIRD of the Will says what it says, but asserts that the Savings Clause expressly excepts any property from the residuary estate allocated to the marital deduction from having to bear the burden of estate taxes.
The parties’ disagreement, then, centers on the impact of the Second Codicil’s qualification of the Family Trust for the marital deduction and, moreover, the interpretation of the restrictions in the Savings Clause as amended by the Second Codicil, juxtaposed against ITEM THIRD of the Will, which indicated that federal estate taxes are to be paid from the residuary estate.
When construing a will and any codicils, “[t]he will and codicils must be construed as one instrument, and effect must, if possible, be given to every part of them.” Lederer v. Safe Deposit & Trust Co. of Baltimore, 182 Md. 422, 428, 85 A.2d 166, 169 (1943); Hutton v. Safe Deposit & Trust Co. of Baltimore, 150 Md. 539, 551, 133 A. 308, 312 (1926) (“The general rule of construction requires us to give a meaning and purpose to every part of the will and codicil”). “It is a settled rule of construction that a will and its codicils must be interpreted as one instrument, and the provisions of the will are to be given effect except to the extent only to which they are revoked by the codicils, either in terms or by clear inconsistency between the earlier and later expressions of the testator’s intention.” Associated Professors of Loyola College of City of Baltimore v. Dugan, 137 Md. 545, 552, 113 A. 81, 84 (1921).
The Older Children and Mrs. Clancy, as well as the personal representative, all agree that the Second Codicil qualified the Family Trust for the QTIP election, because Mrs. Clancy [599]*599became the income beneficiary of the Family Trust for life; she could not transfer her income nor was she given a limited power of appointment, but she could request that the trustee invade the corpus of the trust for her needs, which would reduce the value of the Family Trust passing upon her death. All the parties also agree that the Second Codicil contained a Savings Clause that amended the Savings Clause in the Will to restrict the actions of the personal representative and trustee to qualify the portion of the residuary trust allocated to the Family Trust for the marital deduction.
The Second Codicil did not, however, specifically address, in any way, the Will provision that instructed that taxes were to be paid out of the residuary estate of which the Family Trust was a part.
To resolve the ambiguity and apparent conflict, we rely on the interpretive aide of the Savings Clause to elucidate Mr. Clancy’s intent. In so doing, we determine, as did the Orphans’ Court, that the Savings Clause contained in the Second Codicil which prevented the personal representative from exercising any “authority, power, or discretion” to disqualify any portion of the Family Trust from the marital deduction, such as the payment of federal estate taxes, “trumps” ITEM THIRD of the Will relating to payment of taxes from the residuary estate. We reach this conclusion for a number of reasons, the first of which is because of the decisions in similar circumstances by other courts, as well as the Internal Revenue Service’s decision in Revenue Ruling 75-440.
In Northeastern Pennsylvania Nat. Bank & Trust Co. v. U.S., 360 F.Supp. 116 (M.D.Pa.1973), the federal district court judge determined that a marital trust created by the will was not intended to bear the burden of any estate taxes based on a savings clause in the will which intended to retain the “maximum marital deduction.” The will provisions in issue provided:
(1) that the inheritance and estate taxes are to be paid from the residuary estate; (2) that the residuary estate is to be held in trust for decedent’s wife, son and grandchildren, with 50% of the residue to be placed in the trust for his [600]*600wife, 25% for his son and 25% for his grandchildren; and (3) that notwithstanding any other provision of the will, the Executor shall not have any duties or authority if or to the extent that such would disqualify the wife’s trust from the maximum marital deduction.
Id. at 117. The will’s savings clause stated:
I provide and direct that notwithstanding any other provisions contained herein, ...
(b) That the Executor and trustee shall not have any rights, powers, privileges, duties, authority, immunities, or discretion, given by any other provision of this, my Last Will and Testament, if or to the extent that such would disqualify Trust A [the Marital Trust] for the maximum marital deduction.”
Id. at 119. The Internal Revenue Service had assessed a deficiency because of the exclusion under the marital deduction of property conveyed to the spouse. The Commissioner of the Internal Revenue Service contended that the testator intended that the residue be split between trusts for his spouse, son and grandchildren after the payment of the estate taxes. Id. at 118. The federal district court judge disagreed and in language equally applicable to the instant case stated:
If the executor were to charge the taxes generally to the residue, the wife’s share in residue would bear a portion of the taxes which would disqualify it from the maximum marital deduction. Such payment of taxes from the residue would be in direct conflict with ¶ VIIIA3(b), and the testator has directed that in such an event HVIIIA3(b) prevails. Likewise, if the ratio of 2:1:1 of the minimum monthly payments were interpreted to require the executor to set up corpora in a ratio of 2:1:1 by charging the death taxes generally to residue before computing the distributive shares, the conflicting direction to obtain the maximum deduction for the marital trust would take precedence.
The direction to obtain the maximum marital deduction is the clearest and the predominant evidence of Rodgers’ [601]*601intent. His primary objective can be achieved here only if the wife’s residuary share is free of federal estate tax.
Id. at 119.
Our determination that the Savings Clause in the Second Codicil clarifies Mr. Clancy’s intention that the Family Trust not be charged with any federal estate taxes also is supported by Revenue Ruling 75-^40, supra. In that case, the Service concluded that its savings clause that provided that, “Notwithstanding anything herein contained to the contrary, any power, duty, or discretionary authority granted to my Fiduciary hereunder shall be absolutely void to the extent that either the right to exercise or the exercise thereof, shall in any way affect, jeopardize or cause my estate to lose all or any part of the tax benefit afforded my estate by the Marital Deduction under either Federal or State Laws.”, Rev. Rui. 75-440 at 2, operated to void any power given to the trustees that would disqualify the marital deduction. Id. at 3. The savings clause, as interpreted by the Service, permitted it to displace the provision of the will that had directed estate taxes to be paid from the residuary estate of which the marital property qualifying for the deduction was a part.
Were the Family Trust in the instant case to bear the burden of any portion of the payment of the federal estate tax, that payment would reduce the marital deduction as noted in the tax regulation:26
[602]*602In the determination of the value of any property interest which passed from the decedent to his surviving spouse, there must be taken into account the effect which the Federal estate tax, or any estate, succession, legacy, or inheritance tax, has upon the net value to the surviving spouse of the property interest.
Tax Reg. § 20.2056(b) — 4(c)(1). The Regulation itself indicates the effect on the benefit from payment of estate taxes out of property allocated to the marital deduction:
For example, assume that the only bequest to the surviving spouse is $100,000 and the spouse is required to pay a State inheritance tax in the amount of $1,500. If no other death taxes affect the net value of the bequest, the value, for the purpose of the marital deduction, is $98,500.
Tax Reg. § 20.2056(b)-4(c)(2).
The Savings Clause in the Second Codicil, nevertheless, explicitly directs that the personal representative not act to adversely impact the benefit of the marital deduction of the Marital Trust and the Family Trust. To burden the Family Trust with payment of federal estate taxes at the time of Mr. Clancy’s death when the property is conveyed in trust for the benefit of Mrs. Clancy would be in direct derogation of Mr. Clancy’s intent manifested in the Savings Clause.
The Older Children, however, rely on Estate of James A. Fine v. C.I.R., 90 T.C. 1068 (1988), to bolster their argument that a savings clause does not necessarily avoid payment of federal estate taxes from the marital share. In Fine, the testator died leaving a will that directed in Articles One and Two the prompt payment of “debts and funeral expenses” and the payment of estate taxes out of the residuary estate “without apportionment.” 90 T.C. at 1070. Article Three of the will directed that one-half of the residuary was to go to the testator’s surviving wife and the remainder of the residuary divided into three equal shares to other beneficiaries. Id. Subsection 17 of Article IV stated, “Any power, duty or discretionary authority granted to the Executor shall be void to the extent that its exercise shall cause my estate to lose all [603]*603or any part of the tax benefit afforded by the marital deduction under federal or state laws.” Id. The wife had argued that the marital share should not be burdened by the payment of federal estate tax which would reduce the benefit of the marital deduction.
The court concluded that the testator’s will expressly provided that estate taxes were to be paid out of the residuary estate, without reference to the Virginia apportionment statute which would have maximized the marital deduction and limited payment of estate taxes by the marital share. 90 T.C. at 1075. The court also concluded that the limitation of the personal representative’s discretion contained as a part of Article IV did not affect the payment of estate taxes because the Virginia apportionment statute was inapplicable pursuant to the terms of the will. Id.
Fine, however, is unavailing in the instant case because Mr. Clancy in the Second Codicil’s Savings Clause expressly prohibited his Personal Representative from adversely affecting ability of the Family Trust to benefit from the martial deduction, when it stated “nor shall any payment or distribution by my personal representative or my trustee be limited or restricted by any provision of this Will, such that, in any such event, my estate would be prevented from receiving the benefit of the marital deduction as hereinbefore set forth.” The Savings Clause also expressly applied to Mr. Clancy’s Will in its entirety when in the second sentence of the Savings Clause it specified that “Anything in this Will to the contrary notwithstanding, and whether or not any reference is made in any other provision of this Will .... ” (emphasis added). The restriction on the power granted to Mr. Clancy’s Personal Representative contained in the Second Codicil Savings Clause applies to all provisions of the Will, including ITEM THIRD, which provides for payment of federal estate taxes out of the residuary.
In addition, the Older Children point to Estate of Posner v. C.I.R., 87 T.C.M. CCH 1288 (T.C.2004), for the proposition that a savings clause would be ineffective were it to rewrite a [604]*604will. In Posner, the surviving spouse, who had received the benefit of a marital deduction for federal estate tax purposes for property conveyed to her when her husband subsequently died, having disinherited two of her three children. The two children, then, disputed the efficacy of their disinheritance in the mother’s will and sought to “resurrect” their father’s will, which had divided his residuary estate among the three children. Resolution of the issue depended upon whether the husband’s will had granted his wife an inter vivos or a testamentary power of appointment over the marital property that qualified for the marital deduction.
The Tax Court, in deciding that Mrs. Posner had no general power of appointment, found notable that:
... Mr. Posner’s will contains no language referring to a “general power of appointment” and, indeed, contains no substantive dispositions of the marital trust property. Item II of Mr. Posner’s will does not expressly provide for the disposition of income or principal of the marital trust, and it contains no direction regarding the distribution of principal upon termination of the trust. It refers only to the Federal estate tax marital deduction. Item XIV also refers to the marital deduction but contains no language that we might reasonably interpret to grant decedent a general power of appointment. The references to the marital deduction alone in items II and XIV are insufficient to create a general power of appointment in decedent’s favor.
Id. at 7. (internal citation omitted). The clause to which the Older Children in the present case point to as ineffective in Posner stated:
... my Trustee shall not have or exercise any authority, power or discretion over the Marital Trust or the income thereof, or the property constituting the same, nor shall any payment or distribution by my Trustee be limited or restricted by any provision of this Will, which would in any way ... affect the right of my said wife to all income therefrom or her right to dispose of the principal and income thereof in the amount and to the extent necessary to [605]*605qualify the Marital Trust for the marital deduction for Federal estate tax purposes under the provisions of the law applicable to my estate.
Id. at 1.
The distinguishing characteristics of Mr. Posner’s will, however, compared to Mr. Clancy’s Will in the instant case is that Mr. Clancy did everything in his Will and Second Codicil that Mr. Posner did not. In order to qualify the Family Trust for the QTIP election, Mr. Clancy directed that Mrs. Clancy had a qualifying income interest for life, that she was entitled to all of the income from the property payable annually, that no person had the power to appoint any part of the property to anyone other than her as well as that Mrs. Clancy was provided with the power to request distribution of corpus from the trustee.
We agree with the Older Children that it is clear that a testator could direct that the burden of inheritance taxes could be placed on legatees who otherwise would not have to pay such taxes,27 as well as payment of estate taxes on the marital [606]*606share,28 as the Older Children have asserted. Mr. Clancy, [607]*607however, in his estate documents did not burden the marital share with payment of federal estate taxes.
Moreover, were the Family Trust to bear the burden of federal estate taxes, at the time of Mr. Clancy’s death, the corpus of that trust would be subject to imposition of federal estate taxes twice, at the time of Mr. Clancy’s death as well as when Mrs. Clancy died. The establishment of the QTIP Trust in Mr. Clancy’s Will insures that the Younger Child will have to pay estate taxes when Mrs. Clancy dies. 26 U.S.C. § 2044. [608]*608Certainly, as each party agrees, Mr. Clancy intended to minimize the impact of federal estate taxes in the entirety of his Will, an intent that would be eviscerated by double taxation.
Finally, the Older Children question having the burden of federal estate taxation being placed on them, to the benefit of Mrs. Clancy. Mr. Clancy, however, clearly intended, by the establishment of the QTIP Trust, to benefit Mrs. Clancy to the detriment of the Younger Child, whose remainder could be diminished by Mrs. Clancy’s invasion of corpus for need. As a result, all of Mr. Clancy’s children are burdened for the benefit of Mrs. Clancy and to avoid federal estate tax.
In conclusion, we hold that the property conveyed in the Family Trust as identified in Mr. Clancy’s Will and Second Codicil cannot be burdened by the payment of federal estate taxes.
JUDGMENT OF THE ORPHANS’ COURT AFFIRMED; COSTS IN THIS COURT TO BE PAID BY APPELLANTS.
Barbera, C.J., Greene and McDonald, JJ., dissent
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Cite This Page — Counsel Stack
144 A.3d 802, 449 Md. 577, 2016 Md. LEXIS 562, Counsel Stack Legal Research, https://law.counselstack.com/opinion/bandy-v-clancy-md-2016.