Michelle Bandy et al. v. Alexandra Clancy, No. 93, Sept. Term, 2015 Opinion by
Battaglia, J.
Marital Deduction – Will Construction – Estate Taxes
A second codicil, executed several years after a will, had the effect of qualifying a family
trust, created from the residuary estate, for the marital deduction for federal estate tax
purposes. A savings clause, also in the second codicil, restricted the personal
representative from paying taxes on property allocated to the marital deduction to avoid
diminution of the marital deduction. As a result, the family trust was exempt from
liability for federal estate taxes.
Orphans’ Court for Baltimore City
Estate No. 101962
Argued: June 1, 2016
IN THE COURT OF APPEALS
OF MARYLAND
No. 93
September Term, 2015
MICHELLE BANDY et al.
v.
ALEXANDRA CLANCY
Barbera, C.J.
Greene
Adkins
McDonald
Watts
Hotten
Battaglia, Lynne A.
(Retired, Specially
Assigned),
JJ.
Opinion by Battaglia, J.
Barbera, C.J., Greene and McDonald, JJ.,
dissent
Filed: August 24, 2016
“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, leaving 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
1
Gregory v. Helvering, 293 U.S. 465, 469,
55 S.Ct. 266, 267,
79 L.Ed. 596, 599 (1935).
2
In their Petition for Certiorari, Bandy v. Clancy,
446 Md. 218,
130 A.3d 597 (2016), Mr.
Clancy’s adult children presented the following question:
Did the Orphan’s Court err in finding that a marital deduction savings
clause in a codicil to Mr. Clancy’s Will had the effect of overriding and
eliminating the fundamental structure created by the Will?
Mr. Clancy’s Personal Representative, J.W. Thompson Webb, also petitioned this Court
for a Writ of Certiorari, which we granted, which stated:
Did the Orphans’ Court err in construing Mr. Clancy’s will to require the
personal representative to fund the family trust prior to the payment of
estate taxes, such that the older children’s trusts will bear the burden of all
of the estate’s federal and state estate taxes?
(continued . . .)
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 threshold for the
(. . . continued)
Mrs. Clancy moved to dismiss the Personal Representative’s petition on the basis that the
Personal Representative had no standing. We need not resolve the issue as the certiorari
question presented by the Older Children is the same.
3
Only the issue of federal estate taxes is addressed, as the Maryland estate tax scheme
tracks the federal such that the marital deduction is treated similarly. See Md. Code Tax
Gen. § 7-302. Section 7-304 of the Tax General Article allows for an adjustment to the
Maryland estate tax owed on an estate in excess of one million dollars by the value of
property treated as qualified marital deduction terminable interest property. Md. Code
Tax Gen. § 7-309(b)(5).
4
Section 2010 of Title 26, which embodies the Internal Revenue Code, provides, in
relevant part:
(a) General rule.--A credit of the applicable credit amount shall be allowed
to the estate of every decedent against the tax imposed by section 2001.
…
(c) Applicable credit amount.--
…
(3) Basic exclusion amount.--
(A) In general.--For purposes of this subsection, the basic
exclusion amount is $5,000,000.
(B) Inflation adjustment.--In the case of any decedent dying in a
calendar year after 2011, the dollar amount in subparagraph (A)
shall be increased by an amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment determined under section
1(f)(3) for such calendar year by substituting “calendar
year 2010” for “calendar year 1992” in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $10,000, such amount shall be rounded to the nearest
multiple of $10,000.
26 U.S.C. 2010 (2013). All references hereinafter to Sections will be to Title 26, the
Internal Revenue Code, in 2013, the year of Mr. Clancy’s death.
2
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 beneficiaries, if any, are obligated to pay a
5
Internal Revenue Service, www.irs.gov, https://www.irs.gov/businesses/smallbusinesses-self-employed/whats-new-estate-and-gift-tax (https://perma.cc/4WRHPTKQ).
6
The tax rate schedule for estates valued over the threshold is provided under Section
2001(c) of the Internal Revenue Code as:
If the amount with respect to which the
tentative tax to be computed is: The tentative tax is:
Not over $10,000 18 percent of such amount.
Over $10,000 but not over $20,000 $1,800, plus 20 percent of the excess of
such amount over $10,000.
Over $20,000 but not over $40,000 $3,800, plus 22 percent of the excess of
such amount over $20,000.
Over $40,000 but not over $60,000 $8,200, plus 24 percent of the excess of
such amount over $40,000.
Over $60,000 but not over $80,000 $13,000, plus 26 percent of the excess of
such amount over $60,000.
Over $80,000 but not over $100,000 $18,200, plus 28 percent of the excess of
such amount over $80,000.
Over $100,000 but not over $150,000 $23,800, plus 30 percent of the excess of
such amount over $100,000.
Over $150,000 but not over $250,000 $38,800, plus 32 percent of the excess of
such amount over $150,000.
Over $250,000 but not over $500,000 $70,800, plus 34 percent of the excess of
such amount over $250,000.
Over $500,000 but not over $750,000 $155,800, plus 37 percent of the excess of
such amount over $500,000.
Over $750,000 but not over $1,000,000 $248,300, plus 39 percent of the
excess of such amount over
$750,000.
Over $1,000,000 $345,800, plus 40 percent of the excess of
such amount over $1,000,000.
3
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).
Deductions 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 uses10 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
7
In Maryland, when the will does not direct for the payment of federal estate taxes, the
allocation of liability is determined statutorily under Section 7-308 of the Tax General
Article of the Maryland Code, the Uniform Estate Tax Apportionment Act.
8
See
26 U.S.C. § 2053.
9
Section 2054 of Title 26 provides:
For purposes of the tax imposed by section 2001, the value of the taxable
estate shall be determined by deducting from the value of the gross estate
losses incurred during the settlement of estates arising from fires, storms,
shipwrecks, or other casualties, or from theft, when such losses are not
compensated for by insurance or otherwise.
10
See 26 U.S.C. § 2055.
11
See
26 U.S.C. § 2056.
12
The Maryland marital deduction tracks that of the Federal estate tax marital deduction.
Md. Code Tax Gen. § 7-309(b)(5).
13
See Revenue Act of 1948,
Pub. L. No. 80-471, 62 Stat. 110, 117 (1948).
4
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 (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).
14
Section 2044, “Certain property for which marital deduction was previously allowed”,
provides:
(a) General rule.--The value of the gross estate shall include the value of
any property to which this section applies in which the decedent had a
qualifying income interest for life.
(b) Property to which this section applies.--This section applies to any
property if--
(1) a deduction was allowed with respect to the transfer of such
property to the decedent--
(A) under section 2056 by reason of subsection (b)(7) thereof, or
(B) under section 2523 by reason of subsection (f) thereof, and
(continued . . .)
5
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). “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.
(. . . continued)
(2) section 2519 (relating to dispositions of certain life estates) did not
apply with respect to a disposition by the decedent of part or all of
such property.
(c) Property treated as having passed from decedent.--For purposes of this
chapter and chapter 13, property includible in the gross estate of the
decedent under subsection (a) shall be treated as property passing from the
decedent.
15
Section 2056(a), “Bequests, etc., to surviving spouse”, provides:
For purposes of the tax imposed by section 2001, the value of the taxable
estate shall, except as limited by subsection (b), be determined by
deducting from the value of the gross estate an amount equal to the value of
any interest in property which passes or has passed from the decedent to his
surviving spouse, but only to the extent that such interest is included in
determining the value of the gross estate.
16
Certain exceptions to the exclusion of terminable interests from the marital deduction
are provided under Section 2056, and include a life estate with the power of appointment
in the surviving spouse, life insurance or annuity payments made to the surviving spouse
who also has the power of appointment, and qualified terminable interest property
(QTIPs). 26 U.S.C. § 2056(b)(5)–(7).
17
Property must be elected for treatment as QTIP property on the Federal tax return for
the estate, “(v) Election.--An election under this paragraph with respect to any property
(continued . . .)
6
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.
Subclause (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)-1. 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.
(. . . continued)
shall be made by the executor on the return of tax imposed by section 2001. Such an
election, once made, shall be irrevocable.” 26 U.S.C. § 2056(b)(7)(B)(v)
18
Usufruct is defined as having “the legal right of using and enjoying the fruits or profits
of something belonging to another.” Merriam-Webster, http://www.merriam-webster.com/dictionary/usufruct (https://perma.cc/942S-X4NM).
7
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 possible, 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
19
Section 20.2056(b)-7 of Title 26 of the Treasury Regulation provides the trustee with
the power to distribute principal to the surviving spouse:
An income interest in a trust will not fail to constitute a qualifying income
interest for life solely because the trustee has a power to distribute principal
to or for the benefit of the surviving spouse. The fact that property
distributed to a surviving spouse may be transferred by the spouse to
another person does not result in a failure to satisfy the requirement of
section 2056(b)(7)(B)(ii)(II). However, if the surviving spouse is legally
bound to transfer the distributed property to another person without full and
adequate consideration in money or money’s worth, the requirement of
section 2056(b)(7)(B)(ii)(II) is not satisfied.
Tax Reg. § 20.2056(b)–7(d)(6).
20
Similarly, the spouse may invade principal if given the power of withdrawal over the
QTIP principal when the trust was created although such power of withdrawal, when
given, is limited to the greater of $5,000 or five percent of the trust. 26 U.S.C. §§
2514(e), 2041(b)(2). Section 2514 of Title 26 entitled Powers of Appointment provides:
The lapse of a power of appointment created after October 21, 1942, during
the life of the individual possessing the power shall be considered a release
of such power. The rule of the preceding sentence shall apply with respect
to the lapse of powers during any calendar year only to the extent that the
(continued . . .)
8
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 the 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
(. . . continued)
property which could have been appointed by exercise of such lapsed
powers exceeds in value the greater of the following amounts:
(1) $5,000, or
(2) 5 percent of the aggregate value of the assets out of which, or the
proceeds of which, the exercise of the lapsed powers could be
satisfied.
26 U.S.C. § 2514(e). Identical language is contained in Section 2041(b)(2) of the Internal
Revenue Code, Powers of Appointment.
9
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. Rul. 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 in 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
10
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
21
One commenter on savings clauses has noted:
Although the IRS has adopted an adverse posture towards savings clauses
and will review them carefully, taxpayers will have the most difficulty with
those clauses that include a condition subsequent and attempt to revoke a
transfer, alter a completed transaction, or are connected with a
determination of value. Alternatively, clauses that serve to assist in
interpretation of a document, or explain the parties’ intention, will generally
be more acceptable. However, even though savings clauses may not always
be deemed valid, they are recommended because they cannot hurt and in
fact may save the day if and when unexpected qualification issues arise.
Eugene Lyle Stoler, Savings Clauses, The CPA Journal, 27 (April 1999).
11
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 was 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, Massachussetts . . .
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:
A. 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
22
The two trusts to which we shall refer in the singular as the Older Children’s Trust
include the “Exempt Residuary Trust”, equal to the allowable credit under Section 2010
of Title 26 of the United States Code, and the “Non-Exempt Older Children’s Trust”,
equal to the balance of the residuary after funding the Exempt Residuary Trust.
12
pursuant to Section 3-203(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 “Non-Exempt 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 “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
13
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 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.
...
Mr. Clancy also included a “Savings Clause” in ITEM TWELVETH 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
14
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 my 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.
23
The First Codicil executed in September of 2007 is not in issue in the present case.
24
The Second Codicil also amended ITEM FOURTEENTH to reinstate J. W. Thompson
Webb as Mr. Clancy’s Personal Representative.
15
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 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 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.
...
The 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 be 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
16
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 Codicil 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 TWELVETH, 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”
25
Mrs. Clancy also sought to have the personal representative removed.
17
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 language 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 (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:
18
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 THIRD 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.”
19
Lederer v. Safe Deposit & Trust Co. of Baltimore, 182 Md. 422, 428,
35 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 became 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.
20
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 wife, 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
21
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 ¶ VIIIA3(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' intent. 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 75-440, 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
22
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. Rul. 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
In 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.
26
Section 20.2056(b)-4 of Title 26 of the Treasury Regulation, Marital Deduction;
valuation of interest passing to surviving spouse, provides a discussion of the reduction in
the value of the marital deduction by the amount of any estate tax paid:
If the decedent bequeaths his residuary estate, or a portion of it, to his
surviving spouse, and his will contains a direction that all death taxes shall
be payable out of the residuary estate, the value of the bequest, for the
purpose of the marital deduction, is based upon the amount of the residue as
reduced pursuant to such direction, if the residuary estate, or a portion of it,
is bequeathed to the surviving spouse, and by the local law the Federal
estate tax is payable out of the residuary estate, the value of the bequest, for
the purpose of the marital deduction, may not exceed its value as reduced
by the Federal estate tax.
Tax Reg. § 20.2056(b)-4(c)(4).
23
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 or any part of the tax benefit
24
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
25
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. 1288
(T.C. 2004), for the proposition that a savings clause would be ineffective were it to
rewrite a will. 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:
26
. . . 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 qualify 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 share,28 as the Older
27
In Pfeufer v. Cyphers, 397 Md. 643,
919 A.2d 641 (2007), the will provided that all
estate, inheritance and other taxes “shall be paid out of the principal of my residuary
estate; and such payment shall be made as an expense of the administration of my estate
without apportionment.”
Id. at 647;
919 A.2d at 644. The residuary was divided among
four individuals, three of whom were lineal descendants of the testator and were,
therefore, exempt from inheritance tax. The fourth individual, who was not a relative,
was determined by the Orphans’ Court to be the person upon whom the burden of
(continued . . .)
27
(. . . continued)
inheritance taxes was to be placed. We disagreed, stating that the testator’s intent was
clear:
It is clear that the testamentary language used by the testator in the case at
bar clearly expresses the testator’s intent that any, and all, inheritance taxes
were to be paid from the residuary estate and were not to be apportioned
among, or deducted from, the shares of the individual residuary legatees.
Necessarily, therefore, the testator must have intended that the amount of
the residuary shares to be distributed would be determined based on the
value of the residuary estate after the taxes had been paid, off the top, out of
the estate; it was the clear intention of the testator that each individual share
of the residuary estate be determined after the taxes were paid on the entire
estate, albeit from the residuary estate.
Id. at 655,
919 A.2d at 648-49.
28
In Second Nat’l Bank of New Haven v. U.S., 351 F.2d 489, 494 (2d. Cir. 1965), the
Second Circuit Court of Appeals determined that a will, modified by a codicil designed to
qualify the Wife’s one-third interest in the residuary for the marital deduction, did not
also exempt the Wife’s share from liability for federal estate taxes. The court concluded
that the language of the will stating, “The provisions of any statute requiring the
apportionment or proration of such taxes among the beneficiaries of this will or the
transferees of such property, or the ultimate payment of such taxes by them, shall be
without effect in the settlement of my estate”, id. at 491, expressed the testator’s intention
that the Connecticut appropriation statute did not apply, and that estate taxes were to be
paid out of the residuary:
It would be difficult to conceive of a clearer direction expressing the
thought that death taxes, together with debts and funeral expenses, were to
be paid out of the estate. The first sentence of Article One (‘I direct my
executors to pay out my just debts and funeral expenses and any death taxes
…’) has been held in cases where similar language was construed not
only to shift the tax burden to the residue as an expense of administration,
but also as the equivalent of a direction against proration among the
residuary legatees. The ‘inclusion of them (taxes) in the same classification
as debts, funeral expenses …’ is an expression of ‘an intention that they
should be paid out of the estate in the same way and from the same funds as
these other charges.’
Id. at 492-93 (internal citations omitted). The court reached the conclusion that “while the
codicil shows a desire to qualify one-third of the residue as a marital deduction”, “[i]t
does not disclose an intention to have this part of the residue in effect tax free and grossly
disproportionate to the other two-thirds.” Id. at 494.
The Fifth Circuit Court of Appeals, in First Nat. Bank of Atlanta, 634 F.2d 212
(5th Cir. 1981), interpreted a testator’s intention in a will that provided for the payment of
(continued . . .)
28
(. . . continued)
estate taxes out of a residuary that was divided into two trusts, one a marital trust, and the
other a family trust. The court determined liability for the payment of estate taxes could
be borne, in part, by the marital trust. 634 F.2d at 213. The will in Item Three provided
that the residue of the estate was to be divided equally between a marital trust and a
family trust:
If my wife survives me, I direct my Executors (after paying all of the above
bequests, and after paying all debts, taxes and expenses other than Estate
Taxes) to divide the residue of my estate into two parts, which (after
adjusting for the insurance and other property payable to my wife
hereinafter mentioned) shall be equal in size. I hereby designate these as
Parts A and B. There shall be regarded as a portion of my estate assigned to
Part A, for the purpose of this calculation only, the following: (1) any
insurance on my life which is so payable to my wife as to be lawfully the
subject of a marital deduction for Federal Estate Tax purposes, and (2) the
value of any other property passing to my wife either outside this Will or
under any other Item of this Will in such manner as to qualify as a part of
such marital deduction.... There shall not be included in Part A any property
as to which such a marital deduction would not be allowed.
Id. Item Seven of the will addressed the payment of taxes and stated, “All estate taxes
shall be paid from the residue of my estate, and no claim shall be made against any life
insurance beneficiaries for payment of any pro rata part of such taxes.”
Id. There was no
savings clause in the will. The Fifth Circuit recognized that, “there is no provision for
payment of estate taxes only out of the non-marital portion of the estate, even if the
residue were to be divided prior to payment of such taxes”,
id. at 214, and the value of
the interest passing to the surviving spouse then, for which the marital deduction was
allowed, was the net value of the property interest after the payment of estate taxes
charged against it.
In Estate of Avery v. C.I.R., 40 T.C. 392 (1963), the United States Tax Court held
that the value of the marital deduction was reduced by payment of estate taxes. In that
case, the will first instructed that all debts and funeral expenses be paid as soon as
practicable and then directed that all estate taxes be paid out of the “general assets of my
estate.”
Id. at 393. The Fifth Item of the will devised the “rest, residue and remainder”
equally to the testator’s surviving wife, son and daughter.
Id. at 394. There was no
savings clause. The Commissioner of Internal Revenue argued that the residue, from
which the surviving spouse’s one-third was distributed, was that which remained after
estate taxes were deducted.
The Tax Court agreed, concluding that, “There is nothing in the will to support the
conclusion that the burden of the tax was to fall on the son and daughter and to be borne
only by their shares of the estate.” Id. at 399. The court found that the directive in Item
(continued . . .)
29
Children have asserted. Mr. Clancy, however, 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. Certainly,
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.
(. . . continued)
Second of the will that “Such taxes as my Executors are hereby directed to pay shall not
be charged against or deducted from any such gift, devise and bequest upon or by reason
of which such taxes are assessed and paid”, referred to only to the specific bequests and
not to the distribution of the residue. Id. With respect to the marital share, the court
concluded that it had to bear the burden of estate taxes as a result of the specific provision
in the will that required the payment of taxes from the general assets and, necessarily,
from the residue before any distribution.
Id.
30
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.
31
Orphans’ Court for Baltimore City
Estate No. 101962
Argued: June 1, 2016
IN THE COURT OF APPEALS
OF MARYLAND
No. 93
September Term, 2015
MICHELLE BANDY et al.
v.
ALEXANDRA CLANCY
Barbera, C.J.
Greene
Adkins
McDonald
Watts
Hotten
Battaglia, Lynne A.
(Retired, Specially
Assigned),
JJ.
Dissenting Opinion by McDonald, J.,
which Barbera, C.J., and Greene, J., join
Filed: August 24, 2016
The Majority opinion appears to be based on the premise that the pre-eminent
value for any testator is the avoidance of taxes. Perhaps there are people like that. If so,
one would expect them to have bought a Yugo years ago and scrupulously maintained it
to minimize and thereafter avoid the automobile excise tax.
In fact, while paying no more taxes than necessary is significant, most people have
other values that also inform important decisions for their lives – and for their heirs. In
the purchase of a car, for example, interests in function, reliability, comfort, and safety
may dissuade a person from purchasing the cheapest – and least taxed – car, although that
may mean paying more in tax. So also is the case in devising an estate plan. As this
Court has observed, “[m]inimizing estate and inheritance taxes for beneficiaries ... may
not always be the ultimate driving force behind the testator’s decisions regarding the
provisions contained in his or her will.” Noble v. Bruce, 349 Md. 730, 757,
709 A.2d
1264 (1998).
There appears to be no dispute that the estate plan implemented by Mr. Clancy’s
2007 will (1) provided for the payment of certain expenses and made specific bequests of
real and personal property to his wife from his second marriage (“Mrs. Clancy”), (2) set
aside a portion of his estate for Mrs. Clancy free of estate taxes (“the Marital Share”), (3)
then provided for the payment of taxes, and (4) finally divided the rest of his estate
evenly between a trust benefitting Mrs. Clancy (and ultimately their minor child) (“the
Family Trust”) and trusts benefitting the children from his first marriage (“the Older
Children’s Trusts”).
What is in dispute is the effect on that estate plan of an amendment of that will,
known as the Second Codicil. In the view of Mr. Clancy’s Personal Representative,1 that
amendment had the effect of achieving a significant reduction in tax liability (from $26
million to $15.7 million) while retaining the equal distribution (50% - 50%) of the
residual of the estate.
The reading of the will urged by Mrs. Clancy would achieve a smaller additional
tax reduction (from $15.7 million to $11.8 million), but would cast aside the plan for
equal distributions from the residual – despite the fact that the language of the will
directing equal distributions was not amended – and skew the distributions from the
residual in her favor (63% - 37%).
The Majority opinion opts for Mrs. Clancy’s interpretation of the will – an
interpretation in which an amended savings clause is construed to contradict basic terms
of the original will that remained unchanged. However, we ordinarily read provisions of
wills to be consistent unless there is no way to do so. In my view, the savings clause can
be read consistently with the original will to achieve the tax savings for which codicil
was intended without discarding the basic estate plan. Accordingly, I would adopt the
reading of the will offered by Mr. Clancy’s Personal Representative.
1
The interpretation that the Majority opinion ascribes to the Older Children is the
construction placed on the will and the codicil by Mr. Clancy’s Personal Representative.
The Older Children also defend that interpretation of the will and the codicil.
2
Background
The following supplement to the Majority opinion’s background information will
aid in understanding this dissent.
Gross Estate, Marital Deduction, and Taxable Estate
A gross estate refers to the total dollar value of all property and assets in which an
individual had an interest at the time of the individual’s death. Federal estate taxes are
assessed on the basis of the taxable estate, which is the gross estate minus any allowable
deductions.2 The primary deduction relevant here is the marital deduction. The value of
the marital deduction generally is the full value of all property in the gross estate that
passes from the decedent to a surviving spouse, provided that the interest passing to the
spouse does not terminate or fail. 26 U.S.C. §2056. A property interest that does
terminate, and ordinarily would not qualify for the marital deduction, may still qualify for
the marital deduction if it is “qualified terminable interest property” (“QTIP”).3
26
U.S.C. §2056(b)(7).
QTIP and Savings Clauses
To qualify a trust as a QTIP trust, the property must pass from the testator to that
trust, the surviving spouse must have a qualifying income interest for life, and the
2
There can be other adjustments, but they are not relevant here.
3
A testator may have various reasons for passing a terminable interest in a trust to
a spouse. For example, the testator may want to require that someone other than the
spouse administer the assets in the trust so that the spouse receives the income from the
assets but cannot deplete those assets.
3
necessary election must be made by the personal representative. 26 U.S.C.
§2056(b)(7)(B)(i). A surviving spouse has a qualifying income interest for life if:
(I) the surviving spouse is entitled to all the income from the
property, payable annually or at more frequent intervals, or
has a usufruct[4] 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.
26 U.S.C. §2056(7)(B)(ii). In order to treat property as QTIP, the personal representative
must make an irrevocable QTIP election on the appropriate tax return.
26 U.S.C.
§2056(7)(B)(v).
Because wills often include provisions that may conflict with the QTIP
requirements but that provide guidance for other trusts not intended to qualify as QTIP, a
testator will often include a savings clause in order to ensure that a trust intended to
qualify as QTIP in fact does so. Cf. Edward C. Renenger, Can a State’s Marital
Deduction Savings Clause Reform a Defective Marital Deduction? Estate of Davis v.
Commissioner, 57 Tax Law 615, 619 (2004) (“The requirements to meet the section
2056(b)(5) exception to the non-deductibility of terminable interests are rigorous ...
[W]here the rules are often extremely technical and the stakes may be high, it is not
surprising that advisers seek to minimize risks of disqualification. Using a marital
deduction savings clause is one way to minimize such risks.”).
4
In this context, the term “usufruct interest” refers to a right to use the fruits or
profits of the income resulting from the trust.
4
Apportionment of Obligation to Pay Taxes
While the amount of federal estate tax is determined by federal law, the allocation
of responsibility for paying that tax is determined by state law. Riggs v. Del Drago, 317
U.S. 95, 97-98 (1942).
In Maryland, the tax liability of an estate is generally apportioned among the
interested parties under the apportionment statute. Maryland Code, Tax-General Article
(“TG”), §7-308. By default, that apportionment is made “in the proportion that the value
of the interest of each person interested in the estate bears to the total value of the
interests of all the persons interested in the [taxable] estate.” TG §7-308(b)(1). Stated
differently, if a person has a 45% interest in the taxable estate, then that person must pay
45% of the estate tax due. Therefore, under the apportionment statute, a surviving spouse
who receives property that qualifies for the marital deduction would not pay estate taxes
based on the property covered by the marital deduction because that share is not part of
the taxable estate. See TG §7-308(e)(1) (in apportioning liability for federal estate tax,
allowance is to be made for any exemptions or deductions). Similarly, under the
apportionment statute, responsibility for paying those taxes would not be allocated to a
QTIP trust.
5
Opting Out of Apportionment
A testator, however, may customize how the estate taxes are paid, as is evident by
the fact that the testator may, in the will, opt out of the general apportionment scheme.5
TG §7-308(k); Pfeufer v. Cyphers, 397 Md. 643, 655,
919 A.2d 641 (2007) (“the intent of
the testator, as ascertained from the language of the will, controls the source of the funds
to be used to pay inheritance taxes so long as there is no conflict with the applicable
statute, other law or public policy.”); see also Johnson v. Hall,
283 Md. 644, 649,
392
A.2d 1103 (1978) (explaining that the will must clearly indicate the testator’s intent to
opt out of the apportionment statute). A testator may specify the portion of the estate’s
assets from which estate taxes are to be paid even when that customization may result in
taxes being paid from a portion of the estate that would otherwise qualify for a deduction
in the computation of the tax. See Pfeufer,
397 Md. at 660; accord Second Nat’l Bank of
New Haven v. United States,
351 F.2d 489, 494 (2nd Cir. 1965) (“The codicil shows a
desire to qualify one-third of the residue as a marital deduction. It does not disclose an
intention to have this part of the residue in effect tax free and grossly disproportionate to
the other two-thirds. That which the testator did not choose to do during his lifetime the
courts should not do after his death.”).
5
This distinction between the computation of a tax and the payment of that tax is
not unique. For example, one who receives the proceeds of a Roth IRA excludes those
funds from the calculation of his or her income tax liability, but may well pay that
liability with those funds. In the circumstance of the marital deduction, computation and
payment of taxes are intertwined to the extent that funds used to pay estate taxes are not
counted as part of the deduction. See 26 U.S.C. §2056(b)(4)(A).
6
By opting out of apportionment, a testator may qualify a larger portion of the
estate for the marital deduction – with the resulting benefit in the computation of the tax –
but still allocate payment of estate tax to a portion of the estate intended to benefit the
surviving spouse and thereby pass a larger proportion of the estate to all of the estate’s
beneficiaries, as well as the surviving spouse.
Discussion
The Text of the Will and Codicil
Construction of a will, like interpretation of any other legal text, begins with the
plain meaning of the words of the document. Pfeufer, 397 Md. at 649. When
interpreting a will, a court must ascertain and effectuate the testator’s expressed intent, as
gathered from an examination of the will and codicils as a whole, as if they were one
complete document. Id.; McIntyre v. Byrne,
217 Md. 71, 77,
141 A.2d 692 (1958) (“[t]he
primary object in construing a will is to ascertain the intention of the testator from the
whole instrument”); Associated Professors of Loyola College of City of Baltimore v.
Dugan,
137 Md. 545,
113 A. 81 (1921). In general, we interpret a will so as to
harmonize its provisions and avoid conflicts, such that the interpretation gives effect to
each provision wherever possible. McIntyre,
217 Md. at 77.
Resolution of this case thus begins with the text of the will and codicils. As the
Majority opinion sets forth, the will provides that a portion of the estate is “set apart” (the
“Marital Share”) before the payment of taxes to fund a Marital Trust. Majority slip op. at
12-14 (Item Third, Item Sixth (A)). The will then provides that, after the Marital Share is
set apart, estate and related taxes are to be paid out of the residuary estate, subject to
7
limitations not relevant here. Id. (Item Third). There appears to be no dispute among the
parties that, in directing how estate taxes are to be paid, Mr. Clancy opted out of the
apportionment statute.6 The will then provides that “one-half of the remainder of my
residuary estate shall be paid over and distributed to my trustee as [the Family Trust]”
and “the other one-half of the remainder of my residuary estate shall be” paid over and
distributed to the trustee as the Older Children’s Trusts.
Id. (Item Sixth (B), (C)). Unlike
the provision concerning the part of the estate (the Marital Share) used to fund the
Marital Trust, the parts of the estate used to fund the Family Trust and the Older
Children’s Trusts are not to be “set apart” before the payment of taxes.
The will also contained a Savings Clause to ensure that the Marital Share would
qualify for the marital deduction when estate taxes are computed. It explicitly limited the
Personal Representative’s or trustees’ authority to do anything that would prevent the
estate “from receiving the benefit of the marital deduction as hereinbefore set forth.” Id.
(Item Twelveth (D)).7
6
The Orphans’ Court decision in this case discoursed at some length on whether
the apportionment statute applied before accepting the proposition that the apportionment
statute did not apply.
7
Specifically, it provided:
[N]either my personal representative nor my trustee shall
have or exercise any authority, power, or discretion over 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.
8
The Second Codicil8 amended the will in several respects to allow the Family
Trust to qualify for the marital deduction when estate taxes are computed. For example,
that codicil eliminated a provision of the will that terminated Mrs. Clancy’s interest if she
remarried and also eliminated a provision of the will that allowed the trustee discretion to
use the funds in the Family Trust for the benefit of the minor child during Mrs. Clancy’s
lifetime. See Majority slip op. at 15-16 (amendments of Item Eighth). Consistent with
those amendments, the Second Codicil also amended the Savings Clause to ensure that
the Family Trust, like the Marital Share, would qualify for the deduction when taxes are
computed.9 However, with respect to the payment of taxes, the Second Codicil did not
amend Item Third to provide that the Family Trust was to be set apart before the payment
of taxes. Thus, the plain meaning of the text of the will, as amended by the Second
Codicil, requires that the Marital Share and the funds intended for the Family Trust both
qualify for the marital deduction when taxes are computed; however, the Marital Share is
8
There were two codicils to the will. The First Codicil is not at issue here.
9
That portion of the Second Codicil provides, in pertinent part:
[N]either 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.
9
“set apart” from the funds used to pay those taxes while the one-half of the residuary
estate used to fund the Family Trust is not.
Reconciling the Will and Second Codicil
In short, the will provides that the Family Trust and the Older Children’s Trusts
receive equal shares of the residual of the estate after payment of taxes. The Second
Codicil provides that the estate should receive the benefit of the marital deduction with
respect to both the Marital Share and the Family Trust in the computation of estate tax
liability. If these two provisions can be reconciled, then ordinary principles of will
construction require that we read them to be consistent.
As an initial matter, we ought to expect that these two provisions can be
reconciled. While the operative language in the amended Savings Clause comes from the
Second Codicil, the original will contained nearly identical language. Here, there is no
evidence of a textual conflict. All that the Savings Clause requires – both before and
after its amendment by the Second Codicil – is that the estate “receiv[e] the benefit of the
marital deduction as hereinbefore set forth.” In order to receive the benefit of the marital
deduction, the estate’s personal representative must file the appropriate form so as to
qualify for QTIP treatment the property in which Mrs. Clancy will have a terminable
interest — as relevant here, the Family Trust – and not exercise the various discretionary
powers authorized under the will (e.g., Item Thirteenth) in a way that would undermine
that election. Thus, the Savings Clause can be read to require merely that the Personal
Representative fill out the appropriate form and abide by the other changes to the Family
10
Trust to qualify the Family Trust for QTIP treatment.10 Doing so in no way conflicts
with paying the taxes out of the residual before the Family Trust and Older Children’s
Trusts are funded and thereby maintaining the equal distributions specified in the will.
The Majority Opinion’s Approach
In adopting Mrs. Clancy’s preferred interpretation the Majority opinion finds an
“apparent conflict”11 and resolves it by holding that the Second Codicil “trumps” the
specific directions in the will (in Item Third) concerning the payment of taxes, even
though the Second Codicil made no change to those directions. Majority slip op. at 20-
21. In my view, the Majority opinion is mistaken and there is no need to resort to such
radical surgery.
The reasoning of the Majority opinion appears to be that the Savings Clause, by
itself, mandates that the residual estate be distributed so as to obtain the maximum marital
deduction with respect to the Family Trust, despite the fact that Item Third prescribes
such treatment only for the Marital Share. This entails “setting apart” one-half of the
residual destined for the Family Trust before the payment of taxes, with the result that the
10
The Majority opinion appears to acknowledge this. See Majority slip op. at 20
(“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”).
11
At least, the Majority opinion sometimes appears to do so. On the other hand,
the Majority opinion also states, “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.” Majority slip op. at 20. But if
that were true, then there would be no conflict, and that provision of the original will
concerning payment of taxes from the residual after the Martial Share is set aside should
remain operative.
11
half of the residual devoted to the Older Children’s Trusts absorbs all of the responsibility
for payment of taxes. Thus, an amendment of the will that on its face affected only the
computation of taxes is being construed to alter the directions in the will for the payment
of taxes and radically changes the relative distributions to the beneficiaries.
In essence, the Majority opinion, without explanation, reads the Second Codicil as
expressing Mr. Clancy’s intent that the distribution of his estate maximize the marital
deduction at all costs. There is simply no basis for this interpretation. The Second
Codicil provides that the estate must receive “the benefit of the marital deduction as
hereinbefore set forth,” not “the benefit of the maximum marital deduction,” so the text
provides no support to the Majority opinion’s reading. As justification for its
interpretation, the Majority opinion relies on a case in which the will specifically
provided that it was to preserve “the maximum marital deduction.” See Majority slip op.
at 21 citing Northeastern Pennsylvania Nat. Bank & Trust Co. v. U.S., 360 F. Supp 116,
117 (M.D.Pa. 1973) (“The direction to obtain the maximum marital deduction is the
clearest and the predominant evidence of Rodgers’ intent.”) (emphasis added).12 By
12
The Majority opinion also cites an IRS revenue ruling that is similarly
distinguishable from this case. See Majority slip op. at 22-23 (citing Rev. Rul. 75-440
(1975)). That ruling concerned a will that directed the creation of a trust in an amount
equal to the “maximum marital deduction” and gave further detailed directions as to the
computation of that amount to ensure that the maximum amount was transferred to the
trust. Consistent with those provisions, a savings clause in the will limited any action by
the testator’s Fiduciary that would “lose all or any part of the tax benefit afforded my
estate by the Marital Deduction.” By contrast, the Savings Clause in Mr. Clancy’s will
does not contain language concerning the maximum marital deduction or the loss of “any
part” of the marital deduction.
12
contrast, the Savings Clause of the Second Codicil in this case does not specify that the
estate should receive the maximum possible marital deduction.13
The Majority opinion also reasons that, if taxes are paid out of any part of the
residual estate before the Family Trust is funded, estate tax will be paid on funds that
might otherwise have become part of the Family Trust and would have had the benefit of
the marital deduction. Majority slip op. at 23-24. But that appears likely to happen any
time a testator opts out of the apportionment statute and elects to allocate the payment of
some part of the tax to assets that could otherwise fund a distribution that would qualify
for the marital deduction.14 It is telling that the testator here referred to the Marital Share
being “set apart” before the payment of taxes, but did not use that language in relation to
the funds intended for the Family Trust – nor amend Item Sixth in that respect as part of
the Second Codicil.
13
It is true, as the Majority opinion observes (Majority slip op. at 4-5) that federal
law has been amended over the years to remove a statutory cap on the maximum marital
deduction. Of course, that does not mean there is no longer a “maximum” deduction for
particular circumstances.
14
For example, in Estate of Fine v. Commissioner, 90 T.C. 1068 (1988), the will
directed the payment of taxes out of the residual estate “without apportionment” and then
provided for distribution of the remainder of the residual in specific shares to the
testator’s widow and other relatives. A savings clause limited the authority of the
executor to do anything that would “lose all or any part of the tax benefit afforded by the
marital deduction.” The Tax Court construed the will to provide for payment of taxes out
of funds that could otherwise have funded the widow’s share and therefore would have
qualified for the marital deduction. The court also noted that the testator contemplated
such a result in opting out of the state apportionment statute.
13
Conclusion
Mrs. Clancy’s interpretation – adopted by the Majority opinion – would skew the
distribution of the residual estate significantly in her favor contrary to basic provisions of
the will while reducing the estate’s tax liability somewhat more than what it would
otherwise be. It does so by interpreting the Savings Clause to effect a radical change in
the estate plan without any explicit direction to do so. The Personal Representative’s
construction of the will and codicil would treat the Savings Clause for what it is – a
savings clause – and maintain the equal distribution of the residual specified in the will,
both originally and as amended, while achieving the significantly reduced tax liability
that is the evident aim of the Second Codicil.
Even assuming that the Second Codicil could mean what the Majority opinion
reads it to mean – which is far from clear – we ordinarily resolve textual ambiguities in
favor of consistency, not inconsistency. Where there are two possible interpretations of a
provision of a codicil, one which conflicts with the original will and one which does not,
our precedents favor adoption of the interpretation that does not conflict. Thus, even if
the Second Codicil were ambiguous, it ought to be interpreted to be consistent with the
original will rather than to contradict it.
Chief Judge Barbera and Judge Greene have advised that they join this opinion.
14
