Bandy v. Clancy
144 A.3d 802
| Md. | 2016Background
- Testator Thomas L. Clancy, Jr. died in 2013 leaving a will (2007) and two codicils; principal beneficiaries were his second wife (Alexandra) and children from a prior marriage (Older Children).
- The will allocated a Marital Trust (1/3 of net estate) and created a Non-Exempt Family Residuary Trust (half of the remainder) for Mrs. Clancy and their minor child, with the other half of the remainder going to the Older Children’s trusts.
- ITEM THIRD directed that estate taxes be paid from the residuary estate; ITEM SIXTH and related provisions set timing and order for funding trusts, with the Marital Share expressly to be “set apart” before taxes.
- A Savings Clause (ITEM TWELFTH) sought to prevent any action that would deny the estate the benefit of the marital deduction; the Second Codicil expanded that savings clause to explicitly include the Non-Exempt Family Residuary Trust and granted Mrs. Clancy certain powers to convert unproductive property.
- Dispute at Orphans’ Court: whether the amended savings clause bars charging any portion of the federal estate tax to the Family Trust (thereby shifting tax burdens to the Older Children). Orphans’ Court held the clause prevented the Family Trust from bearing estate taxes; Maryland appellate court affirmed.
Issues
| Issue | Plaintiff's Argument (Older Children / Personal Representative) | Defendant's Argument (Mrs. Clancy) | Held |
|---|---|---|---|
| Whether the Second Codicil’s amended savings clause prevents charging estate taxes to the Family Trust | Will’s ITEM THIRD plainly directs taxes be paid from the residuary, so the Family Trust (half the remainder) must share tax burden | Savings clause expressly protects marital deduction for both Marital Trust and Family Trust, so Family Trust cannot be used to pay estate taxes | The court held the savings clause (as amended) prevents the Family Trust from bearing federal estate taxes; affirmed Orphans’ Court |
| Whether the codicil’s savings clause conflicts with earlier will directions and, if so, which controls | Codicil cannot rewrite the will to materially alter funding/allocation scheme not expressly changed | Codicil’s savings clause is an interpretive aid expressing testator’s predominant intent to preserve marital deduction for Family Trust | Court treated the codicil’s savings clause as clarifying and dispositive regarding testator’s intent to protect the marital deduction and thus to trump the tax-payment direction to the extent it would impair that deduction |
| Whether QTIP qualification and related distributions allow trustee or personal representative to pay taxes from Family Trust without losing the marital deduction | Even if QTIP election, paying taxes from the Family Trust does not necessarily disqualify the marital deduction; will’s tax clause governs | Paying estate taxes from property used to compute the marital deduction reduces that deduction and the savings clause forbids actions that would cause that reduction | Court concluded that payments from the Family Trust would reduce the marital deduction and thus are barred by the savings clause |
| Precedential weight of IRS Rev. Rul. and case law on savings clauses vs. explicit tax-payment provisions | Older Children cite cases (Fine, Posner) where tax-payment provisions required taxes to be borne by residue despite savings clause language | Mrs. Clancy relies on Northeastern Pennsylvania Bank, Rev. Rul. 75-440, and related authorities upholding interpretive savings clauses that preserve marital deduction | Court relied on Northeastern and IRS guidance and distinguished Fine/Posner, holding savings clause here clearly expresses intent to protect the Family Trust from tax apportionment |
Key Cases Cited
- Riggs v. Del Drago, 317 U.S. 95 (explains state law determines which beneficiaries bear federal estate taxes)
- Northeastern Pennsylvania Nat. Bank & Trust Co. v. United States, 360 F. Supp. 116 (M.D. Pa.) (savings clause can prevent residue from bearing taxes if intended to secure maximum marital deduction)
- Second Nat'l Bank of New Haven v. United States, 351 F.2d 489 (2d Cir.) (codicil qualifying a marital share did not necessarily exempt that share from tax liability where will directed taxes from residue)
- First Nat. Bank of Atlanta v. United States, 634 F.2d 212 (5th Cir.) (residuary split into marital and non-marital shares did not preclude charging estate taxes against marital portion absent a savings clause)
- Pfeufer v. Cyphers, 397 Md. 643 (Md.) (state will language controls source of inheritance taxes when testator opts out of statutory apportionment)