Maryland Court of Special Appeals: Tax Court Erred in Interpreting Will to Allow for Marital Deduction
Leanne Broyles, Esq., Associate
Executive Summary
Proper interpretation of will provision regarding whether estate may claim $2.25 million that passed to spouse as marital deduction to decedent’s gross estate depends on what terms of the will say-not the intent the terms may suggest.
Tax Court is only authorized to waive interest and penalties for reasonable cause; estate has burden to provide affirmative evidence that such reasonable cause exists, or that there was clear error in Comptroller’s assessment
A recent Maryland Court of Special Appeals (the Court) decision reiterates the importance of using carefully drafted and up-to-date language in estate planning documents, such as the will at issue in Comptroller v. Estate of Meyers, Sr.[1]Here, the estate’s failures to file a timely estate tax return and to respond to a series of Comptroller notices ultimately resulted in the Comptroller’s assessment of significant taxes, interest and penalties-without allowing a marital deduction. Emphasizing that the actual language of the will controls-not an inferred intent from the will’s terms, and certainly not the tax laws in force at the time of death-the Court found that the Tax Court erred by interpreting the will to allow a marital deduction, resulting in no estate tax liability. Notably, the Court also found that: (1) the Tax Court failed to sufficiently explain its decision regarding penalties and interest, and (2) the estate has the burden to either establish reasonable cause to waive interest and penalties or prove error on the Comptroller’s part.
Facts
The decedent, William Meyers, Sr., died testate in December of 2012, survived by his wife and two adult children. Approximately three months after his death, the Personal Representative of his estate (the Estate) filed his will dated June 3, 2009 with Baltimore County’s Register of Wills.
In January of 2014, an inventory was filed with the Register of Wills, indicating that the Estate’s value was just over $3.2 million, consisting of stock and real estate. The decedent’s other assets were owned with his wife as tenants by the entireties. The decedent’s wife died about one year later, leaving assets worth approximately $2.25 million to be distributed through her estate.
The Personal Representative did not file a Maryland Estate Tax Return. Following the filing of the inventory, the Register of Wills provided the Comptroller a partial copy of a docket sheet for the Estate. Over the next two years, the Comptroller sent three different types of notices to the Personal Representative about the “missing” Maryland estate tax return. The Personal Representative failed to respond to any of the notices.
The Orphans’ Court approved the Estate’s “Second and Final Administration Account,” which showed an estate value just over $3 million, with approximately $2.8 million remaining after expenses. About $2.1 million of that remainder was distributed to the wife’s estate and $754,766.50 was distributed to one of the decedent’s sons.
In June of 2016, the Comptroller assessed taxes, interest and penalties based on the January 2014 Inventory showing $3.2 million of estate assets. Thereafter, the Estate appealed the Comptroller’s assessment to the Maryland Tax Court. The Tax Court held that: (1) the $2.25 million distributed to the wife’s estate was allowable as a marital deduction per the terms of the decedent’s will; and (2) the Estate did not owe estate taxes; and the assessment of interest and penalties would not be upheld. The Circuit Court for Baltimore County affirmed the Tax Court’s decision, remanding with instructions for the Tax Court to value certain assets and include them in the Estate.
The Comptroller appealed to the Maryland Court of Special Appeals, arguing that under the terms of Decedent’s will, the $2.25 million was not distributed to the wife as a bequest; rather, it passed to a residuary trust[2]established by the will and therefore did not qualify for the marital deduction. Additionally, the Comptroller argued that the assessment of penalties and interest was proper.
Applicable Law and Analysis
The primary dispute was whether the Estate was able to claim the $2.25 million that ultimately was transferred to the Wife as a marital deduction against the Decedent’s gross estate. If allowed, the decedent’s taxable estate for Maryland estate tax purposes would fall below the $1 million exemption threshold effective at his death. As such, the Estate would have no estate tax liability.
CitingBandy v. Clancy,[3]the Court first clarified that “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 thetaxable estate, which is the gross estate minus any allowable deductions.[4]
The Court continued to explain that according toComptroller of the Treasury, in Maryland a gross estate is comprised of two parts: the federal gross estate (determined by the IRS), plus any property apart from the federal gross estate which is included in Tax-Gen. §7-309(b)(6).[5]The Court noted that only the first part was at issue in this case.
Considering the marital deduction, the Court again citedBandy, which provides that the marital deduction is generally “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.”[6]
Agreeing that the decedent’s federal taxable estate value would be equal to the Maryland federal taxable estate value, the Court emphasized that in 2012 (the year Decedent died), the exclusion amounts for federal and Maryland estate taxes were different. Specifically, $5.12 million of a taxable estate was exempt from federal estate taxed, but only $1 million was exempt from Maryland estate taxes.
As such, the Estate’s $3.2 million value, even without application of the marital deduction, owed no federal estate taxes, because it was clearly less than the federal exclusion amount of $5.12 million. However,withoutthe marital deduction, the Estate owed Maryland estate taxes because the value of the taxable estate exceeded $1 million.
Significantly, according to the Court, whether the marital deduction was allowed “hinged” on whether that amount was passed to the Wife (or to the Residuary Trust) as a bequest under the following provision (Item V) in Decedent’s will:
If my beloved wife, […], survives me, I give to her an amount equal to the lesser of (1) the maximum marital deduction available to my estate, less the value of all other property interests which qualify for the marital deduction and pass or have passed to my said wife either under provision of this, my Will, or in any manner outside of this, my Will; and (2) the lowest amount, if any (including zero) which, when added to the value of all other property interests which qualify for the martial deduction and pass or have passed to my wife either under another provision of this, my Will, or in any manner outside of this, my Will, after allowing for the unified credit against the Federal Estate Tax and the State Death Tax Credit (if use of this credit does not increase the State Death Taxes paid) reduce[s] to zero the Federal Estate Tax payable by my estate. It is my intention to use the maximum amount of any unified credit to fund the RESIDUARY TRUST as long as and provided that my estate is not required to pay any Estate Tax.
It is my intention to use the maximum amount of any unified credit to fund the RESIDUARY TRUST as long as and provided that my estate is not required to pay any Estate Tax.[7](emphasis added).
A. Interpreting Item V of the Will
Clarifying that the Court must consider what the terms of the will express-not the intent the terms may suggest,[8]the Court interpreted Item V as establishing a marital bequest to Wife, calculated as follows:
the “amount equal to the lesser of” (1) the maximum marital deduction available to [Estate] (less the value of other property interests that passed to his wife, if any) and (2) the lowest amount which would reduce to zero the Estate’s federal liability (after “allowing for” certain credits).[9]
In contrast, the Court pointed out that the Tax Court had not applied that formula; instead, the Tax Court seemed to have focused on the last sentence of Item V and inferred an intention on Decedent’s part to establish a marital bequest that was eligible for a marital deduction.
Accordingly, the Court indicated that the Tax Court should reconsider the Item V language, as written, assign a final value to the Item V marital bequest and calculate the Estate tax owed therefrom.
Thus, the Court: (1) reversed the circuit court’s affirmance; (2) remanded the case with instructions to vacate the Tax Court’s order; and (3) remanded to the Tax Court for further proceeding in accordance with the Court’s decision.
B. Insufficient Explanation of Interest and Penalties Decision and Failure to Use Reasonable Cause Standard
The Court stated that it was unable to “meaningfully” review the Tax Court’s decision regarding interest and penalties, because the Tax Court failed to explain the decision and reasoning used. Furthermore, the Court observed that once the Item V value is recalculated on remand-the appropriate interest and penalties calculation may or may not be affected.
The Court explained that, per Frey v. Comptroller of Treasury[10]and Comptroller of the Treasury,[11]the Tax Court is authorized to waive interest and penalties for reasonable cause. Importantly, though, the Estate has the burden to provide affirmative evidence that such reasonable cause exists, or that there was clear error in the Comptroller’s assessment.
Finding no indication in the record that the Tax Court used the reasonable cause standard, the Court reversed the circuit court’s order on this issue and remanded to both vacate the Tax Court order and remand the case for additional proceedings consistent with the Court’s decision.
Conclusion
Again, language must be carefully drafted in estate planning documents and updated to reflect changes in relevant laws, to ensure that an individual’s intentions are legally fulfilled without being subject to various interpretations. Furthermore, filing estate tax returns timely and responding to tax authorities’ follow up inquiries and notices may stymie accrual of penalties and interest. For these reasons and more, one is well-advised to consult with an estate planning professional who can guide you through the process and help you feel secure in knowing that your wishes will be implemented.
If you have estate planning questions or concerns, please contact Leanne Broyles today at Frost Law at 410-497-5947.
[1]No. 2540, 2 (Md. Ct. Spec. App. Feb. 7, 2020) (Court added emphasis in original).
[2][2] It was undisputed that the residuary trust did not qualify for the marital deduction.
[3]449 Md. 577, 610 (2016).
[4]Comptroller v. Estate of Meyers, Sr. at 2 (Court added emphasis in original).
[5]465 Md. 76, 89 (2019).
[6]Comptroller v. Estate of Meyers, Sr.,at 3,citingBandy,449 Md. at 610 (citing26 U.S.C. §2056).
[7]Id. at 4.
[8]Citing Pfeuer v. Cyphers, 397 Md. 643, 648 n.5 (2007).
[9]Id. at 15.
[10]422 Md. 111, 29 A3d 476 (2011).
[11]465 Md. 76, 213 A.3d 629 (2019).
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