Bandy v. Clancy

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/small-

businesses-self-employed/whats-new-estate-and-gift-tax (https://perma.cc/4WRH-

PTKQ).

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