Opinion ID: 2020619
Heading Depth: 1
Heading Rank: 7

Heading: Federal Estate Tax

Text: In their first assignment of error, the Scharvins argue the county court erred in ordering them to reimburse the trust for a portion of the federal estate tax paid by the trust. We note at the outset that the Nebraska estate tax is not at issue in this appeal. The Scharvins argue that article X of Ervin's trust agreement waived any right of recovery against them and that instead, the full estate tax should be paid by the Blauhorns as beneficiaries under Ervin's trust. In particular, the Scharvins draw our attention to the following language in article X: [T]ax payable by Settlor's estate shall be allocated as follows with no right of reimbursement from any recipient or beneficiary of any such property whether or not such property passes under this Will. Some background as to the estate law principles at play is helpful to a full understanding of the issue presented by this case. Prior to 1981, the Internal Revenue Code permitted a maximum marital deduction of 50 percent of the value of the estate to the first spouse to die. [5] This deduction was only available if the surviving spouse was given control over the disposition of the marital property at the time of the surviving spouse's death. [6] This all changed with the Economic Recovery Tax Act of 1981, which essentially created the QTIP trust. [7] In discussing the need for the QTIP trust, the 11th Circuit has observed: As divorce and remarriage rates rose, Congress became increasingly concerned with the difficult choice facing those in second marriages, who could either provide for their spouse to the possible detriment of the children of a prior marriage or risk under-endowing their spouse to provide directly for the children. In the Economic Recovery Tax Act of 1981, Congress addressed this problem by creating the QTIP exception to the terminable property rule. According to the House of Representatives Report, the QTIP trust was designed to prevent a decedent from being forced to choose between surrendering control of the entire estate to avoid imposition of estate tax at his death or reducing his tax benefits at his death to insure inheritance by the children. [8] The current allowance for QTIP trusts is found in I.R.C. §§ 2044 and 2056(b)(7)(B) (2000). As the facts above indicate, Bonnie and Ervin's estate plan employed a QTIP trust. Bonnie, as the first to die, left a life interest in her property to Ervin with the remainder interest to the Scharvins. No tax was paid on Bonnie's estate. When Ervin died, his property was left to the Blauhorns, while the life interest he held in Bonnie's property was extinguished and the Scharvins received full ownership of the property. Tax was owed (and eventually paid) by Ervin's estate. It is reimbursement for a portion of this tax which is at issue in this case. Section 2207A of the Internal Revenue Code is instrumental in answering this question. That section provides in relevant part: (a) Recovery with respect to estate tax (1) In general If any part of the gross estate consists of property the value of which is includible in the gross estate by reason of section 2044 (relating to certain property for which marital deduction was previously allowed), the decedent's estate shall be entitled to recover from the person receiving the property the amount by which  (A) the total tax under this chapter which has been paid, exceeds (B) the total tax under this chapter which would have been payable if the value of such property had not been included, in the gross estate. (2) Decedent may otherwise direct Paragraph (1) shall not apply with respect to any property to the extent that the decedent in his will (or a revocable trust) specifically indicates an intent to waive any right of recovery under this subchapter with respect to such property. [9] Prior to 1997, § 2207A(a)(2) provided only that Decedent may otherwise direct by will[.] Paragraph (1) shall not apply if the decedent otherwise directs by will. [10] As an initial matter, we note that Congress' general intent with respect to the federal estate tax is that it be governed by state law and that absent contrary congressional enactments, state law governs the allocation of tax burden. [11] However, we conclude that § 2207A directly applies to the question presented by this appeal and, as such, is a contrary congressional enactment. As a result, we conclude that § 2207A preempts any applicable state law to the extent that state law might purport to deal with the payment of federal estate tax attributable to QTIP. [12] Under § 2207A, Ervin's estate is entitled to recover from the Scharvins the tax paid by the estate that would not have been owed had Bonnie's property not been included in Ervin's estate. But § 2207A does provide an exception for Ervin that if he, by will or trust, otherwise direct[ed] by specifically indicating] an intent to waive any right of recovery under this subchapter, then no recovery is allowed. The question of whether a decedent otherwise directed] has previously been addressed by other jurisdictions. For example, in Matter of Estate of Gordon, [13] the court, in interpreting the pre-1997 version of § 2207A, concluded that specific reference to QTIP was required in order to `otherwise direct ... by will.' Other jurisdictions have followed suit. [14] Our research has revealed no cases interpreting the current, i.e., 1997, version of § 2207A. We note, however, that the current version is more specific than its predecessor with respect to waiver. We conclude, therefore, that the 1997 amendment only reinforces the correctness of prior decisions. In addition, a plain reading of the statute supports requiring a specific reference to QTIP. Statutory language is to be given its plain and ordinary meaning. An appellate court will not resort to interpretation to ascertain the meaning of statutory words which are plain, direct, and unambiguous. [15] Section 2207A provides that an intent to waive any right of recovery under this subchapter must be specifically made. (Emphasis supplied.) A plain reading of the language shows that some reference to this subchapter, in other words, § 2207A(a), is necessary in order to show a testator's intent to waive the right to recovery. [16] The language of article X of Ervin's trust agreement, which was signed after the effective date of the current version of § 2207A, indicated that there was to be no right of reimbursement against recipients or beneficiaries. However, we conclude that such was insufficient to waive the trust's right of reimbursement under that section. As is detailed above, this is so because there was no reference to § 2207A, or even to the QTIP trust or property, in article X, and thus no language specifically indicating] an intent to waive any right of recovery under this subchapter as required by § 2207A. The county court did not err in ordering the Scharvins to reimburse the trust for a portion of the federal estate tax paid by the estate, and the Scharvins' first assignment of error is without merit.