CONSTRUCTION OF THE TRUST CREATED UNDER A TRUST AGREEMENT DATED APRIL 5, 2010, BY AND BETWEEN JANET C. FISHER, NOW DECEASED, AS GRANTOR, AND A NANCY FISHER KIRSCHNER, CHARLES FISHER AND BARBARA SNOW, AS CO-TRUSTEES
IN THE MATTER OF THE CONSTRUCTION OF THE TRUST CREATED UNDER A TRUST AGREEMENT DATED APRIL 5, 2010, BY AND BETWEEN JANET C. FISHER, NOW DECEASED, AS GRANTOR, AND A NANCY FISHER KIRSCHNER, CHARLES FISHER AND BARBARA SNOW, AS CO-TRUSTEES. (86/B/11) — This is a contested construction proceeding involving the disposition of the substantial remainders of two grantor retained annuity trusts respectively established in 2009 and 2010 by Janet C. Fisher.
Grantor established the first trust on April 3, 2009 (the "2009 GRAT"), and the second on April 5, 2010 ("the 2010 GRAT"), naming her three children (Nancy, Barbara and Charles) as trustees of both trusts. Each GRAT had a two-year term and, for each of the two years, the trustees were required to pay to grantor (or grantor's estate, if grantor was not then living), a fixed percentage of the initial fair market value of the property transferred to the trustees. Upon the expiration of the term of each trust, its remainder, if any, was to be distributed pursuant to substantially identical provisions in subparagraph (C) of Clause FIRST of each trust instrument, which provide in relevant part:
(C) Upon the expiration of the Trust Term, the Trustees shall distribute all of the remaining principal and, except as otherwise required by applicable Regulations, all income of the trust accrued or on hand...as follows:
(1) If the Grantor is then living, such property shall pass to the Grantor's children NANCY FISHER KIRSCHNER, CHARLES A. FISHER AND BARBARA SNOW, in equal shares if all of them are then living....
(2) If the Grantor is not then living, the remaining trust property shall pass as follows:
(a) A fractional share of the trust property, the numerator of which is equal to the amount of said trust property which is includible in the Grantor's gross estate for Federal estate tax purposes, and the denominator of which is equal to the value of the entire trust property, as finally determined in the Federal estate proceeding in the Grantor's estate, shall pass to the Grantor's estate [emphasis added].1
(b) The balance thereof shall pass to the Grantor's children NANCY FISHER KIRSCHNER, CHARLES A. FISHER AND BARBARA SNOW, in equal shares if all of them are then living....
Grantor died on December 28, 2010, at the age of 94, before either trust had terminated, triggering the application of subparagraph (C)(2) of Clause FIRST and the calculation of the "fractional share" to determine how the trust remainders should be distributed.
Under grantor's will, dated July 19, 2002, and codicil, dated January 9, 2009, which were admitted to probate in this court, any property distributable to grantor's estate from the 2009 GRAT or the 2010 GRAT under subparagraph (C)(2)(a) of Clause FIRST passes as part of the residuary estate, which the will divides in Clause FOURTH among the grantor's three children, each daughter given a fortyfive percent (45 percent) share and the son given only a ten percent (10 percent) share. Grantor explained the inequality as follows:
I wish to record that I intentionally have provided for disproportionate division of my residuary estate...in order to adjust, to some extent, for the gifts that my late husband AVERY made to or for the benefit of my son CHARLES.
By contrast, any portion of the GRATs that passes under subparagraph (C)(2)(b) is distributed equally to the three children. Thus, the smaller the "fractional share," the smaller the portion of trust property passing to the residuary estate and, consequently, the greater the benefit to Charles.
The determination of the "fractional share" would have been routine but for the fact that decedent died in 2010. Pursuant to the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), the federal estate tax was inapplicable to the estates of decedents dying in that year. However, with the enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Tax Act"), the federal estate tax was reinstated for decedents dying in 2010, with the proviso that the fiduciaries of any such decedent's estate could elect to apply EGTRRA and pay no estate tax; in the case of such election, the estate's assets are subject to a modified carryover basis. The executors here, Nancy and Charles, have made such an election.
Nancy, a trustee and beneficiary of the trusts as well as an executor and beneficiary under grantor's will, commenced this proceeding to resolve what she contends is a construction issue arising from the election. Specifically, she argues that application of the 2010 Tax Act and EGTRRA to the grantor's estate renders subparagraph (C)(2)(a) of Clause FIRST of the trust instruments ambiguous, since the "fractional share" calculation is based upon federal estate tax concepts that are "inapplicable" as a result of the executors' election. According to her, absent the construction for which she argues, the "fractional share" cannot be calculated, and the amount passing to the grantor's estate therefore cannot be determined.
Based upon this purported ambiguity, Nancy offers extrinsic evidence to show that grantor intended, if she died during the term of the trusts, to leave all remaining property in the GRATs to her estate. To effectuate such intent, Nancy proposes that the court construe the terms in subparagraph (C)(2)(a) of Clause FIRST as such terms are defined in the 2010 Tax Act, the law in effect at grantor's death, without regard to whether the executors have elected to apply EGTRRA to grantor's estate.
Alternatively, Nancy argues that EPTL §2-1.13 should apply to the "fractional share" provision of the GRATs. Subsection (a)(1) of that provision provides for certain formula clauses to "be deemed to refer to the federal estate tax law as applied with respect to decedents dying in  regardless of whether an election is made not to have the federal estate tax apply to a particular estate." If the subsection applies, one hundred percent (100 percent) of the funds remaining in each GRAT would pass to grantor's estate under subparagraph (C)(2)(a) of Clause FIRST.2
Charles, who would be adversely affected by the construction offered by petitioner, as well as by the application of EPTL §2-1.13, has filed opposition papers.3 He argues that the language of the provisions at issue is unambiguous and requires that the trusts' assets be distributed equally among the grantor's children as provided in subparagraph (C)(2)(b) of Clause FIRST. Further, he maintains that, to the extent that such provision can be deemed ambiguous and resort to extrinsic evidence is required, he is entitled to discovery on the issue of grantor's intent. Finally, as for EPTL §2-1.13, Charles, asserts that, by its terms, the statute does not apply.
We begin with EPTL §2-1.13, since, if it applies, the "fractional share" calculation could be determined as if no election to opt out of the federal tax scheme had been made. The very title of the statute, "Certain formula clauses to be construed to refer to the federal estate...tax laws applicable to decedent's dying after December [31, 2009] and before January [1, 2011]", makes clear that the statute does not apply to every formula clause that makes reference to the federal estate tax. The limited applicability of the statute is specifically set forth in the only relevant portion, subsection (a) (1), which provides:
If by reason of the death of a decedent property passes or is acquired under a beneficiary designation, a will or trust of a decedent who dies after December [31, 2009] and before January [1, 2011], that contains a bequest or other disposition based upon the amount of property that can be sheltered from federal estate tax by referring to the "unified credit", "estate tax exemption", "applicable exclusion amount", "applicable exemption amount", "applicable credit amount", "marital deduction", "maximum marital deduction", "unlimited marital deduction", "charitable deduction", "maximum charitable deduction" or similar words or phrases relating to federal estate tax, or that measures a share of an estate or trust based on the amount that can pass free of federal estate taxes, or that is otherwise based on a similar provision of the federal estate tax then such beneficiary designation, will or trust shall be deemed to refer to the federal estate tax law as applied with respect to decedents dying in two thousand ten, regardless of whether an election is made not to have the federal estate tax apply to a particular estate.
Subsection (C)(2)(a) of Clause FIRST of each trust instrument does not contain "a bequest or other disposition based upon the amount of property that can be sheltered from federal estate tax ... or that measures a share of the estate or trust based on the amount that can pass free of federal estate tax...." The "fractional share" provisions here were not, nor could they have been, intended to minimize federal estate tax liability. Thus, the statute, which the legislative history confirms was intended to protect spouses and charities from being disinherited as an unintended consequence of the repeal of the federal estate tax in 2010, has no application here.
Since EPTL §2-1.13 does not apply, petitioner's case for relief must depend upon the language of subsection (C) (2) of Clause FIRST of the GRATs. In the event of grantor's death during the term of the trust, subsection (C)(2)(a) bases the determination of a "fractional share" passing to grantor's estate upon federal estate tax concepts. As noted above, subsection (C)(2)(b) provides for the "balance thereof" to be distributed equally to grantor's three children.
At the time the 2009 GRAT and the 2010 GRAT were established, grantor was in her 90's. Her survival of the two-year term of each GRAT therefore could not have been assumed. Further, it was foreseeable that the estate of an individual who died in 2010 might not be subject to federal estate tax. When the 2009 GRAT was established, such tax was slated to be eliminated for the year 2010 under ETGRRA. At the time the 2010 GRAT was established in April of that year, the federal estate tax already had been repealed for that year. It was not until December 17, 2010, less than two weeks before grantor died, that the 2010 Tax Act was passed and the federal estate tax for decedents dying in 2010 was reinstated subject to the right of fiduciaries to opt out of the federal estate tax scheme.
Petitioner does not challenge any of the above. Nor does she address the fact that the purported ambiguity is the result of a choice by the executors, of whom she is one (along with Charles), to avoid the application of the federal estate tax to grantor's estate.
In any event, there is no ambiguity in subsection (C)(2)(a) of Clause FIRST and therefore no need for the court to construe the provision to make reference to the 2010 Tax Act (see e.g. Matter of Bisconti, 306 NY 442 ). Contrary to petitioner's contention, the "fractional share" is not incalculable absent such a construction. The numerator, the amount of trust property which is "includible in the Grantor's gross estate for Federal estate tax purposes," equals zero. Since the "fractional share" must therefore be zero percent (0 percent), the "balance" of the property of each trust passes to Nancy, Barbara and Charles in equal shares in accordance with subsection (C)(2)(b). This is the same result as would have been obtained if grantor had survived the term of the trusts.
Grantor could have specifically provided for the remaining trust property to pass to her estate if she died at a time when no federal estate tax would be due, a circumstance that was, as noted above, clearly foreseeable. Instead, grantor established an unambiguous distribution scheme under which her children would share equally in the remainder of her GRATs unless her estate was subject to federal estate tax.
Based upon the foregoing, the assets remaining in the 2009 GRAT and 2010 GRAT shall be distributed in accordance with subparagraph (C) (2)(b) of Clause FIRST.
This decision constitutes the order of the court.
January 30, 2013
1. The above-quoted language of subparagraph (C) (2) (a) of Clause FIRST relating to what constitutes the denominator of the "fractional share" is from the 2009 GRAT. The 2010 GRAT contains slightly different language with the same effect ("the value of the entire trust property, as finally determined for Federal estate tax purposes in the Grantor's estate"). Accordingly, no distinction will be made between the language of subparagraph (C) (2) (a) in the two instruments.
2. There is no dispute that, in such circumstance, the "amount of trust property...includible in the Grantor's gross estate for Federal estate tax purposes" would be all the remaining assets of the GRATs, That is, the numerator of the "fractional share" for each trust would equal the remainders entire value; the denominator would also equal one, one hundred percent (100 percent) of the property in each GRAT would pass to grantor's estate.
3. The only other interested party, Barbara, filed a waiver and consent.