APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE FRANCIS BARTH, JUDGE PRESIDING.
Released for Publication November 18, 1996.
The Honorable Justice Wolfson delivered the opinion of the court: Buckley, J., concurs. Campbell, P.j., dissenting.
The opinion of the court was delivered by: Wolfson
JUSTICE WOLFSON delivered the opinion of the court:
Every once in a while a court is required to pick through the bones of a statute that has been laid to rest by legislative fiat. This is such a case. The statute is the Illinois Inheritance and Transfer Tax Act, repealed in 1982 but of consequence in cases where the issue concerns reassessment of a tax already paid.
This is an appeal by the State of Illinois (State) from a judgmententered on a petition for inheritance tax reassessment brought by the Continental Bank (Continental), as trustee of a residuary trust created by the will of Frederick W. Croll (Croll). The facts are not in dispute.
Croll died on July 15, 1959, leaving an estate valued at $9,789,125.77 to his wife, Florence, and his three sons, Robert, Richard, and John. The distribution of the estate was governed by Croll's will. Among other things, the will provided for the creation of two trusts. Half of the estate was to be placed in a trust for the benefit of Florence (the Marital Trust). The remaining half of the estate (the residuary estate) was to be divided equally into three separate trusts, one for the benefit of each of the three children (collectively referred to as the Residuary Trust). The trusts were to be administered by a corporate trustee (Continental) and two individual trustees. If possible, Florence and one of the sons or two of the sons were to act as the individual trustees.
The Marital Trust is what is at issue in this case. Under the terms of the will, Florence was to receive the income from the corpus of the Marital Trust during her life (life estate). Florence had no power to withdraw the principal. But if the income from the trust was insufficient for Florence's support, maintenance, or medical needs, the corporate trustee had the uncontrolled discretion to distribute, in any year, up to 5% of the corpus of the Marital Trust to Florence.
Florence was given a testamentary power of appointment over the corpus of the trust. This meant that, at her death, Florence could distribute the principal of the trust as appointed in her will. In the event that Florence failed to exercise her right of appointment, the corpus of the trust was to be added to the residuary estate and distributed according to the provisions in Croll's will regarding the Residuary Trust.
The distribution of Croll's estate was subject to taxation in accord with the Illinois Inheritance and Transfer Tax Act (the Act). Ill. Rev. Stat. 1959, ch. 120, sec. 375 et seq., now repealed, P.A. 82-1021. 1982 Ill. Laws 2902, 2909. In order to determine the amount of taxes to be paid by Croll's estate, certain assumptions were imposed by law.
Taxes were assessed on the value of the life estate and the remainder in accord with sections 1, 2, and 25 of the Act. Ill. Rev. Stat. 1959, ch. 120, sec. 375, 376, and 398. Section 25 provided:
"When property is transferred or limited in trust or otherwise, and the rights, interest or estates of the transferees or beneficiaries are dependent upon contingencies or conditions whereby theymay be wholly or in part created, defeated, extended or abridged, a tax shall be imposed upon the transfer at the rate which would be applicable under the provisions of this Act on the happening of the most probable of the contingencies or conditions . . . On the happening of any contingency whereby the property, or any part thereof is transferred to a person, corporation or institution exempt from taxation under the provisions of the inheritance tax laws of this State, or to any person, corporation, or institution taxable at a rate less than the rate imposed and paid, the person, corporation or institution shall be entitled to a reassessment or redetermination of the tax and to a return by the State Treasurer of so much of the tax imposed and paid as is the difference between the amount paid and the amount which the person, corporation, or institution should pay under the inheritance tax laws.
Where an estate for life or for years can be divested by the act or omission of the legatee or devisee it shall be taxed as if there were no possibility of such divesting."
In accord with section 25, taxes were paid by Croll's estate for the transfer of the life estate to Florence and the remainder to the three sons, based on the assumption that the remainder would be distributed to the residuary estate upon Florence's death, without her exercising the right of appointment.
The value of the life estate was determined by multiplying the fair market value of the corpus of the trust by an assumed interest rate of 5%, and then by Florence's life expectancy (based on mortality tables). Ill. Rev. Stat. 1959, ch. 120, sec. 376. The value of the remainder was determined by subtracting the value of the life estate from the fair market value of the corpus of the marital trust. Ill. Rev. Stat. 1959, ch. 120, sec. 376.
It is clear from the computations that, in valuing the life estate and remainder, it was assumed that Florence would take the income from the trust but no additional distributions of principal. The life estate was valued at $2,625,574.91 and the remainder was valued at 3,102,556.20.
Florence died testate in February 1992. In her will, Florence exercised her power of appointment over the corpus of the trust. She thereby extinguished the remainder interest that had been created by Croll's will. In accord with section 1(4) of the Act, the property over which a power of appointment is exercised is no longer deemed a taxable transfer from the original (Croll's) estate, but instead is treated as if it were the property of the donee's (Florence's) estate. Ill. Rev. Stat. 1959, ch. 120, par. 375(4). Thus, the inheritance taxesthat had been paid by Croll's estate, based on the assumption that the right of appointment would not be exercised, were now recoverable under the provisions of section 25 of the Act.
A petition for reassessment of the inheritance tax for Croll's estate was submitted by Continental Bank and Croll's sons (petitioners). The petitioners contended that a refund was due on the amount of taxes paid on the remainder interest, without regard to any distributions that may have been made to Florence from the corpus of the Marital Trust. The petitioners requested a refund in the amount of $434,357.89.
The State agreed that a reassessment and refund were in order. However, the State argued that the reassessment should take into account any distributions actually made by the corporate trustee to Florence from the corpus of the Marital Trust. Such distributions, said the State, were transfers from Croll's estate to Florence, subject to taxation. Any such transfer would reduce the amount of refund due under the reassessment. The State requested trust records to determine what, if any, distributions had occurred.
After a hearing on the matter, the circuit court ruled that any distributions of principal were "legally irrelevant" to the reassessment and denied the State's request for trust records. A motion for reconsideration was denied.
The circuit court entered an Order Reassessing the Inheritance Tax and judgment was entered on the court's finding that a refund of $434,357.89 was due. The State appealed and the circuit court stayed the refund pending appeal.
The single issue before this court is whether a trustee's discretionary distributions of principal from a marital trust to the life tenant are relevant to the reassessment and refund of inheritance taxes on the remainder interest under the ...