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Comptroller wins marital trust estate tax case at high court

John Wilson Taylor thought ahead.

Seven years before his death, he drafted a will calling for the creation of a marital trust for his wife consisting of 11 parcels of stocks and bonds, the net income of which would be paid annually to her and, after she died, to his son and grandchildren, according to court papers.

When Taylor died in 1989, the portfolio was valued at nearly $2.3 million. His estate’s personal representative filed a federal tax return then claiming a deduction for the marital trust, known as a qualified terminable interest property election, or QTIP.

The election’s purpose was to stave off estate taxes until the death of his wife, Margaret.

The Taylors lived in Michigan. Margaret Taylor moved in 1993 to Maryland, where she died 20 years later.

Maryland Comptroller Peter Franchot sought the estate taxes on the $4.1 million value of the trust upon Margaret Taylor’s death in January 2013. The estate argued that Maryland was owed nothing, as the trust was established in Michigan.

On Monday, Maryland’s top court ruled for Franchot.

In its 6-1 decision, the Court of Appeals said the significant factor for estate tax purposes was not where Taylor’s trust was established but where his wife was when she died.

“The comptroller did not seek to tax Mr. Taylor’s property or the transfer of his property, but rather sought to tax the deemed transfer of the QTIP property upon Ms. Taylor’s death as a Maryland resident,” Judge Michele D. Hotten wrote for the majority.

“Upon her death in Maryland, Ms. Taylor had a property interest in the lifetime income from the residuary trust,” Hotten added, citing state and federal estate tax law. “Ms. Taylor’s fictional ‘outright ownership’ interest did not dissipate upon her death. That value was deemed to have transferred to the beneficiaries of the trust and is subject to taxation by this state pursuant to the definition of an ‘estate’ in (Maryland’s Tax-General Article).”

Hotten was joined in the opinion by Chief Judge Mary Ellen Barbera, Judge Robert N. McDonald and retired Judges Clayton Greene Jr. and Irma S. Raker, who participated by special assignment.

Judge Shirley M. Watts wrote a concurring opinion in which she stated that the Tax-General Article’s “plain language establishes that, where a Maryland resident’s interest in a QTIP trust that was created in another state is subject to the federal estate tax, it is also subject to the Maryland estate tax.”

State law “does not make an exception from the Maryland estate tax for any particular kind of property, such as a Maryland resident’s interest in a QTIP trust that was created in another state,” Watts added.

Judge Joseph M. Getty, the court’s sole dissenter, stated that Maryland had no taxable interest in the case, as it involved a trust established in Michigan that clearly delineated the beneficiaries from the outset, including the wife, son and grandchildren. For Maryland to collect an estate tax without a connection to the trust would violate constitutional due process, Getty added.

“In summation, Mrs. Taylor neither owned the corpus of the QTIP, nor received derivative privileges from the government of Maryland,” Getty wrote. “The comptroller is now attempting to tax these assets absent any nexus between the trust and the state of Maryland. Lacking any exchange of benefits, Maryland is not authorized to impose its estate tax under the 14th Amendment.”

The Court of Appeals’ ruling restored a Maryland Tax Court decision in favor of the comptroller. On appeal, both the Washington County Circuit Court and the intermediate Court of Special Appeals ruled for the estate, prompting Franchot’s successful request for high court review.

Neither Franchot’s office nor K. Donald Proctor, the estate’s attorney, returned messages seeking  comment Tuesday on the decision. Proctor is with Proctor & McKee P.A. in Towson.

The Court of Appeals rendered its decision in Comptroller of the Treasury v. Richard Reeves Taylor, No. 56, September Term 2018.

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