Estate is Allowed Charitable Deduction for Distribution Made Pursuant to Settlement Agreement

Estate allowed to claim an estate tax charitable deduction for estate funds distributed to a charitable trust pursuant to a settlement agreement reached after negotiations over contested will.

Download PDF pdf-icon

 

Estate of Antonio J. Palumbo, (DC PA 03/09/2011) 107 AFTR 2d ¶ 560.

Facts.  In 1974, Antonio J. Palumbo established the A.J. and Sigismunda Palumbo Charitable Trust (the “Charitable Trust”).  Subsequently, Mr. Palumbo executed various estate planning documents, including wills and trusts with testamentary provisions.  Upon his death in December of 2002, his Will of July 6, 1999 (and its three codicils) was in effect.  The 1999 Will included a provision that all taxes were to be paid from the residuary estate.  Further, the Will identified and named the Charitable Trust as a remainder beneficiary throughout the Will and the three codicils.  However, after analyzing the Will, the estate and IRS agreed that, due to a scrivener’s error, the Will did not include an express residuary provision.  (Each prior will executed by Mr. Palumbo did include a residuary provision.)

Since the Will did not include a residuary provision, Mr. Palumbo’s son claimed that the Will was invalid and the entire residuary estate should pass to him pursuant to the laws of intestacy as the sole surviving heir. In opposition, the Trustee of the Charitable Trust contacted Mr. Palumbo’s son and filed a claim against the residuary estate since the missing clause was due to a scrivener’s error.

Mr. Palumbo’s son and the Trustee of the Charitable Trust negotiated a settlement agreement with respect to the disposition of the residuary estate.  According to the terms of the settlement agreement, the Charitable Trust would receive a portion of the residuary estate amounting to $11,721,141 and Mr. Palumbo’s son would receive $5,600,000 and certain real property.  Upon filing a joint petition, the settlement agreement was approved on July 10, 2003 by Order of the Orphans’ Court Division of the Court of Common Pleas of Elk County, Pennsylvania.  After executing the settlement agreement, the estate filed a claim for a federal estate tax charitable deduction in the amount of $11,721,141 for the distribution made to the Charitable Trust.  The IRS notified the estate that the charitable deduction would be disallowed since the transfer was actually made by Mr. Palumbo’s son by way of the settlement agreement, and not directly from Mr. Palumbo’s estate through the 1999 Will.  The estate then sued in district court, arguing that it should be entitled to a charitable deduction under Internal Revenue Code § 2055.

District Court’s Decision.  The court allowed the charitable deduction due to the facts of the case and legislative history, which demonstrated that IRC § 2055 was designed to encourage charitable gifts.  The facts demonstrated that Mr. Palumbo intended (through many versions of estate planning documents) to leave the residuary estate to the Charitable Trust.  Further, the attorney who drafted the 1999 Will admitted (in the resulting malpractice case) that he had unintentionally forgotten to include the residuary provision.  The court also concluded that the settlement negotiations were held at arms-length, the final agreement was court approved, and there was no evidence of any collusion among the parties to the agreement.