The United States District Court in Arkansas determined it lacked jurisdiction to settle a dispute between siblings regarding the payment of $2 million in estate taxes on their mother’s estate in the case of Manley v. Devazier, 115 AFTR 2d ¶2015-712.

In this the sister and brother were involved in the battle regarding payment of estate taxes related to life insurance. Ms. Manley was appointed as executrix of her mother’s estate and is facing a tax bill of over $2 million. Her brother, Mr. Devazier, was the trustee of their mother’s trust and, as trustee of the trust, received life insurance proceeds as an asset of the trust.

Ms. Manley requested that Mr. Devazier disburse funds from the trust to pay the $2 million in estate taxes that will be due on the insurance—a request Mr. Devazier refused to honor. Ms. Manley brought suit in federal court to attempt to get her brother to, in her words, “do the right thing” and provide the funds to pay the estate taxes which are due in a few weeks.

The Court determined that Ms. Manley was asking the wrong party at this point. The Court notes that the Internal Revenue Code creates no claim for the estate until the taxes are paid. IRC §2206 provides:

Unless the decedent directs otherwise in his will, if any part of the gross estate on which tax has been paid consists of proceeds of policies of insurance on the life of the decedent receivable by a beneficiary other than the executor, the executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds of such policies bear to the taxable estate.

Similar problems exist under similar recovery provisions in IRC §§2207 and 2207B.

Noting that all parties are residents of the state of Arkansas, the Court finds that it is not appropriate (at least until the tax is paid) for the federal courts to intervene. The Court held that:

At bottom, Manley and DeVazier have fallen out about the proper administration of their mother's life insurance trust. Resolving that dispute in federal court, in the absence of diverse parties, would deprive Arkansas's courts of their properly preeminent role in this matter involving a fiduciary, a trust, and trust property.