Source: http://masscases.com/cases/sjc/378/378mass148.html
Timestamp: 2019-04-19 08:58:41+00:00

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CIVIL ACTION commenced in the Probate Court for the county of Norfolk on February 8, 1977.
The case was reported to the Appeals Court by Ford, J. The Supreme Judicial Court granted a request for direct review.
Steven J. Goldberg (Richard J. Litner with him) for the plaintiffs.
KAPLAN, J. The will of William Pastan was admitted to probate in Norfolk County on May 21, 1973, and in December of that year the plaintiff executors filed a Federal estate tax return claiming a marital deduction [Note 3] of $82,193; giving effect to the deduction, they paid an estate tax of $1,683. The Internal Revenue Service (I.R.S.), basing itself on a certain interpretation of the provisions of the will regarding the executors' powers in funding the marital deduction trust -- an interpretation disputed by the executors -- disallowed $73,874 of the claimed deduction, [Note 4] and assessed an additional tax which, with interest and penalty, came to $19,663.44. This was paid in January, 1976. The executors retain their cause of action for refund.
considerable repetition, the interpretive question underlying the tax liability. We granted direct appellate review on application of the executors.
any part of the principal to her or to the children of the marriage or grandchildren; on her death the principal was to go in equal shares to the children or their issue. As Lillian had no power of appointment, her interest in this trust would be regarded as "terminable" and therefore ineligible for a marital deduction even if that were not exhausted by the share No. 1 trust.
From paragraph III C setting up the share No. 1 trust, a purpose appears to make full use of the marital deduction; and other indications of the same design are found in the will such as the provision in paragraph VII that "all estate, inheritance, transfer, legacy or succession taxes" should be paid out of share No. 2 without apportionment. Cf. Boston Safe Deposit & Trust Co. v. Children's Hosp., 370 Mass. 719 (1976). The I.R.S. held, however, that the plan to maximize the marital deduction failed and the deduction was in substance lost because, according to the I.R.S. interpretation, a terminable feature remained. This was said to derive from paragraph VIII J (appendix 2) where are set forth the powers of the executors in making distributions, including the distribution by which they were to fund the share No. 1 trust.
their judgment as to the value of such stock, securities, or other property so allocated shall be conclusive on all parties;..." [Note 12] This language, it could be argued, comprehends a power to distribute assets to the share No. 1 trust, upon its founding, at their value established for estate tax purposes, despite a decline in value by the date of the distribution.
But two principles of interpretation or of trust administration impinge on the language: First, in allocating assets in kind, a fiduciary as a general rule is to take them at their values as at the time of distribution and ordinarily at their then market values. See Boston Safe Deposit & Trust Co. v. Stone, 348 Mass. 345 , 350 (1965); Restatement (Second) of Trusts Section 347, Comment h (1959); 4 A. Scott, Trusts Sections 347, 347.6-347.7 (3d ed. 1967). Second, despite wording in a dispositive instrument which seemingly empowers the fiduciary to be fanciful or arbitrary in making valuations, he is held by the law to the exercise of an honest, objective judgment, which in practice will mean a reasonable judgment corresponding to reality, and in the case of traded-in properties will doubtless mean a judgment in terms of market values. See Boston Safe Deposit & Trust Co. v. Stone, supra at 350-353; 4 A. Scott, supra, Section 347.4, at 2759; Restatement, supra. Cf. Old Colony Trust Co. v. Silliman, 352 Mass. 6 , 9-10 (1967).
allocated to Share #1, to make any division or distribution," etc. Although these quoted clauses are not artful, they do bespeak an intent to avoid any interpretation that would jeopardize the marital deduction. Hence we are reinforced in the conclusion that the executors here were bound to value the assets passing to the share No. 1 trust at fair market value as at the time of distribution. The proposition that interpretation of the dispositive instrument may be influenced or weighted by a consideration of the testator's tax intentions [Note 13] has been developed in our series of cases beginning with Mazzola v. Myers, 363 Mass. 625 (1973), and continuing through First Nat'l Bank v. First Nat'l Bank, 375 Mass. 121 (1978). [Note 14] The thought is expressed in Putnam v. Putnam, 366 Mass. 261 , 271 (1974), as follows: "It would be a rare case in which a conflict of terms or an ambiguity in a will should be resolved by attributing to the testator an intention which as a practical matter is likely to benefit the taxing authorities and no one else... If[the testator's primary] intention can be discerned from the will, using normal principles of construction, it should not be thwarted by placing legalistic overreliance on an omission of counsel in dealing with a subject of such complexity."
both trusts should suffer and enjoy on an even basis market depreciations and appreciations (see Old Colony Trust Co. v. Silliman, supra at 10; Boston Safe Deposit & Trust Co. v. Stone, supra at 350), but that rule bends to contrary intention (see New England Merchants Nat'l Bank v. Koufman, 363 Mass. 454 , 460-461 ; Fitts v. Powell, 307 Mass. 449 , 454 ; Heaton v. Bartlett, 87 N.H. 357, 365 ). This intention we find expressed in the very terms of the marital deduction bequest.
We answer the questions reported in the sense that the executors were required to value the assets distributed to the share No. 1 trust as at the date of distribution, and to assure that the value then passing to that trust was not less than 50% of the adjusted gross estate for Federal estate tax purposes.
"III.... C. Share # 1 shall be equal in amount to fifty per cent of my adjusted gross estate for federal estate tax purposes diminished, however, by the federal estate tax value of any property or interest in property passing to my said wife LILLIAN under this Will or otherwise, includible in my gross estate for federal estate tax purposes and qualifying for the marital deduction under said federal estate tax. In no event shall any property or interest be allocated to this bequest of the residue of my estate which is a `terminable interest' (as provided in Section 2056(5) of the Internal Revenue Code or any successor Statute)."
personal, as to them seems proper in their absolute judgment, and their judgment as to the value of such stock, securities, or other property so allotted shall be conclusive on all parties; provided, however, that the Trustees shall not be required to make physical division of the funds except when necessary for distribution of principal, but may, in their discretion, keep the Trusts in one or more consolidated funds; nor shall the Trustees be required to make any provision on account of the diminution or increase in value of any securities or investments at any time constituting a part of my estate or of the Trusts hereby established, or for depreciation in respect of any tangible property, or for the purpose of amortizing or making good any amounts paid in premiums on the purchase of securities or of any other property."
[Note 1] Harvey Pastan and Julius Stone.
[Note 2] Robert S. Pastan, Patricia Manuel, Arlyne Norman, Sanford Pastan, and Harvey Pastan (beneficiaries).
[Note 3] I.R.C. Section 2056.
[Note 4] The difference of $8,319 is accounted for by an insurance recovery and property jointly held by husband and wife as to which no question of unascertainability of amount (see below) could arise.
[Note 5] For the discussion in this court as to whether we should lend ourselves to litigation not exhibiting the usual adversary characteristics, see Babson v. Babson, 374 Mass. 96 , 101-103, 106-108 (1977) (Quirico, J., dissenting).
[Note 6] See generally R. B. Covey, The Marital Deduction and the Use of Formula Provisions (2d ed. 1978).
[Note 7] The words following those quoted in the text cover such items as the fund and property mentioned in n.4 above.
Before the Tax Reform Act of 1976 the deduction was limited to one-half of the "adjusted gross estate"; the 1976 act substituted the greater of half the adjusted gross estate or $250,000. See I.R.C. Section 2056(c)(1)(A).
[Note 8] See I.R.C. Section 2056(b)(5). The confinement of the marital deduction to nonterminable interests is explained by the origins of the deduction in the attempt to secure parity in taxation between estates in community-property States and in other States. See Surrey, Federal Taxation of the Family -- the Revenue Act of 1948, 61 Harv. L. Rev. 1097, 1127-1128 (1948).
[Note 9] "An argument could be made that the fiduciary has a power of appointment over the marital bequest which has the effect of making the value of the property disposed of by the legacy provision unascertainable in amount and disqualifying such property for the marital deduction." Covey, supra at 100-101. See Rogovin, The Sound and the Fury, Official Views on Revenue Procedure 64-19, 104 Trs. & Est. 432, 434 (1965).
[Note 10] The estate might thereby escape tax on the amount of an appreciation of assets between the estate tax and distribution date values. It is said also that, receiving depreciated assets, the marital trust might sell at prices up to estate tax values without paying tax on that appreciation. If the assets continued depreciated in the marital fund to the death of the surviving spouse, the tax in the estate of that spouse would be on the depreciated figure. Appreciated assets that were kept out of the marital fund and distributed to the nonmarital fund would not be subject to the estate tax in the surviving spouse's estate on that spouse's death. Nor would that spouse be likely to suffer from such distribution where (as is often the case, and was the case here) the surviving spouse has a life estate in the nonmarital fund. See Covey, supra at 100; Hoffman, in Practice Commentary on N.Y. Estates, Powers and Trusts Law Section 2-1.9, at 174 ff. (McKinney 1967); C.L.B. Lowndes, R. Kramer, & J.H. McCord, Federal Estate and Gift Taxes 488-490 (3d ed. 1974).
[Note 11] See also Rogovin, supra. Mississippi discovered this pitfall the hard way when it enacted a statute permitting a choice between the Section 2.02 alternatives. See Covey, supra at 104-112.
[Note 12] The subsequent language of paragraph VIII J about the trustees not being required to make provision for diminution or increase, and so forth, seems referable to the period after the trusts are set up.
[Note 13] One is reminded of the maxim that "the thing should rather achieve its effect than be destroyed" (ut res magis valeat quam pereat).
[Note 14] In addition to Mazzola, Putnam, and First Nat'l Bank, see Babson v. Babson, 374 Mass. 96 , 104-105 (1977); Boston Safe Deposit & Trust Co. v. Children's Hosp., 370 Mass. 719 , 724-725 (1976); State Tax Comm'n v. Loring, 350 Mass. 568 , 571 (1966); New England Trust Co. v. Faxon, 343 Mass. 273 , 281 (1961). Cf. Persky v. Hutner, 369 Mass. 7 , 15 (1975).
[Note 15] The conclusion is assisted by the fact that Lillian is a beneficiary of both trusts (the executors being Lillian, an outsider, and a remainderman of the share No. 2 trust); ratable sharing might have some-what greater appeal if there were not such an identity.
The Tax Court in Estate of Hamelsky, 58 T.C. 741 (1972), read New Jersey common law to require ratable sharing, thus saving a marital trust, under a will explicitly directing that estate tax values control distribution. See also Hurst v. First Ky. Trust Co., 560 S.W.2d 819 (Ky. 1978).

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