Opinion ID: 592206
Heading Depth: 2
Heading Rank: 3

Heading: Estate Tax Marital Deduction: A Historical Perspective

Text: 22 This case is ultimately decided on the legal meaning of the plain and unambiguous words of the Will and Code § 2056. This is a true eight-corners case, determinable within the four corners of the Will and the four corners of the statute. Nevertheless, Code § 2056 as the sole statutory well-spring of the estate tax Marital Deduction--as well as both the general exception thereto (the terminable interest) and the one among the several exceptions to that general exception for terminable interests with which we are here concerned (QTIP)--can be completely understood and appreciated only when viewed in the perspective of their collective historical development. 11 23 From 1916 to 1942, the federal estate tax law took into account the differences between community property states and common-law states. Abiding by state law, however, produced a disparity between community property states and common-law states. 12 The first effort of Congress to eliminate that disparity was included in the 1942 amendments to the Internal Revenue Code of 1939. 13 As a result of the 1942 enactment, however, the value of the entire community property was taxed in full in the estate of the first spouse to die. 14 Rather than creating equality, the 1942 enactment put married couples residing in community property states at a distinct disadvantage. 24 Despite this new geographical disparity [between community property and common-law states], the Supreme Court upheld the constitutionality of the 1942 Economic Source Rule in Fernandez v. Weiner, [sic] 15 decided in 1945. 16 25 In the first major tax bill after World War II, 17 Congress undid the result of Wiener, which had been so unpalatable to community property states, enacting for the first time the new concept of 'estate-splitting' as a corollary to 'income-splitting' between husband and wife. 18 The vehicle employed for so doing was the Marital Deduction. 26 The original Marital Deduction was quite obviously a device designed to allow estate equalization, i.e., to recognize the 50-50 situation in community property jurisdictions while allowing common-law couples to equalize, through the Marital Deduction, their combined estate irrespective of which spouse was actually the wealthier. 19 An essential feature of the Marital Deduction from its very beginning, however, was that any property of the first spouse to die that passed untaxed to the surviving spouse should be taxed in the estate of the surviving spouse. This concept persists to the present time; and it is an indispensable ingredient of the result we reach today. 27 A corollary of taxability in the estate of the surviving spouse was and remains the exclusion of terminable interests from the category of properties for which the Marital Deduction is available. An interest that terminates does not form part of the death estate of the surviving spouse, so if a terminable interest in property were deductible in the first estate, such property would escape tax in the estates of both spouses. 20 Thus, in 1948 and today, [t]o qualify for the Marital Deduction, an interest in property must ... avoid being disqualified by a complex set of rules relating to 'terminable interests.'  21 As shall be shown, however, a number of exceptions to the terminable interest exception are recognized. 28 In 1976 Congress liberalized the Marital Deduction significantly by establishing dual yardsticks for measuring the maximum estate tax Marital Deduction. 22 For decedents dying after December 31, 1976, the maximum Marital Deduction was the greater of $250,000 or one-half of the adjusted gross estate. Nevertheless, many other features of Code § 2056, including the unavailability of the Marital Deduction for terminable interest property, remained essentially unaffected by the TRA of 1976.