Opinion ID: 2311222
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Heading: Computation of the Federal Estate Tax Marital Deduction

Text: The law is well-settled that where a testator in his will gives specified property or a share of his estate in exact or substantial compliance with the terms of his obligations under an inter vivos property settlement (or separation) agreement made with his wife, that wife is a creditor of the estate and not a legatee under his will and that consequently the wife's claim is superior to the claims of other legatees and devisees. Zeitchick Estate, 426 Pa. 171, 175, 231 A.2d 131, 133 (1967); Pratt Estate, 422 Pa. 446, 450, 221 A.2d 117 (1966) (and cases cited therein). Likewise, it is clear that a husband may assume a contractual obligation to his wife which will survive his death and bind his estate. Ervin Estate, 430 Pa. 431, 437, 243 A.2d 420 (1968); Wolfsohn v. Solms, 392 Pa. 129, 132, 139 A.2d 523 (1958). Nevertheless, the fact that a claim arising out of such an agreement is enforceable under state contract law is insufficient to establish that it was supported by fair and adequate consideration in money or money's worth, as required for deduction from the gross estate under Federal Estate Tax provisions of the Internal Revenue Code. [6] Estate of Davis, 57 T.C. 833 (1972); Estate of Rubin, 57 T.C. 817 (1972). See also Commissioner of Internal Revenue v. Wemyss, 324 U.S. 303, 65 S.Ct. 652, 89 L.Ed. 958 (1944); United States v. Righter, 400 F.2d 344 (8th Cir. 1968). Since the obligations of Ralph Mathay in favor of his former wife were undertaken in connection with and defined by a support agreement preceding their divorce, there is no question that Hazel Mathay has priority to receive her interest in the estate as a creditor under State law. What is at issue is whether and to what extent Hazel Mathay's claims may be considered debts that should be subtracted from decedent's assets in determining decedent's adjusted gross estate for Federal Estate Tax purposes. Since the burden is on the party seeking a deduction to establish that the deduction comes within the terms of the Internal Revenue Code [ New Colonial Ice Company v. Helvering, 292 U.S. 435, 54 S.Ct. 788, 78 L. Ed. 1348 (1934); White v. United States, 305 U.S. 281, 59 S.Ct. 179, 83 L.Ed. 172 (1938)], the appellants have attempted to prove that the debts of the estate to Hazel Mathay fall within the terms of Section 2053(a)(3). In making their assertion, the controversy has centered on the nature of the consideration given by Hazel Mathay, in exchange for the promises made by the decedent in the 1960 support agreement. See Section 2053(c)(1)(A). [7] Relying on Section 2043(b) of the Internal Revenue Code, 26 U.S.C.A. [8] Dorothy Mathay has argued that decedent's promise to make payments to Hazel Mathay at death were exchanged for Hazel Mathay's promise to relinquish her rights as a surviving spouse or heir of his estate and that, this being the case, Hazel's consideration was not in money or money's worth. Appellants, on the other hand, contend that the consideration given by Hazel was the relinquishment of support rights and that, this being the case, Section 2043 is not applicable. Unfortunately, this dichotomy is an oversimplification. Admittedly, the Commissioner of Internal Revenue has recently recognized that the relinquishment by a wife of support rights, in contrast to inheritance rights [9] , in an agreement incident to divorce may constitute a consideration in money or money's worth. [Rev.Rul. 68-379, 1968-2 Cum.Bull. 414. See also Rev.Rul. 60-160 1960-1 Cum.Bull. 374, Estate of Watson, 20 T.C. 386 aff'd, 216 F.2d 941 (2d Cir., 1954) and E.T. 19, 1946-2 Cum.Bull. 166.] [10] However, the Commissioner has found such rights to qualify as full and adequate statutory consideration for estate tax purposes only to the extent they are measurable under state law. Rev.Rul. 71-67, 1971-1 Cum.Bull. 271 (2 Fed.Est. & Gift Tax Rep. ¶ 8011 (1971)). See also 1 Merten's Law of Federal Gift and Estate Taxation, 1970 ed., Cumulative Annual Supplement Section 5.21. Thus whenever payments are to be made in exchange for relinquished support rights, the value to be placed on such payments is to be measured in accordance with the amount of alimony that would usually be awarded in a divorce action under the applicable state law on the applicable valuation date and giving consideration to all facts that would influence the amount of the award. . . . 1 Merten's, supra, p. 147. [11] This method of valuation creates an interesting situation in Pennsylvania where, generally, there is no continuing statutory obligation to pay support. [12] In the instant case, since there would be no legal duty to pay support on termination of the Mathay marriage, valuation in terms of alimony would be impossible. The fact is, since no statutory duty to pay support was relinquished, if the presently contested payments were in lieu of any support rights, they were in lieu of that which the decedent felt personally obligated to pay. [13] Such a feeling of indebtedness, however, does not give rise to bona fide contractual obligations whose relinquishment enriches the estate or discharges an existing claim. With this in mind, it seems safe to assume such payments were not meant to qualify to any extent under Section 2053 of the Internal Revenue Code. [14] The case that comes closest to confronting this issue is Smith v. United States, 277 F.Supp. 583 (M.D.Fla. 1967). In the Smith case, the Florida District Court considered whether a claim by a decedent's widow that was based on a separation agreement incident to a Florida divorce action instituted by the husband was deductible. The Commissioner claimed that an ex-wife could give up no rights in consideration for transfers from her husband since under Florida law a wife against whom a divorce is granted cannot recover alimony. The Florida District Court, although recognizing the merit of this argument, concluded that since the Smith divorce resulted from collusion the preceding Florida law was inapplicable. Had the proper party, i.e. the wife, who was a resident of Ohio, been the plaintiff in the Florida divorce action, or had she instituted a divorce action in Ohio where alimony is allowed, she would have had support rights. Therefore, the Court held there was adequate and full consideration for the husband's transfer to the extent of these rights. In contrast, in the present case, there is no evidence that either spouse was ever a resident of another state or that either spouse ever contemplated bringing a divorce action elsewhere. It would thus seem we are limited by Pennsylvania law. [15] Accordingly, having found that the discharge of the duty to support has only been recognized to qualify as statutory consideration to the extent the duty to support is an obligation to the State [16] and having found that, in this case, there was only a duty imposed by the parties themselves. We believe the present contested payments made in lieu of support rights do not qualify for federal deduction treatment. We, therefore, conclude that the marital deduction gift bequeathed to decedent's surviving spouse has been properly computed. [17] 3) Funding of the testamentary trust in favor of Hazel Simpson Mathay The agreement dated March 25, 1960 between Hazel Simpson Mathay and decedent as well as item 5b of decedent's will defines the corpus of the trust in favor of decedent's ex-spouse to be such an amount as the earnings therefrom, computed at four per cent per annum will produce $200 per month. Calculation of this amount yields $60,000. Nevertheless appellants contend that the proposed funding in the amount of $60,000 is excessive. Their argument is based on Section 20.2031.7 of the Internal Revenue Estate Tax Regulations which deals with the computation of annuity funds by use of actuarial tables. By using the tables set forth in this section, the appellants submit that the proper corpus of the fund should be the sum of $19,890.02. Although the sum arrived at by the appellants would enable the payment of $2400 to be made annually during the ex-spouse's life expectancy, there is no reason to believe that either spouse believed that Hazel would die within this period or, more importantly, that they contracted on the basis of her actuarial life. Rather it appears that payments were to be made to Hazel until the end of her natural life, however long it should last. The fact that invasion was permitted should at some future time the earnings be insufficient was not an indication, as appellants suggest, that invasion such as is done in annuity funding was the intended result. This fact seems particularly clear since the trust income was to be distributed to future life interests and the corpus to then be distributed to certain named charities. Had the testator intended the dissipation of the trust at the theoretical time of death of an actuarial beneficiary, it is not likely that he would provide for this chain of future interests.