Court Opinion

ID: 4486467
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:27.415019+00
Date Added: 2024-06-11T15:03:49.918824
License: Public Domain

RUWE, J., dissenting: Prior to the enactment of the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, 95 Stat. 172, the marital deduction was limited to the greater of $250,000 or one-half of the adjusted gross estate. ERTA removed these dollar limits for decedents dying after December 31, 1981. Congress was aware that many people had executed wills (and trusts), prior to ERTA, containing maximum marital deduction formula clauses with the expectation that bequests pursuant to such formulas would be limited to the greater of $250,000 or one-half of the adjusted gross estate. Because use of the new unlimited marital deduction in these formula bequests might distort a decedent’s intention by greatly increasing the bequest to the surviving spouse, Congress enacted the transitional rule contained in section 403(e)(3) of ERTA. The purpose of section 403(e)(3) was to prevent an unintended marital bequest in excess of the maximum amount of the marital deduction in effect at the time a pre-ERTA will or trust was executed. Estate of Bruning v. Commissioner, 888 F.2d 657 (10th Cir. 1989), affg. a Memorandum Opinion of this Court; Estate of Christmas v. Commissioner, 91 T.C. 769, 773-774 (1988); S. Rept. 97-144 (1981), 1981-2 C.B. 412, 462. Unlike many limitations on deductions, Congress was not primarily concerned about lost revenue when it enacted the transitional rule. Congress specifically provided in section 403(e)(3) that a decedent could obtain the maximum unlimited marital deduction simply by changing his or her will (or trust) subsequent to ERTA’s enactment. Congress also provided that the individual States could pass legislation making the new unlimited marital deduction applicable to pre-ERTA instruments containing maximum marital deduction formulas.1  The trust in issue provides that the amount to be placed into Trust A is “The Marital Deduction Amount consisting of that amount of the balance of the Trust Estate which will equal the maximum marital deduction allowable for federal estate tax purposes on my death.” This is clearly a maximum marital deduction formula clause. The trust further provides that the maximum marital deduction amount shall be reduced, if necessary, in order to take full advantage of the unified credit and any other available credits. This provision does not eliminate the existence or operative effect of the maximum marital deduction formula clause nor does it eliminate the problem that Congress was addressing through enactment of section 403(e)(3). The majority and concurring opinions attempt to apply a literal approach by finding that the provision immediately after the maximum marital deduction formula clause removes this case from the purview of section 403(e)(3). For the reasons previously stated, I do not agree that this is a correct literal application of the statute. However, even if a literal reading of the statute supported the majority’s result, such “literal interpretations of statutes must be rejected if they lead to results which are absurd in light of Congressional intent.” Thoburn v. Commissioner, 95 T.C. 132, 149 (1990). The congressional intent behind section 403(e)(3) has been accurately described in the following manner: The purpose of this transitional rule is to prevent an unintended testamentary disposition in wills executed before September 12, 1981, that contain a maximum marital deduction “formula clause.” Congress was concerned that formula clauses in wills drafted prior to 1981 could operate to make the marital deduction applicable to the entire adjusted gross estate rather than fifty percent of the estate. S.REP. No. 201, 97th Cong., 1st Sess. 163-64 (1981), U.S. Code Cong. & Admin. News 1981, p. 105. Therefore the transitional rule stated that the marital deduction for wills with a formula clause written before September 2, 1981, and in which the testator died after December 31, 1981, the marital deduction would be fifty percent or $250,000, unless the will was subsequently amended to refer to the unlimited marital deduction or state law construed the formula clause as referring to the marital deduction in its unlimited amended amount. * * * [Liberty Nat. Bank & Trust Co. v. United States, 867 F.2d 302, 303-304 (6th Cir. 1989).] At the time the trust was last amended in 1978, the decedent would clearly have intended that the maximum amount that could pass to Trust A for his wife’s benefit would be dependent upon the pre-ERTA maximum marital deduction (the greater of $250,000 or one-half of his adjusted gross estate). This is exactly the type of situation that Congress had in mind and for which section 403(e)(3) was enacted. In arriving at its conclusion, the majority overrules our prior opinion in Estate of Blair v. Commissioner, T.C. Memo. 1988-296, on appeal (10th Cir., Jan. 22, 1990). The formula in Estate of Blair is indistinguishable from the formula in this case. The majority concludes that Estate of Blair incorrectly applied our opinions in Estate of Neisen v. Commissioner, 89 T.C. 939 (1987), affd. per curiam 865 F.2d 162 (8th Cir. 1988), and Estate of Bruning v. Commissioner, supra. The language used in the instruments construed in Estate of Neisen and Estate of Bruning is clearly different from that used , here and in Estate of Blair. The marital bequest in Estate of Neisen provided for an alternative between “the lesser of (a) the maximum marital deduction allowable * * * [or] (b) the minimum marital deduction which, after taking into account the unified credit * * * will result in no federal estate tax.” Estate of Neisen v. Commissioner, 89 T.C. at 940. Relying upon what we found to be the expressed intent in alternative (b), we concluded that “it is a formula expressly providing that the spouse is to receive the minimum amount necessary to ensure that decedent’s estate pays the least amount of Federal estate tax” and, therefore, was not a maximum marital deduction formula within the meaning of section 403(e)(3). Estate of Neisen v. Commissioner, 89 T.C. at 942. The formula in Estate of Bruning is practically the same as that in Estate of Neisen. In Estate of Bruning, the amount to be placed in a marital trust was the lesser of (1) the maximum amount allowable as a marital deduction or “(2) the amount which, after taking into account all credits, exemptions and deductions, other than the marital deduction * * * will result in the elimination of all federal estate tax in Settlor’s estate.” Estate of Bruning v. Commissioner, 888 F.2d at 658. The Tenth Circuit relied upon the specific language in alternative (2) of the trust in finding that the formula was not a maximum marital deduction formula within the meaning of section 403(e)(3). Reading the disposition clause in its entirety convinces us that decedent’s primary intent was to minimize the estate taxes rather than to limit the marital deduction to the amount that was the maximum (the greater of one-half of the adjusted gross estate or $250,000) permissible under the law in effect at the time he executed the will. * * * Because decedent here expressly bequeathed an amount to achieve a minimum payment of federal estate taxes, we conclude that decedent’s intent was clearly expressed and the will does not contain a maximum marital deduction formula clause within the meaning of section 403(e)(3). [Emphasis added.] [Estate of Bruning v. Commissioner, supra at 659-660.] The formula in the instant case does not contain an express statement that the decedent intended “the elimination of all federal estate tax” or that he wanted the amount placed in Trust A to “result in no federal estate tax.” Immediately following the maximum marital deduction formula clause, is a provision that the formula amount shall, under certain circumstances, be reduced by an amount necessary to increase the taxable estate to “the largest amount that will not result in a federal estate tax being imposed” after allowing for available credits. This reference to an “amount that will not result in a federal estate tax being imposed” was a limitation on the amount by which the taxable estate was to be increased to take full advantage of credits that would otherwise go unused. The only effect that this provision can have on decedent’s estate is to allow it to take full advantage of available credits. The provision would not come into play unless the amount passing to Trust A under the maximum marital deduction formula clause resulted in unused credits. There could be no unused credits, unless there was no estate tax liability to begin with. Therefore, the provision to take full advantage of the credits by reducing the amount going into Trust A could not have been intended to reduce or eliminate estate tax on decedent’s estate. The following illustrates how the provisions for funding Trust A operate. The unified credit available at decedent’s death was $121,800. That is the amount of tax that would be due on a taxable estate of $400,000.2 The provision for reducing the maximum marital deduction formula clause amount would not be activated unless full use of the maximum marital deduction would cause the taxable estate to be less than the $400,000 that would be necessary to fully absorb the unified credit. If use of the maximum marital deduction would cause the taxable estate to be too small to fully utilize the credit, it would already be apparent that there would be no estate tax liability.3 It follows that the provision following the maximum marital deduction formula clause was not intended to reduce or eliminate estate taxes.4  Although not mentioned by the majority, both this Court and other courts have recognized critical distinctions between the formulas in Estate of Neisen and Estate of Bruning on the one hand, and the formula in Estate of Blair that is identical to the formula in this case. In Estate of Christmas v. Commissioner, supra, which involved a maximum marital deduction formula similar to the one in this case, we found that ERTA section 403(e)(3) precluded an unlimited marital deduction. After distinguishing Estate of Neisen, we indicated our agreement with Estate of Blair stating: The conclusion we reach in this case is consistent with two recently decided cases. Estate of Blair v. Commissioner, T.C. Memo. 1988-296, and Estate of Bauersfeld v. Commissioner, T.C. Memo. 1988-224. The facts in this case are in substance the same as the facts in Estate of Blair. [91 T.C. at 777 n. 9.] In Liberty National Bank & Trust Co. v. United States, supra, the Court of Appeals found that the transitional rule contained in section 403(e)(3) applied to restrict the amount of the marital deduction to that which would have been allowable prior to December 31, 1981. In doing so, the Court of Appeals distinguished Estate of Neisen and Estate of Bruning because the formulas in both of those cases involved express language stating that the testators intended to eliminate all Federal estate taxes. Liberty National Bank & Trust Co. v. United States, supra at 304. The court also stated: Here there is no specific language in decedent’s will that he intended the marital bequest to change if federal tax law changed. The clause in the will which states that he intended to bequest a share “equal to the maximum marital deduction allowable” is precisely the type of provision addressed in ERTA. Estate of Christmas v. Commissioner, 91 T.C. No. 49 (Oct. 6, 1988); Estate of Bauersfeld v. Commissioner, 55 T.C.M. (CCH) 891 (1988); Estate of Blair v. Commissioner, 55 T.C.M. (CCH) 1246 (1988). All three of these cases had language in wills or testamentary trusts nearly identical to the language in decedent’s will. In each of these cases, the court held that the clause was a formula clause, and that the transitioned rule therefore applied to limit the marital deduction. [Liberty National Bank & Trust Co. v. United States, 867 F.2d at 304.] This same distinction was relied on by the Tenth Circuit Court of Appeals in Estate of Bruning when it found that section 403(e)(3) did not apply to prevent an unlimited marital deduction. After discussing the specific language in the Bruning formula, which the court found to be closely analogous to that contained in Estate of Neisen, the court stated: Other cases finding a formula marital deduction clause within the contemplation of section 403(e)(3) are distinguishable from this case. In each, the wills contained a standard marital deduction formula clause specifically indicating that the decedent’s intent was that the spousal bequest be dependent upon the maximum marital deduction. See Liberty Nat’l Bank & Trust Co. v. United States, 867 F.2d 302; Estate of Christmas v. Commissioner, 91 T.C. 769 (1988); Estate of Bauersfeld v. Commissioner, 55 T.C.M. (CCH) 891 (1988); Estate of Blair v. Commissioner, 55 T.C.M. (CCH) 1246 (1988). [Estate of Bruning v. Commissioner, 888 F.2d at 660.] Because the purpose of section 403(e)(3) was to prevent an unintended increase in the amount passing to the surviving spouse, the majority attempts to show that decedent’s sole intent was to benefit his wife. The majority states: Nothing in the revocable trust agreement before us could lead a reasonable person to believe that the decedent’s primary concern was to limit the amount going to his surviving wife to protect the interests of his other heirs. On the contrary, the decedent’s trust only shows concern for the welfare of the person who was his wife of 44 years when the amended trust agreement was signed in 1978. * * * [Majority op. at 301. Emphasis in original.] I must respectfully disagree. The trust instrument indicates that decedent was concerned about both his wife and his children. If his “only” concern was for his wife, the trust corpus would not have been divided into Trust A and Trust B. The purpose and effect of Trust B was to place limits on the spouse’s dominion and control over its principal. These limits were not in Trust A. The only beneficiaries of these limitations were decedent’s sons.5  The majority also finds that the trust gave the spouse “unlimited access to all of the income and principal of Trust A and Trust B after the decedent’s death, provided only that the principal of Trust A must be used up before the principal of Trust B can be invaded.” (Majority op. at 301. Emphasis in original.) If this were true, the nature of the property interests passing to the spouse under both Trust A and Trust B would be the same, making the distinctions between the two trusts meaningless.6 Certainly, that is not what the decedent intended. Trust A and Trust B both entitled the spouse to income for life and both allowed for the possible distribution of principal to the spouse. All of the principal of Trust A was available for distribution to the spouse “as Spouse may direct from time to time.” Trust B principal, however, could only be invaded after the exhaustion of the principal in Trust A and then only for the “reasonable care, support and maintenance” of the spouse. (Emphasis added.) This type of limitation is subject to an ascertainable standard and there is a fiduciary obligation to protect the interests of decedent’s children who were the ultimate distributees of Trust B. See Estate of Little v. Commissioner, 87 T.C. 599 (1986); Estate of Sowell v. Commissioner, 74 T.C. 1001 (1980), revd. on other grounds 708 F.2d 1564 (10th Cir. 1983). Compare Finlay v. United States, 752 F.2d 246 (6th Cir. 1985), with Peoples Trust Co. of Bergen County v. United States, 412 F.2d 1156 (3d Cir. 1969).7  A distinction of even greater importance between Trust A and Trust B is that paragraph 2 of Trust A gives the spouse the “absolute power” to appoint any part of the principal to herself or any other person. There were no limiting standards for exercise of this absolute power. By contrast, no similar rights were given to the spouse under the provisions of Trust B which could be used to defeat the rights of decedent’s sons.8  Finally, the majority speculates that “It seems highly unlikely, if not inconceivable,” that decedent would have foregone additional tax savings to protect the dispositive scheme in Trust B. (Majority op. at 301.) I find no factual basis for this. Decedent had made detailed provisions for the disposition of his estate. He had obviously been advised on estate tax issues at one time. He did not change the provisions in the trust during the 4 years of his life subsequent to the enactment of ERTA or during the 3 years after the California legislature determined that pre-ERTA limits would apply in construing maximum marital deduction formulas. We know nothing of the specific needs and circumstances of decedent’s heirs. In any event, we are not free to wander outside the confines of the trust instrument in an attempt to determine what the decedent would have intended where the language falls squarely within a set of criteria established by Congress. We should not vary or change the result prescribed by Congress based on after-the-fact arguments as to what the decedent would have intended if he had considered the issue. Estate of Christmas v. Commissioner, 91 T.C. at 776. Parker, Jacobs, and Gerber, JJ., agree with this dissent.  At the time of his death, decedent resided in California. California passed legislation in 1982 providing that pre-ERTA instruments containing maximum marital deduction formula clauses will be construed as if the pre-ERTA marital deduction limitations apply. Cal. Prob. Code sec. 1034 (current version at Cal. Prob. Code sec. 21523 (West Supp. 1990)).   The amount of the unified credit available in 1978, when decedent amended the trust was $34,000. This was the tax on a taxable estate of $134,000. The analysis contained herein ' produces the same conclusion regardless of the unified credit amount.    Example 1 Example 2 Example 3 Adjusted gross estate Maximum marital deduction $1,000,000 $800,000 $600,000 (pre-ERTA) (500,000) (400,000) (300,000) Taxable estate 500,000 400,000 300,000 Tentative tax 155.800 121,800 87,800 Unified credit 121.800 121,800 121,800 Estate tax due 34,000 Unused credit 34,000 In the first two examples, the taxable estate is large enough to fully absorb the unified credit and, thus, there is no need to decrease the marital deduction in order to increase the taxable estate. In the third example, although no estate tax is due, the taxable estate is not large enough to fully absorb the unified credit. In this situation, the provision following the maximum marital deduction formula clause provides for the taxable estate to be increased in order to use the entire unified credit. To accomplish this, the amount going into Trust A that qualifies for the marital deduction is reduced by $100,000, which increases the taxable estate to $400,000.   The provision for reducing the maximum marital deduction formula amount cannot serve to reduce or eliminate decedent’s estate tax whether one uses the current unlimited marital deduction or the pre-ERTA limited amount. In either event, the reduction provision does not come into play unless there would otherwise be unused credits.   The restrictions in Trust B may also have been intended to preclude the possibility that Trust B might be includable in the spouse’s taxable estate. However, this is not inconsistent with decedent’s intent to benefit his children. The beneficiaries of such tax savings would be decedent’s children who were the ultimate beneficiaries of Trust B.   If the decedent’s spouse had “unlimited access” to the principal and income of both Trust A and Trust B, as the majority finds, that finding would distinguish the facts in this case from those contained in our opinion in Estate of Blair, making the disapproval of Estate of Blair dicta.   The majority seems to suggest that because the surviving spouse was also the trustee, her powers would be unrestrained. (Majority op. at 301.) However, we have frequently refused to assume that a trustee will fail to act in accordance with his or her fiduciary responsibilities. See Estate of Graves v. Commissioner, 92 T.C. 1294, 1302-1303 (1989).   Decedent clearly intended that the property interests in Trust A would qualify for the marital deduction and that the property interests in Trust B would not. If the majority is correct, that decedent’s spouse had the same “unlimited access” to principal and income of both Trust A and Trust B, it would seem to follow that upon her death, the fair market value of Trust B would be includable in her taxable estate pursuant to sec. 2041. That is a result that would probably be contrary to decedent’s intentions. (See supra note 5.)