New York Probate and Estate Administration Lawyer Blog
This is a motion by the executrix requesting the Surrogate to fix the New York estate tax (Tax Law § 249–w).
The papers allege that the executrix made a motion to fix the tax returnable on March 16, 1972. Although the State Tax Commission (Commission) was duly served, no order fixing the tax has, 2 years and 9 months later, been submitted to the Surrogate. The executrix requests the Surrogate to act in his judicial, rather than administrative capacity, and to fix the tax (Tax Law § 249–w).
The Commission has appeared but has made no response, formal or informal, to the relief requested by the taxpayer. For the nature of the Commission’s objections, the Court must rely on the information imparted to it by the moving papers. It is there stated that the taxpayer was informed by the Commission that its decision in this and other cases is awaiting determination of pending appeals on related issues.
This Court is sympathetic with the Commission’s desire to protect state revenues. However, none of the case in which appeals are pending are relevant to the issue in this case.
This tax problem, like so many in other areas of the law, is created by a joint will. The Commission, depending on the outcome of some pending appeals, purposes to deny to the taxpayer a marital deduction of $60,800 on the ground that under the terms of the will the interest passing to the surviving spouse is a terminable interest. In simple terms, the Commission contends that although the disposition to Mrs. Tatkow, the surviving spouse, is of all property absolutely and forever, an interest which concededly would be entitled to the marital deduction, a later disposition passes such property contractually and irrevocably on Mrs. Tatkow’s death to the couple’s children. Since the children will possess or enjoy such interest in property upon Mrs. Tatkow’s death, it is contended by the Commission that the interest passing to her from the decedent, Mr. Tatkow, is terminable.
To establish its contention that Mr. Tatkow’s will contractually and irrevocably disposes of the same interest passing absolutely to Mrs. Tatkow to third party beneficiaries, the Commission relies on a few decisions of our Appellate Courts construing joint wills on issues which have no relation to the availability of the marital deduction, and where equitable rather than legal principles control the conclusion. This same mistake is evident elsewhere.
Preliminarily we mention briefly the pending appeals referred to in the moving papers. It is observed with regard to the appeals in Matter of Tricarico and Matter of Kahn that both Surrogate Laurino and this Court agreed with the Commission that the wills there in issue were contractual in nature. We both allowed the marital deduction on alternative grounds not relevant to the issue in this proceeding. In the third case this Court did find the will to be non-contractual. However, it is axiomatic that no two wills are alike: the will here under consideration is distinguishable from the Gold will. And, parenthetically, it is observed that even when there are similarities in the dispositive language employed, extrinsic circumstances surrounding execution of a joint will are as often determinative as the provisions of the will itself. Otherwise it would be impossible to reconcile many of our high court decisions. The point made is that nothing in the pending appeals will be dispositive of the issue raised in this proceeding.
Because the tax issue raised by the Commission has been raised in other cases, some general principles are mentioned.
As observed, the I.R.S. has allowed the marital deduction tothe taxpayer. Indeed where there is a federal disallowance, the issue is invariably determined administratively or judicially under Federal jurisdiction. It is only when there has been a final federal determination in favor of the taxpayer that a State judicial determination may be required. However, our Tax Law, section 961(a)(3) provides that a final federal determination determines the same issue for purposes of the tax under this article unless such final federal determination is shown by a preponderance of the evidence to be erroneous.
When the federal tax authorities have allowed a deduction, the statute places the burden of proof and the burden of producing evidence on the Commission. As this Court observed in Matter of Kahn Supra the Surrogate is often required to rule for the taxpayer when in a first instance submission it might very well rule for the Commission. This was a consequence of the enactment of section 961 recognized by the Commission yet recommended as desirable to assure conformity with federal law in the estate tax area where conformity was deemed essential. It is pointless after a final federal determination for the Commission to rest its contention on the provisions of a will such as is in issue in this case without offering extrinsic evidence to establish the federal determination to be erroneous.
The I.R.S. very properly regards the marital deduction as merely a postponement of the tax. The general policy, as expressed by Congress, is to allow the deduction in the estate of the first spouse to die when the same interest in property, if unconsumed, will be taxable in the estate of the surviving spouse. Thus if the interest is in trust or legal life estate with remainder over to designated remaindermen, the marital deduction will be disallowed because the interest in property will escape taxation in the estate of the surviving spouse. Where, however, as in the instant case, the interest in property passing to the surviving spouse is of all property absolutely and forever, to deny the marital deduction in the estate of the first to die will result in double taxation for inevitably the same interest will be taxed in the estate of the surviving spouse.
Congress has also expressed its concern that the marital deduction will not be lost to a taxpayer because of inept will draftsmanship. The marital deduction statute makes provision for disclaimers by third party beneficiaries when a disposition over to such beneficiaries upon the death of the surviving spouse, places the availability of the marital deduction in question.
With respect, it is observed that the Commission has failed to consider a basic distinction between a tax issue and other issues arising from joint wills. Tax issues are rare–indeed none in this State appears to have reached an Appellate Court. Other issues recur with greater frequency and many–some 40 odd–have been decided by our Appellate Courts. The Commission seeks to apply the legal principles applicable to the latter class of cases, to a tax issue.
A tax issue, one almost invariably involving the availability of the marital deduction, can arise only in the estate of the First of the joint will makers to die.
Other issues in joint will cases, those which recur frequently, almost invariably arise in the estate of the Last survivor of the joint will makers to die. And, these will arise only if and when the survivor has in his lifetime, made a new and different will contrary to a binding contract between the spouses. A few decisions consider also the right of the survivor to make inter vivos gifts contrary to the agreement. In determining in such joint will cases whether a survivor is contractually and irrevocably bound with respect to the gift over to third party beneficiaries, the Courts have applied equitable principles not at all applicable to tax issues.
A first equitable principle is that the survivor having made a contract with the first to die not to revoke the joint will, And having gained the benefit of such a contract, may not contrary to such an agreement, divert the property to others than the intended third party beneficiaries. The Courts must therefore determine in the first instance whether or not the spouses are contractually bound Inter se. However, in a tax issue, it does not matter in the least whether the spouses, as between themselves, are contractually bound or not contractually bound. Whether the interest in property passes to the survivor voluntarily or pursuant to a contract, the estate of the first to die is entitled to the marital deduction.
A second principle applied is to determine whether the survivor has breached the contract by failing to perform. The Courts search the provisions of the will to determine whether the survivor was contractually bound to leave the property to the third party beneficiaries–and if found to be so, will compel his executors to perform. A decision whether to specifically enforce the contract turns on the existence of an intention of the joint will makers at the time of execution to contractually bind the survivor. However, in a tax issue, there is no need to search for the intention of the joint will makers. It may be presumed that when the spouses leave all property to the survivor absolutely and forever they do intent to obtain the benefit of the marital deduction. Nor do the third party beneficiaries ever contest the right of the estate of the first to die to obtain the benefit of the marital deduction–there is no decision on record where this has been done.
The point is that in a tax case, where the issue is the availability of the marital deduction to the estate of the first to die, there has been no breach of a contract, no unjust enrichment, no division of assets and no ‘mockery of justice’ to require the intervention of a Court of equity or the application of equitable principles.
The distinction here made, while not articulated, is evident from the few cases which have considered the marital deduction problem arising from joint wills.
That such distinction exists may reasonably be inferred from the decisions which hold that a tax decision allowing the marital deduction would not be Res judicata in any subsequent proceeding by the third party beneficiaries to compel performance of the contract by the executors of the last of the spouses to die.
Some practical considerations are mentioned. Whenever articulated to their draftsmen, the reasons most often expressed by the spouses for making a joint will, is to save the survivor the trouble and expense of making a new will.
No doubt, at least at the time of execution, they have the then intention of leaving to the survivor of them their individually owned property. Often this will be expressed by the use of the words agree or agreement. Whether they intend the joint will to be irrevocable inter se depends on whether the terms used represent their actual intention or merely the draftsman’s mannerisms. But as discussed, when the issue is the availability of the marital deduction it does not matter in the least whether the spouses intended that they would be contractually bound Inter se or not so bound.
When the joint will contains also a further disposition over to third party beneficiaries, there is also little question but that at the time of execution they intend that their property upon the death of the survivor shall pass to these intended beneficiaries.
Whether or not they also intend irrevocably to bind the survivor to the ultimate disposition over is rarely expressed in explicit terms in the will itself although occasionally it is so expressed by separate written agreement outside the will.
In those cases where the third party beneficiaries seek the intervention of a Court of equity to compel the executor of the survivor to perform the contract, the issues for the Court are: Did the joint makers intend that the disposition over should be contractually and irrevocably binding upon the survivor? Or were the joint makers merely expressing their present, and therefore revocable, intention ultimately to pass their property to the objects of their mutual concern and bounty?
A will is by nature ambulatory and to remain so must of necessity be revocable. Social events such as death or marriages or economic changes in the circumstances of the survivor or the intended third party beneficiaries will often require changes in the will. As the decisions, discussed Infra, hold, the presumption is that revocability was intended unless irrevocability is clearly and convincingly expressed in unambiguous terms.
We put aside the distinction discussed between tax cases and those in which the equitable intervention of the court is sought by the beneficiaries to enforce a contract. Apart from the provision of paragraph Fourth which cuts down the absolute interest given to the survivor under paragraph Third, the only evidence of an enforcible contract is in the provision of the exordium expressing an intention to make an agreement for the distribution of our property after the death of either of us and After the death of our survivor.
The quality of proof required to establish a contract enforcible in equity is discussed in: As a will an instrument is revocable at pleasure, but as a contract, if supported by adequate consideration, it is enforcible in equity. The evidence required to show a contract by one deceased, to dispose of his property in a certain manner after his death, must be clear and convincing, or it will not be regarded as sufficient. The agreement depended upon for the award of the relief demanded must be clearly and definitely established by full and satisfactory proof. To attribute to a will the quality of irrevocability demands the most indisputable evidence of the agreement, which is relied upon to change its ambulatory nature, and that presumptions will not, and should not, take the place of proof.
In cases, other than above cited, the courts have determined that the quality of proof viz. clear, convincing, indisputable, to establish that irrevocability was intended was lacking.
To put it another way, there is simply no decision on record in this State, in which a court has specifically enforced a disposition over to third party beneficiaries in a joint will, where the disposition between the joint makers was in terms of all property absolutely and forever.
The same general principle is expressed in single will cases in Matter of Ithaca Trust Co.,: A remainder cannot be limited upon an absolute estate in fee. Where a gift is provided by will and such gift is intended to be Absolute, a gift over is repugnant to such absolute gift and void, and the purported gift over must be treated as a mere expression of a wish or desire regarding the distribution of such part of the gift as may remain undisposed of at the death of the donee.
As discussed, none of these decisions upon which the Commission relies are at all applicable to a tax issue.
The Court determines: (1) That the taxpayer is entitled to the marital deduction, the Commission having failed by a preponderance of evidence to establish that the final federal determination is erroneous. (2) That the taxpayer is entitled to the marital deduction since the interest passing to the surviving spouse is absolute and not terminable. The proof before the Court does not establish either an express or implied promise between the spouses to make their joint will irrevocable. 3) The taxpayer would be entitled to the marital deduction, even if the disposition to the surviving spouse was terminable, under the exception to the terminable interest rule since the surviving spouse receives under the joint will a beneficial power to consume and dispose of the interest in property received without restriction of any kind. The fact that the taxpayer is contractually bound under the terms of a will to leave whatever remains to third party beneficiaries does not disqualify the interest received by him from being allowed the marital deduction.
An order has been signed fixing the New York net estate tax at $584.61 without interest or penalties since the delay in payment is the fault of the Commission.
If you have any problems regarding estate tax, contact Stephen Bilkis and Associates.