Lally, Gerald P.

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Volume 7 Issue 3 Article 8 1962 Estate Planning - Marital Deduction - Formula Gifts Gerald P. Lally Follow this and additional works at: https://digitalcommons.law.villanova.edu/vlr  Part of the Estates and Trusts Commons, and the Tax Law Commons Recommended Citation Gerald P. Lally, Estate Planning - Marital Deduction - Formula Gifts, 7 Vill. L. Rev. 478 (1962). Available at: https://digitalcommons.law.villanova.edu/vlr/vol7/iss3/8 This Note is brought to you for free and open access by Villanova University Charles Widger School of Law Digital Repository. It has been accepted for inclusion in Villanova Law Review by an authorized editor of Villanova University Charles Widger School of Law Digital Repository. VILLANOVA LAW REVIEWis a statute which says this is negligence per se. While some fault can beimputed to the owner in such a case, still a thief has intervened and stolenthe car. Yet, the owner has contributed to the accident by his negligencewhich, in a sense, placed the automobile in the thief's hands, and thusput the thief in "control." The ever-increasing number of highway acci-dents would be the policy basis for finding jurisdiction in this case.It would not seem to offend "fundamental fairness" to impose jurisdictionover this negligent owner, who presumably knows the serious conse-quences of highway accidents. The Hess case designated automobiles as"dangerous instrumentalities; ' 86 certainly their vast increase in number,speed and size has not decreased their dangerousness.The fifth situation involves theft of the automobile without any faultof the owner. The control doctrine would not confer jurisdiction in thiscase, because it would be unreasonable, and unfair (and thus offend dueprocess) to hold the owner responsible where there is no basis to imputea method of "control." Only by adopting a doctrine of absolute liabilitycould jurisdiction be imposed on a nonresident, nonnegligent owner. Thisdoctrine has been cautiously applied and sparingly used because of itsdire consequences on innocent parties. At present, the automobile situationdoes not appear to have reached the point where imposition of this doctrineis necessary. However, since solutions to jurisdictional problems arefound as the problems become acute, a steady increase of automobile acci-dents may force a further broadening of rules governing acquisition ofjurisdiction.Edwin W. ScottMichael R. BradleyESTATE PLANNING-MARITAL DEDUCTION-FORMULA GIFTS.Estate of Althouse (Pa. 1961).In order to obtain the maximum marital deduction available under theInternal Revenue Code of 1954,' testator created two trusts in his will:36. Hess v. Pawloski, 274 U.S. 352, 356, 47 S. Ct. 632, 633 (1927).1. Int. Rev. Code of 1954, § 2056: "(a) Allowance of marital deduction - Forpurpose of the tax imposed by section 2001; the value of the taxable estate shall ...be determined by deducting from the value of the gross estate an amount equalto the value of any interest in property which passes or has passed from thedecedent to his surviving spouse but only to the extent that such interest is in-cluded in determining the value of the gross estate .... (c) Limitation on aggregateof deductions - (1) General rule - The aggregate amount of the deductionsallowed under this section ... shall not exceed 50 percent of the value of theadjusted gross estate."[VOL. 71Lally: Estate Planning - Marital Deduction - Formula GiftsPublished by Villanova University Charles Widger School of Law Digital Repository, 1962SPRING 1962]one, called "Trust A," for his wife; the other, called "Trust B," for hischildren. In Trust A, testator gave his wife a life estate with power toappoint the remainder by will. In default of appointment, the principalwas to pass to Trust B. To Trust A the testator devised and bequeathed"so much of my estate of whatsoever nature and wherever situate, togetherwith other property included in my adjusted gross estate qualifying forthe marital deduction which passes or has passed from me to my wife,shall equal the maximum marital deduction as provided in Section 2056of the Internal Revenue Code, or such other corresponding provision asmay be in effect at the time of my death . . ." To Trust B, testatorgave, devised and bequeathed "all the rest, residue and remainder of myestate not hereinbefore provided for." Between the date of testator's deathand the date of distribution, the assets of the estate increased substantiallyin value. The Orphans' Court of Montgomery County decided that themarital deduction trust should share ratably in the increase. The Su-preme Court of Pennsylvania reversed, holding that the marital deductiontrust was pecuniary and not residual.2  Estate of Althouse, 172 A.2d146 (Pa. 1961).Tax considerations, which were once so pressing as to induce thePennsylvania legislature to adopt a wholly unfamiliar community prop-erty system, 3 enter into the drafting of wills in which a surviving spouseis to share. The Internal Revenue Code, in attempting to equalize theincidence of estate taxes between common law and community propertystates, permits half of the decedent's estate to pass tax free to hisspouse.4 Planning to take advantage of this privilege is complicated bythe fact that the estate, for federal estate tax purposes, includes manythings such as life insurance and living trusts which do not pass underthe will or in intestacy, and is based upon the net estate before taxes.5A simple gift by will of half the testator's estate risks giving the spouseless than the full marital deduction, with a consequent and unnecessarydiversion of funds from the natural objects of the testator's bounty andincreased liability to the federal government. 62. A pecuniary legacy is not affected by increases or decreases in the size ofthe estate unless an abatement becomes necessary. § 14 (9) and (10), Wills Act of1947, and § 751, Fiduciaries Act of 1949, 20 PA. STAT. ANN. §§ 180.14 and 320.751(1950).3. These were declared "utterly unconstitutional" in Willcox v. Penn Mutual LifeInsurance Co., 357 Pa. 581, 55 A.2d 521 (1947).4. In re Rosenfeld Estate, 376 Pa. 42, 101 A.2d 684, 685 (1954). Lefever,The Marital Deduction, 89 TRusTs AND ESTATzS, 644 (1950). "The theory isthat the husband and wife each has an undivided one-half interest in property ownedby them. Consequently when the husband makes a gift to the wife, under themarital deduction, it is assumed that he only owns half of the community from whichhe gives and, therefore, he is taxed only on one-half of the total." Ibid.5. Casner, Estate Planning - Marital Deduction Provisions of Trust, 64 HARV.L. Rzv. 582, 591 (1951). Bowe, ESTATS PL.ANNING AND TAXATION, §§ 2.22-2.26(1957).6. See Will of Uihlein, 264 Wis. 362, 59 N.W.2d 641 (1953), discussed in 52MicH. L. Rxv. 1098 (1954); Campbell v. Lloyd, 162 Ohio St. 203, 122 N.E.2d695 (1954), cert. denied 349 U.S. 911 (1955).CASE NOTES2Villanova Law Review, Vol. 7, Iss. 3 [1962], Art. 8https://digitalcommons.law.villanova.edu/vlr/vol7/iss3/8VILLANOVA LAW REVIEWDraftsmen have worked long and hard preparing a formula thatwould achieve the maximum tax saving;7 but the testator, in adoptingsuch a formula, must always make an election between giving his wifea certain sum or a share of the residue of his estate.8 If he gives hiswife a residual gift equal to the maximum marital deduction, her sharewill be diminished by any decline in the value of assets before distribution,as well as by any failure to realize the values fixed by the tax assessors. 9It is therefore sometimes advocated that a non-residual, or pecuniarylegacy, be given in terms of the formula, so that the widow will beprotected in a declining market. Such a choice, however, carries therisk, as demonstrated in the present case, that the market will rise, andthe widow will object that she has not received equal treatment withthe other heirs. What is said here of the widow is, of course, alsotrue in the case of a widower. Once the choice has been made by thetestator, the beneficiaries must be bound by it (except to the extent thatthe widow may have an election to take against the will), because it isnot the function of the court, like a Monday morning quarterback, toreform the testator's plan when subsequent events have made it seemunwise.In deciding that the testator in the instant case intended a pecuniarybequest, the court followed a New Jersey precedent, 10 which discoveredthe intent from the arrangement of the gifts in the will: first a gift tothe marital deduction trust, then a gift of "the remainder" to the otherbeneficiaries. A gift of "that part" of the residuary estate to be deter-mined by a formula, would show an intent to make a residuary bequest,as a surrogate's court in New York has held."' That same court hasreached a like result where the will authorized distribution in kind, andspecified that assets distributed to the marital deduction trust were tobe taken at the value finally determined for federal estate tax purposes. 12Other formulae are to be found in the literature."5There is no doubt in this case that testator had made an election.The language of the will discloses that he had had professional advice,and suggests that his counsel was familiar with the very ample profes-sional literature on marital deduction gifts. It is not a case in which7. Casner, Estate Planning - Marital Deduction Provisions of Trusts, 64HARV. L. Rzv. 582, 584 (1951).8. Edmonds, Hints on Marital Deduction Problems, 89 TRUSTS AND ESTATES669, 670 (1950). "A bequest based on a percentage of the adjusted gross estate,such as a formula type bequest, will usually effect a greater tax saving and morenearly carry out a testator's wishes than one based on a percentage of residue, apecuniary legacy, or a specific bequest."9. Smith, Marital Deduction in Estate Plann:ing, 32 TAXES 15, 16 (1954). Ina survey conducted by the author, however, he found that leading trust companiesfavored the residency type formula gift over the pecuniary type by a ratio of sixto one.10. Estate of Kanter, 50 N.J. Super. 582, 143 A.2d 243 (1958).11. Estate of Inman, 22 Misc.2d 573, 196 N.Y.S.2d 369 (1959).12. Estate of Bing, 23 Misc.2d 326, 200 N.Y.S.2d 913 (1960).13. Casner, Estate Planning - Marital Deduction Provisions of Trust. 64 HARV.L. REv. 582 (1951).[VOL. 73Lally: Estate Planning - Marital Deduction - Formula GiftsPublished by Villanova University Charles Widger School of Law Digital Repository, 1962

Estate Planning - Marital Deduction - Formula Gifts

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Estate Planning - Marital Deduction - Formula Gifts

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