Estate of Virginia Loren Ray, Andrew M. Ray, Executor, Petitioner v. Commissioner of Internal Revenue, Respondent, 54 T. C. 1170 (1970)

A bequest to a surviving spouse is a terminable interest, ineligible for the marital deduction, if it is contingent on the spouse fulfilling certain conditions within a specified time after the decedent’s death.

Summary

In Estate of Ray v. Commissioner, the decedent left her residuary estate to her husband on the condition that he execute an agreement within four months of her death to devise equivalent property to their daughter upon his death and not defeat this agreement through inter vivos gifts. If the husband failed to execute this agreement, the bequest would pass to a trust for the daughter. The Tax Court held that this bequest was a terminable interest under section 2056(b) of the Internal Revenue Code, and thus not eligible for the marital deduction, because at the time of the decedent’s death, the interest could fail if the conditions were not met, and the daughter could possess the property if the husband’s interest terminated.

Facts

Virginia Loren Ray died testate on August 12, 1964. Her will left her residuary estate to her husband, Andrew M. Ray, on the condition that within four months of her death, he file an agreement with the Probate Court to devise property of equivalent value to their daughter, Deborah Lynn Ray, upon his death, and not make any gifts or transfers that would defeat this agreement. If Andrew did not execute the agreement, the bequest would pass to a trust for Deborah’s benefit. Andrew filed the required agreement on September 10, 1964. The estate tax return claimed a marital deduction for the bequest to Andrew, which the Commissioner disallowed, asserting it was a terminable interest.

Procedural History

The Commissioner determined a deficiency in the estate tax and disallowed the marital deduction for the bequest to Andrew. The estate filed a petition with the United States Tax Court to challenge the deficiency and the disallowance of the marital deduction. The Tax Court issued its decision on May 27, 1970, holding that the bequest to Andrew was a terminable interest not eligible for the marital deduction.

Issue(s)

1. Whether the bequest to Andrew M. Ray, conditioned on his execution of an agreement to devise property to his daughter upon his death, constitutes a terminable interest under section 2056(b) of the Internal Revenue Code?

Holding

1. Yes, because the interest passing to Andrew could terminate or fail if he did not execute the required agreement within four months of the decedent’s death, and upon such failure, the property would pass to a trust for the benefit of their daughter, fulfilling the criteria of a terminable interest under section 2056(b).

Court’s Reasoning

The court applied section 2056(b) of the Internal Revenue Code, which disallows a marital deduction for a terminable interest. The court found that the bequest to Andrew was terminable because it could fail if he did not execute the required agreement within four months of Virginia’s death. This failure would result in the property passing to a trust for Deborah, satisfying the statutory conditions for a terminable interest: (1) the interest would fail upon the lapse of time without the agreement’s execution, (2) an interest in the same property would pass to Deborah for less than full consideration, and (3) Deborah could possess or enjoy the property upon the termination of Andrew’s interest. The court cited Allen v. United States to support its decision, emphasizing that the nature of the interest at the time of death is determinative, regardless of subsequent events. The court rejected the petitioner’s argument to consider the interest after the conditions were fulfilled, as this approach is not supported by the statute or case law. The court also distinguished the case from Estate of James Mead Vermilya, noting that Vermilya involved a joint and mutual will, a different scenario from the conditional bequest at issue.

Practical Implications

This decision clarifies that a bequest to a surviving spouse conditional on the fulfillment of certain acts by the spouse within a specified time after the decedent’s death is a terminable interest ineligible for the marital deduction. Estate planners must carefully structure bequests to avoid creating terminable interests, as such interests can significantly impact estate tax liability. The ruling emphasizes the importance of considering the nature of the interest at the moment of death, not after conditions are met. This case has influenced subsequent cases involving conditional bequests and has been cited in discussions about the marital deduction’s applicability. Practitioners should advise clients to seek alternatives to conditional bequests, such as outright gifts or trusts that comply with the requirements of the marital deduction, to minimize estate tax exposure.