Marital Deduction Research Articles

Lifting the Shroud Obscuring Estate of Hubert: The Logic of the Income and Estate Tax Treatment of Estate Administration Expenses

In Commissioner v. Estate of Hubert, the Supreme Court upheld a Tax Court decision that $1.5 million of estate administration expenses charged against the income of a marital deduction bequest did not reduce the marital deduction for estate tax purposes. In Hubert, the marital deduction bequest was a residuary bequest, and estate administration expenses were payable out of the residue, but the executors had discretion to allocate such expenses between principal and income2 Pursuant to what is known as the "section 642(g) election," the expenses charged against income were deducted for purposes of computing the taxable income of the estate as a separate taxpayer, and were not deducted for estate tax purposes.This comment both critiques Hubert on a doctrinal basis and explores what should be the proper income and estate tax consequences of estate administration expenses.

Planning to Minimize the Risks and Maximize the Rewards of the Estate Portability Election

ABSTRACT Estate tax planning has been changed substantially with the enactment of the carryover of unused estate tax exclusion amounts from the first spouse to die to the estate of the second spouse. Termed portability, the availability of the deceased spouse's unused exclusion amount (DSUEA) largely eliminates the need for most taxpayers to conduct a series of lifetime asset transfers to balance estates and maximize the use of the exclusions. It also opens an opportunity for a double basis increase adjustment, one when the first spouse dies and a second when the surviving spouse dies. Where the DSUEA is sufficient to offset the additional inclusion from estate taxation in whole or in part, there may be an advantage to using the marital deduction to avoid inclusion in the tax base until the second demise. We explore the combination of estate asset values, appreciation expectations, and appropriate properties within the context of planning with the portability election, as well as the risk variables associated with such planning strategies.

Status of same-sex marriage in the USA as of 4 December 2014

Since the 2013 Windsor decision of the US Supreme Court holding the Defense of Marriage Act (DOMA) unconstitutional, 35 states of the United States, the District of Columbia and 17 foreign countries allow same-sex marriage. The Internal Revenue Service now holds that legally married same-sex couples are treated as married for federal tax purposes, if living in any jurisdiction recognizing same-sex marriage. Justice Kennedy’s decision in the Windsor case held section 3 of DOMA unconstitutional, thus allowing plaintiff, the surviving spouse of a samesex marriage, to claim the federal estate tax marital deduction from the gross estate of her deceased same-sex spouse. In writing the Supreme Court’s opinion in the Windsor case, he said DOMA is unconstitutional as a deprivation of the liberty of the person protected by the Constitution’s Fifth Amendment. In the Hollingsworth case, also decided 26 June 2013, California’s amendment to its constitution banning same-sex marriage was held unconstitutional. The IRS has revised its guidance to reflect both theWindsor andPerry decisions. The Federal Office of Personnel Management has said that all legally married same-sex spouses will now be eligible family members for health insurance purposes. Further guidance from the IRS is needed of the effective date for applying the Windsor case’s holding to federal tax law. Revenue Ruling 2013-17, carries out the Windsor decision by providing that same-sex couples will be considered married for federal income, estate, and gift tax purposes. Potential conflicts of law problems exist in same-sex relationships between most state DOMAs and the laws of those states recognizing same-sex marriages. Thus, conflicts over child custody, due to differences in state laws may develop. A same-sex married couple residing in a state recognizing same-sex marriages should be eligible for Social Security benefits. There are many non-tax and state law issues that have arisen since the Windsor and Perry decisions. Strong opposition to same-sex marriage remains in the United States, particularly among Mormons, Roman Catholics, Evangelical Protestants, and many other Americans. Support for same-sex marriage is increasing in the United States as well as in a number of foreign countries. However, Nigeria, Saudi Arabia, and Uganda have draconian penalties for people in same-sex relationships.

Justices Douglas and Whittaker in Meyer v. United States: A False Claim Rebutted

Justices Douglas and Whittaker in Meyer v. United States: A False Claim Rebutted DAVID J. DANELSKI In a recent issue of the Journal of Supreme Court History, Craig Alan Smith claimed that the following passage in William O. Douglas’s autobiography, The Court Years, was, “from first to last,” a fabrication:1 In one case when the vote was five to four, Whittaker was assigned the opinion for the majority. I had already written the dissent and went to his office to discuss a wholly different matter. When I entered he was pacing his office, walking around his desk withpursedlips as ifpossessed. I asked him what was wrong. He said, refer­ ringto the five-to-fourdecision, thathe had been trying to write the majority opinion but simply could not do it. “That is because you are on the wrong side,” I said. “Not at all. Not at all. I am right but cannot get started.” “Would you like me to send you a draft of the majority opinion?” “Would you please?” Within an hour the draft was in his office, and when the opinion came down (Meyer v. United States, 362 U.S. 410) it was one of the few in which the majority and minority opinions were written by the same man.2 Charging Douglas with “deceit,”3 “fraud­ ulence,”4 and “besmear[ing] Whittaker’s rep­ utation,”5 Smith wrote Nothing Douglas reported about Meyer was true: it was not a five to four decision; Whittaker was not assigned the opinion of the Court; Douglas had not already written a dissent; and, most significant, Douglas did not write both deci­ sions announced.6 DOUGLAS AND WHITTAKER IN MEYER V. UNITED STATES 173 To assess the accuracy of Smith’s claim, I examined the papers of all members of the Court who had Meyer files—Earl Warren, Felix Frankfurter, William O. Douglas, Tom C. Clark, John Marshall Harlan II, and William J. Brennan, Jr.7 The documents in those files and the published and unpublished interviews of Douglas’s and Whittaker’s law clerks are the main data for this article. I begin with a chronology of the events in Meyer v. United States. Next, I consider the DouglasWhittaker relationship. I then present evi­ dence from primary sources and assess the Smith’s argument based on secondary sour­ ces. Finally, I state my conclusion that Smith’s claim is false. The Meyer Chronology November 23, 1959. The executors of the Estate of Albert F. Meyer filed a petition for a writ of certiorari in the Supreme Court of the United States, seeking a refund of an overpayment of estate taxes. The petitioners claimed that, under Section 812 (e) of the Internal Revenue Code, they were entitled to a marital deduction for a portion of the proceeds of two life insurance policies that guaranteed (1) monthly payments to Meyer’s wife for a period of twenty years after his death unless she died during that period, in which case the payments were to go to Meyer’s daughter and (2) monthly payments to Meyer’s wife for the rest of her life if she lived more than twenty years after Meyer’s death. The insurers, by entries in their books, allocated two specified amounts, one to fund the guaranteed monthly installments for twenty years and the other to fund monthly payments to the wife as long as she lived. The U.S. District Court for the Western District of New York, relying on In Re Reilly’s Estate v. Commis­ sioner, 239 F2d 797 (3d Cir 1957), held that, under Section 812 (e) of the Internal Revenue Code, the petitioners were entitled to the marital deduction. On appeal, the Court of Appeals for Second Circuit reversed in a split decision.8 January 2, 1960. Steven Duke, Dou­ glas’s law clerk for the 1959 Term, summa­ rized the case’s facts and the parties’ contentions in a certiorari memorandum and recommended that certiorari be granted.9 January 11, 1960. The Supreme Court voted unanimously to grant certiorari in Meyer w The case was docketed as No. 13 in the Court’s 1960 Docket. October 14,1960. ChiefJustice Warren presented the...

Debunking Douglas: The Case Against Writing Both Majority and Minority Opinions

Debunking Douglas: The Case Against Writing Both Majority and Minority Opinions CRAIG ALAN SMITH Introduction In the annals of Supreme Court history, Meyer v. United States was hardly notewor­ thy. Decided by a six to three majority and announced in late November 1960, the case by all appearances was a run-of-the-mill federal tax question involving a disputed marital deduction on estate taxes paid.1 Although treated favorably by Shepard's citations, Meyer did not become a significant precedent, and no one outside the parties involved, their lawyers, or the Justices (at least, for a few weeks) paid any attention to it. Not so for the legacies ofJustices Charles Evans Whittaker and William O. Douglas. Although Whittaker was the second person ever to serve at all three levels of the federal judiciary,2 he was still rated a judicial “failure” by sixty-five legal and political experts in a 1971 survey.3 The only Missou­ rian and first native Kansan appointed to the Supreme Court, Whittaker’s five years of service were routinely dismissed as ineffec­ tive or insignificant. Shortly after Whittaker’s resignation, Leon Friedman prepared a bio­ graphical sketch portraying him as “not fitted intellectually or physically for the job.” Relying on Friedman, Victoria Woeste con­ cluded Whittaker “was in eveiy way unsuited for his exalted position.”4 Criticized for making inconsistent decisions, struggling with making decisions (or changing his mind once he made a decision), Whittaker’s weakened reputation was further tarnished when he (supposedly) failed to write the majority opinion assigned to him in Meyer v. United States. William O. Douglas, on the other hand, was the longest serving Justice in history. His feats were truly remarkable, often controver­ sial, and some were arguably unbelievable. Touted more than once as a vice presidential candidate while on the Bench (each time unsuccessfully), Douglas left an indelible stamp on Supreme Court history with his 228 JOURNAL OF SUPREME COURT HISTORY four marriages (a couple to women less than half his age), several calls for his impeach­ ment, wide-ranging publications based on his world travels, and nearly being killed when the horse he was riding fell on him.5 Stories of Douglas’s youth hiking through western mountains to overcome polio seemed fabled, and, according to one Douglas biographer, they probably were.6 Even Douglas’s rela­ tions with his law clerks contributed to recent debates over just how cruel a taskmaster he really was.7 Setting aside the hype, however, there was one Douglas legend that for over thirty years became so commonplace as to scarcely need attribution. According to Douglas himself, he wrote the Court opinion and the dissenting opinion in Meyer v. United States. Considering Douglas’s prodigious work out­ put and Meyer's relative obscurity, this claim was accepted by at least a dozen different authors as evidence of another memorable act in Douglas’s long list ofaccomplishments. As Supreme Court historical trivia, the story of how one Justice wrote the majority and minority decisions in the same case was repeated and regaled. Unfortunately, none of it was true; Douglas embellished it beyond credulity. More tragic, though, than the gullibility ofscores ofDouglas commentators was the irreparable damage this innocuous story did to Whittaker’s reputation once he became the unwitting buffoon of another Douglas tall tale. This article analyzes the persistency of Douglas’s story and presents how various sources (including Douglas) used it to perpetuate his legacy while denigrating Whittaker. This textual analysis reveals inconsistencies with other factual circum­ stances that made Douglas’s story all the more suspect. While the earliest sources who believed Douglas could be excused their naivete, later sources were guilty of inexcus­ able laxness for preserving such a preposter­ ous story without verification (even Douglas related inaccurate facts). It was more conve­ nient—some might say plausible—to cast Douglas as the genius behind two written opinions and Whittaker as the incapable rube who needed assistance. The truth found in the historical record (hidden in plain sight for thirty years) proved far more revealing for both men’s characters. Not only was Dou­ glas’s story untrue, but the truth cast Whittaker in a more positive...

NOT ALL DEFINED VALUE CLAUSES ARE EQUAL

Defined value clauses, used to value nonmarketable family limited partnership (FLP) interests, create valuation distortions and other public policy issues. This article describes these abuses and proposes the employment of restrictions similar to those applied to pecuniary formula marital deduction clauses.This article explains how pecuniary formula marital deduction provisions created valuation distortions by allowing for undervaluation of the marital share that were remedied by the IRS’s Rev. Proc. 64-19 and the enactment of § 2056(b)(10). Additionally, this article analyzes recent case law expanding the use of defined value clauses into the FLP area and criticizes the courts for not applying the public policy doctrines of Procter and Robinette to those cases. This article also distinguishes defined valuation clauses in the FLP context and shows how all fixed value clauses are not equivalent. Finally, this article proposes solutions for overcoming the valuation distortions that these clauses create.

Not All Defined Value Clauses are Equal

Defined value clauses used to value nonmarketable family limited partnership (FLP) interests create valuation distortions and other public policy issues. This paper describes these abuses and proposes the employment of restrictions similar to those applied to pecuniary formula marital deduction clauses. The article explains how pecuniary formula marital deduction provisions created valuation distortions by allowing for undervaluation of the marital share that were remedied by the IRS’s Rev. Proc. 64-19 and the enactment of section 2056(b)(10). The article analyzes recent case law expanding the use of defined value clauses into the FLP area and criticizes the courts for not applying the public policy doctrines of Procter and Robinette to those cases. The article distinguishes defined valuation clauses in the FLP context and shows how all fixed value clauses are not equivalent. Finally, the article proposes solutions to deal with the valuation distortions that these clauses create.

The New Super-Charged PAT (Power of Appointment Trust)

This article proposes to repeal the QTIP provisions in order to collect revenue now for transfers that are essentially transfers to third parties and not to the decedent's spouse. Because there are advantages of increased flexibility attendant to a QTIP as opposed to a PAT, this article proposes to take those repealed QTIP benefits and attach them to the PAT, which would greatly enhance that marital deduction trust form. A super-charged PAT would thereby be able to preserve the decedent's GST tax exemption (like a reverse QTIP), create a decedent's by-pass trust by allowing a PAT (or a partial PAT) election-out, and create a decedent's state-only PAT marital deduction. The super-charged PAT would provide for much desired post-mortem tax planning without the complex and strict requirements of a disclaimer. Moreover, the new PAT would eliminate conflicts of interest and fiduciary problems inherent in the QTIP form of the marital deduction. Lastly, by repealing the QTIP provisions and by super-charging the PAT, the marital deduction would truly be a marital deduction and not a third party beneficiary tax deferral device. I have criticized the QTIP trust on the basis that the QTIP provisions are both illogical and sexist. The QTIP provisions are illogical because they conflict with their stated public policy goal of taxing marital property when it leaves the marital unit and passes to other beneficiaries. Because the goal of the marital deduction is to tax property when it leaves the marital unit and because the QTIP expressly endorses passing the property to third parties at the first spouse’s death, the QTIP undermines the fundamental rationale for the marital deduction. Likewise, the QTIP provisions are sexist. They treat women as the invisible spouse and they equate giving an income interest to women with giving them the corpus. With the QTIP, the first spouse to die controls the disposition of the corpus and he selects the decision maker who will make the QTIP election. The QTIP provisions implicitly equate giving an income interest to women with giving them the property itself because unlike the other exceptions to the terminable interest rule in which the widow is given a rough equivalent to outright ownership of the corpus, the QTIP provisions allow a marital deduction for the full value of the property at the husband's death even though the surviving spouse, the other half of the marital unit, receives only the income interest in that property. A PAT provides the surviving spouse with both an income interest and a power to appoint the property to herself or to her estate; it is considered an equivalent to ownership although this article recommends that the PAT require that the surviving spouse be entitled to both an inter vivos and a testamentary power of appointment over the trust property. The PAT, however, has all but disappeared as a marital transfer because of the popularity of the QTIP. This article proposes to repeal the QTIP provisions but recognizes that repeal is virtually impossible because of certain well-liked features of the QTIP that have nothing to do with the decedent’s desire for dead hand control, but which provide advantages of increased flexibility in estate planning. Therefore, this article proposes to take those repealed QTIP “flexibility” benefits and attach them to the PAT to create a “super-charged” PAT to take the place of the QTIP trust.

The Inequity of U.S. Estate Tax Consequences for Noncitizen Spouses and Expatriates and the Impact of the Proposed Exit Tax

In most cases, U.S. estate tax law permits assets passed to a spouse on death to be excluded from the tax net via the operation of the marital tax deduction. For individuals with noncitizen spouses, however, the law denies the marital deduction unless the assets are placed in a qualified domestic trust. The purpose of this arrangement is to prevent assets being lost to the estate tax system due to repatriation by the noncitizen spouse. The additional compliance costs imposed on noncitizen spouses regardless of whether they repatriate, stands in stark contrast to the regime faced by U.S. citizens who elect to relinquish their citizenship. The alternative tax system imposed on such former-citizens offers considerable scope for both legitimate and illegitimate tax minimization. This paper proposes a greater alignment of these divergent systems, in light of the proposed exit tax legislation, both of which are designed to achieve the same objective of ensuring that wealth generated in the U.S. does not escape the estate tax net.

The Estate Tax and Charitable Bequests: Elasticity Estimates Using Probate Records

This paper uses data from San Francisco probate re- cords and cross-year variation in tax rates to estimate the effect of the estate tax on charitable bequests. Identification of the tax price does not require strong assumptions about the marital deduction or functional form, both of which can bias the price elasticity estimate. Estate and inheritance taxes are found to be significantly related to charitable bequests for both filers and non-filers of the federal estate tax return. These results hold whether the tax price is based on the date-of-will tax schedule, the date-of-death tax schedule, or expectations about future tax rates.

Estate Entitled to Marital Deduction for Contingent QTIP Election

The US Court of Appeals for the Eighth Circuit has reversed the Tax Court's decision in 'Estate of Robertson v. Commissioner' and allowed the estate a marital deduction for the interest of the decedent's surviving spouse in two residuary trusts. The appellate court reasoned that the estate was entitled to the deduction because the executor's qualified terminable interest property (QTIP) election was in full compliance with the requirements specified in IRC Sec. 2056(b)(7). The Tax Court's argument was that a non-marital trust could be funded by the possibility property since the executor's option to pass up a QTIP election enables them to appoint the property, thereby hindering the interest from meeting requirements that would make it a qualified income interest for life. The Eight Circuit Court followed the reasoning of the Fifth Circuit and rejected this argument.

The Marital Deduction QTIP Provisions: Illogical and Degrading to Women

In 1981, Congress enacted the qualified terminable interest property (QTIP) provisions that allow an estate and gift tax marital deduction for the full value of the underlying property where a spouse receives only a qualifying income interest for life and where the executor of the estate or the donor spouse makes a timely election. The article reviews the history of the marital deduction and its evolved rationale, explains and analyzes the current QTIP provisions together with their supposed comity with the decision to adopt the marital unit as the proper unit of transfer taxation, illustrates how the QTIP demeans women, and proposes that Congress repeal the QTIP provisions.

Court of Appeals Reverses Tax Court on Marital Deduction for Contingent QTIP: Estate of Spencer

Court of Appeals Reverses Tax Court on Marital Deduction for Contingent QTIP: Estate of Spencer

Tax Court Holds Marital Deduction Unavailable to Non-Marital Trust: Estate of Robertson

Tax Court Holds Marital Deduction Unavailable to Non-Marital Trust: Estate of Robertson

Estate Planning for Nonindustrial Forest Owners

forest property is held and provisions for funding estate settlement. This paper presents research results on the interaction of business form, funding technique, and forest management on federal income and estate tax liabilities of private nonindustrial forest owners. Business forms analyzed are sole proprietorship, partnership, Subchapter S corporation, and trust. Funding techniques examined are immediate liquidation of some timber assets, loans, and life insurance proceeds. Harl (1965) examined intergenerational farm asset transfers within a corporate business form. Harrison (1966) and Allwood (1969) applied mathematical programming to develop least-cost intergenerational transfer models. Buss (1971) investigated tax impacts of alternative business forms but did not fully integrate income and death taxes, nor include techniques for funding estate settlements. Boehlje and Harl (1978) and Reinders, Boehlje, and Harl (1980) developed models for determining the size of the federal estate tax marital deduction. Boehlje and Eisgruber (1972) noted that farm estate transfer problems are compounded by simultaneous planning for capital growth. Roush (1978) and Walker, et al. (1979) incorporated this dynamic concept of estate management in analyzing farm business structures. Forestry research efforts have focused on funding by immediately liquidating timber or borrowing from the government (Sutherland 1978; Tedder and Sutherland 1979; Prindle 1981; Sutherland and Tedder 1981).

Simplifying Retained Life Interests, Revocable Transfers, and the Marital Deduction

Simplifying Retained Life Interests, Revocable Transfers, and the Marital Deduction

Estate Tax Reduction Through Section 2032A Use Valuation

The Economic Recovery Tax Act of 1981 (ERTA) provides a gradual increase in the unified credit which by 1987 will exempt estates of up to $600,000 from estate taxation. The unlimited marital deduction and the increase of tax-free gifts to an amount of $10,000 per year per donee has freed many farm families from the gift and estate tax burdens that arguably had been causing the break-up of small farms (U.S. Congressional Record, vol. 122; Begleiter). At the same time, however, the estate tax relief resulting from the provisions incorporated in ERTA has not completely remedied the tax problems of farmers. Farm estates greater than $600,000 are still subject to taxation. Expensive technology together with inflation and the appreciation of the value of farm real estate will undoubtedly continue to cause the value of many farm holdings to increase in size beyond the amount exempted by the uniform tax credit. The resultant estate tax liability could require the sale of farm assets in order to raise cash to pay these taxes. Thus, estate planning techniques which diminish estate taxation are still important to farmers.

The Role of the Marital Deduction in Planning Intergenerational Transfers

AbstractThe marital deduction is an important and commonly used estate‐planning tool. The optimal marital deduction should be chosen to minimize the present value of the tax outlays at the deaths of both the husband and wife given the expected growth rate, the appropriate discount rate, the expected time of death of the surviving spouse, the distribution of wealth between the spouses, and the total wealth of both spouses. The typical practice of claiming the maximum marital deduction allowed by law or the amount that just reduces the tax liability of the decedent to zero does not necessarily produce an optimal result.

The physician's estate. An epilogue

A THREE-PART series entitled "The Physician's Estate" has recently been concluded inThe Journal(236:1743, 2217, and 2796, 1976). As was indicated, this series of articles was prepared long before the recent 1976 statutory changes in the federal estate and gift tax law. The information in this series of articles did not, therefore, reflect these changes in the law. It would be impossible to detail all of the changes that were enacted in the limited time and space available. Changes in the major federal tax provisions that were discussed before, though, can be noted. This will include mention of the new federal estate and gift tax rates and structure, current filing requirements, marital deduction limits, and gifts in contemplation of death. Unified Estate and Gift Tax Rates The basic federal estate and gift tax structure had been the same for many years. The 1976 tax law changes have introduced a

The Physician's Estate

A THREE-PART series entitled Physician's has recently been concluded inThe Journal(236:1743, 2217, and 2796, 1976). As was indicated, this series of articles was prepared long before the recent 1976 statutory changes in the federal estate and gift tax law. The information in this series of articles did not, therefore, reflect these changes in the law. It would be impossible to detail all of the changes that were enacted in the limited time and space available. Changes in the major federal tax provisions that were discussed before, though, can be noted. This will include mention of the new federal estate and gift tax rates and structure, current filing requirements, marital deduction limits, and gifts in contemplation of death. Unified Estate and Gift Tax Rates The basic federal estate and gift tax structure had been the same for many years. The 1976 tax law changes have introduced a