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Court Discusses NY Estate Tax Law 249


This is a motion filed by the executrix requesting the Surrogate to fix the New York estate tax – Tax Law § 249–w.

The executrix made a motion to fix the tax returnable on 16 March 1972. While the State Tax 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.

The Commission appeared but 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. In the papers, the taxpayer was informed by the Commission that its decision in this and other cases is awaiting determination of pending appeals on related issues.

While the Court is sympathetic with the Commission’s desire to protect state revenues, 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 a result of a joint will.

The Commission, depending on the outcome of some pending appeals, proposes to deny to the taxpayer a marital deduction of $60,800 (allowed in the federal return) on the ground that under the terms of the will the interest passing to the surviving spouse is a ‘terminable’ interest (I.R.C.1954, § 2056(b)). According to the Commission, although the disposition to MST, 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 MST’s death to the couple’s children; that since the children will ‘possess or enjoy’ such interest in property upon MST’s death, the interest passing to her from the decedent, MRT, is ‘terminable’ (I.R.C. § 2056(b)(1)(B)).

To establish its contention that MRT’s will contractually and irrevocably disposes of the same interest passing absolutely to MST to third party beneficiaries, the Commission relied 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.

The pending appeals referred to in the moving papers finds no application here. No two wills are alike. The will under consideration here is distinguishable from those in the pending cases. And, parenthetically, even when there are similarities in the dispositive language employed, extrinsic circumstances surrounding the 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 is that nothing in the pending appeals will be dispositive of the issue raised in this proceeding.

Nonetheless, since the tax issue raised by the Commission has also been raised in other cases, some general principles are worth mentioning.

The I.R.S. has allowed the marital deduction to the 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, the Tax Law, section 961(a)(3) provides that ‘a final federal determination determine(s) the same issue for purposes of the tax under this article (Article 26–New York Tax Law) 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. Often, the Surrogate is 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. regards the marital deduction as merely a postponement of the tax. The general policy 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 voiced 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.

The Commission failed to consider a basic distinction between a tax issue and other issues arising from joint wills. Tax issues are rare. None in the State appears to have reached an Appellate Court. Other issues recur with greater frequency and many – some 40 odd – have been decided by 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 only arise 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. 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 such joint will cases, in determining 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. Those principles have been expressed in the case of Rich v. Mottek, 11 N.Y.2d 90: ‘However, ‘after the agreement (has) been executed by one dying without making a different testamentary disposition of his property and after the acceptance by the other of the benefits of the agreement, it (becomes) obligatory upon the latter and enforcible in equity upon his death.’ In other words, if the survivor of the two testators breaches the contract by executing a will other than that agreed upon the courts will compel his executors to ‘perform the contract’. Indeed, as we observed in the Tutunjian case (299 N.Y. at p. 319, 87 N.E.2d (275) at p. 277), ‘to permit the one who survives to gain the benefits of the joint will and then to flout its provisions in violation of the promise made to the other ‘would be a mockery of justice.'”

The foregoing are equitable principles based on unjust enrichment of the survivor.

The first principle – 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. Therefore, the Courts must 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 or not 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.

The second principle – 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 or not 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’ (rather than a life estate with income only or a trust with remainder over to named beneficiaries) they do intend to obtain the benefit of the marital deduction. Third party beneficiaries never 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.

In short, 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, 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 also worth discussing.

Whenever articulated to their draftsmen, the reasons usually expressed by the spouses for making a joint will, is to save the survivor the trouble and expense of making a new will. Certainly, at the time of execution, they had intention of leaving to the survivor their individually owned property. This is often expressed by the use of the words ‘agree’ or ‘agreement’. Whether or not 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 whether the spouses intended that they would be contractually bound inter se or not so bound. When the joint will contains 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 it is occasionally expressed by separate written agreement outside the will.

In 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 as follows: “‘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 for it to remain as such, it must be revocable. Social events such as death or marriages or economic changes in the circumstances of the survivor or the intended third party beneficiaries often require changes in the will. Case law dictates the presumption that revocability was intended unless irrevocability is clearly and convincingly expressed in unambiguous terms.

Now to the issue of the joint will of MRT and MST.

Sometime in 1965, a joint and reciprocal will was executed by MRT and MST, husband and wife. On 23 January 1971, MRT died. Thereafter, the will was admitted to probate

The exordium clause of the will provides:

‘We MRT and MST, being husband and wife and having agreed between ourselves to make a Joint and Mutual Last Will and Testament to carry out our agreement and intention to make certain provisions for the distribution of our property after the death of either of us and after the death of our survivor . . . do hereby make, publish and declare this to be our Last Joint and Mutual Will and Testament . . .’

‘THIRD: Upon the death of either of us, we do hereby give, devise and bequeath unto our survivor all our property . . . for his or her benefit as the case may be, absolutely and forever.

‘FOURTH: Upon the death of our survivor, we do hereby give, devise and bequeath all of our property . . . which may be possessed by our survivor at the time of his or her death to our beloved sons ELLIOTT H. and MICHAEL J., share and share alike, absolutely and forever.’

Apart from the provision titled ‘Fourth’ which cuts down the absolute interest given to the survivor under the ‘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.’

In the case of Lally v. Cronen, 247 N.Y. 58, the quality of proof required to establish a contract enforcible in equity was discussed as follows: “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 the above cited, courts have determined that the quality of proof viz. ‘clear,’ ‘convincing,’ ‘indisputable,’ to establish that irrevocability was intended was lacking.

In other words, there is simply no decision on record 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 Court in the case of Rubenstein v. Mueller, 19 N.Y.2d 228, 232, 278 N.Y.S.2d 845, 848, 225 N.E.2d 540, 542, in distinguishing the will there involved from the will in Matter of Zeh, 24 A.D.2d 983, 265 N.Y.S.2d 257, affd. 18 N.Y.2d 900, 276 N.Y.S.2d 635, 223 N.E.2d 43, made the point as follows: ‘The recently decided case of Matter of Zeh, wherein we held that the joint will in question was not binding upon the survivor is distinguishable from the present case. In Zeh the survivor was given all the property, ‘meaning thereby that The survivor of us shall be the absolute owner, to him or to her to have and to hold, his or her heirs and assigns Absolutely and forever, of all that both of us possess.’ (Emphasis added.) Under the rule that before the right to alter or revoke a will may be curtailed prior to the testator’s death, his intention to so bind himself must be manifested clearly and unambiguously, the use of language such as ‘absolutely’ barred our finding that the survivor was bound to the testamentary plan found in that joint will.’

The same general principle was expressed in single will cases in Matter of Ithaca Trust Co., 220 N.Y. 437, 441–442, 116 N.E. 102, 103: ‘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.’

The same rule was also expressed as a rule of construction in the case of Tillman v. Ogren, 227 N.Y. 495, 505, 125 N.E. 821, 823: ‘Where there is an absolute gift . . . in order to qualify it or cut it down, the latter part of the will should show equally clear intention to do so by use of words definite in their meaning.’

In some states, statutes have been enacted requiring ‘clear, satisfactory and convincing evidence’ to establish a contractual joint will. In a recent case, the Iowa Supreme Court suggested that a clause expressly affirming or denying contractual intent should be included in all joint or mutual wills. This is a warning which should be observed by New York draftsmen.

There have been a few cases in which the courts have specifically enforced a joint will contract in favor of third party beneficiaries. However, the wills in these cases are altogether different from the will at bar.

Clearly, none of the decisions upon which the Commission relied upon are applicable to a tax issue.

Accordingly, the court ruled as follows: (1) that the taxpayer is entitled to the marital deduction – the Commission failed by a preponderance of evidence to establish that the ‘final federal determination’ is erroneous. (Tax Law, § 961); (2) the taxpayer is entitled to the marital deduction since the interest passing to the surviving spouse is absolute and not ‘terminable’ (I.R.C.1954, § 2056; Tax Law § 955) – the proof before the Court does not establish either an express or implied promise between the spouses to make their joint will irrevocable; and (3) the taxpayer would be entitled to the marital deduction, even if the disposition to the surviving spouse was ‘terminable,’ under the ‘exception’ (I.R.C.1954, § 2056(b)(5)) 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.

In view of the above, the New York net estate tax was fixed at $584.61, without interest or penalties since the delay in payment is the fault of the Commission.


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