Pastan v. Pastan

• Decision Date: 21 May 1979
• Citation: 390 N.E.2d 253,378 Mass. 148
• Parties: Lillian PASTAN et al., 1 Executors, v. Lillian PASTAN et al. 2
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 253

390 N.E.2d 253

378 Mass. 148

Lillian PASTAN et al., ¹ Executors, v. Lillian PASTAN et al. ²

Supreme Judicial Court of Massachusetts, Norfolk.

Argued April 2, 1979.

Decided May 21, 1979.

Steven J. Goldberg, Boston (Richard J. Litner, Boston, with him), for plaintiffs.

Before HENNESSEY, C. J., and QUIRICO, KAPLAN, WILKINS and LIACOS, JJ.

KAPLAN, Justice.

The will of William Pastan was admitted to probate in Norfolk County on May 21, 1973, and in December of that year the plaintiff executors filed a Federal estate tax return claiming a marital deduction ³ of $82,193; giving effect to the deduction, they paid an estate tax of $1,683. The Internal Revenue Service (I.R.S.), basing itself on a certain interpretation of the provisions of the will regarding the executors' powers in funding the marital deduction trust an interpretation disputed by the executors disallowed $73,874 of the claimed deduction, ⁴ and assessed an additional tax which, with interest and penalty, came to $19,663.44. This was paid in January, 1976. The executors retain their cause of action for refund.

In February, 1977, the executors commenced the present action in the Probate Court for Norfolk County, joining all beneficiaries, and praying a construction of the pertinent clauses of the will according to the law of the Commonwealth which might bind the I.R.S. under the doctrine of Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967). As usual in such cases, the I.R.S. although notified of the action, chose not to participate in it. ⁵ After hearing, the judge accepted as "evidence" the complaint and a statement of agreed facts, and on that basis reported seven questions of law to the Appeals Court which pose, with considerable repetition, the interpretive question underlying the tax liability. We granted direct appellate review on application of the executors.

The evidence consists essentially of the will. The decedent directed that his estate (minus funeral and other charges) be divided into two shares. By recognizable "formula" provisions, ⁶ share No. 1 was to be set up as a marital deduction trust for the benefit of the wife Lillian. Under paragraph III C (text in appendix 1 below), this share was to "be equal in amount to fifty per cent of my adjusted gross estate for federal estate tax purposes" (the maximum amount then permitted for the deduction). ⁷ Paragraph IV A directed that income from the share should be paid to Lillian monthly during her life, with power in the trustees to distribute to her any part of the principal, and with a power in her to appoint by will any principal or unpaid income remaining at the time of her death. In form, Lillian's interest, taking the provision for her lifetime together with her testamentary power, would qualify for the marital deduction as "nonterminable." ⁸

Share No. 2, consisting of the rest of the testator's estate, after deduction of a cash legacy for his son Robert, was to form a trust with income for life to Lillian and discretion in the trustees during that period to distribute any part of the principal to her or to the children of the marriage or grandchildren; on her death the principal was to go in equal shares to the children or their issue. As Lillian had no power of appointment, her interest in this trust would be regarded as "terminable" and therefore ineligible for a marital deduction even if that were not exhausted by the share No. 1 trust.

From paragraph III C setting up the share No. 1 trust, a purpose appears to make full use of the marital deduction; and other indications of the same design are found in the will such as the provision in paragraph VII that "all estate, inheritance, transfer, legacy or succession taxes" should be paid out of share No. 2 without apportionment. Cf. Boston Safe Deposit & Trust Co. v. Children's Hosp., 370 Mass. 719, 351 N.E.2d 848 (1976). The I.R.S. held, however, that the plan to maximize the marital deduction failed and the deduction was in substance lost because, according to the I.R.S. interpretation, a terminable feature remained. This was said to derive from paragraph VIII J (appendix 2) where are set forth the powers of the executors in making distributions, including the distribution by which they were to fund the share No. 1 trust.

To frame the problem, we have to refer to Revenue Procedure 64-19 (1964-1 C.B. 682). This states "the position of the Internal Revenue Service relative to allowance of the marital deduction in cases where there is some uncertainty as to the ultimate distribution to be made in payment of a pecuniary bequest or transfer in trust where the governing instrument provides that the executor or trustee may satisfy bequests in kind with assets at their value as finally determined for Federal estate tax purposes." Id. at § 1. Suppose the amount of such a trust is fixed in the will as equal in amount to a percentage of the adjusted gross estate as that figure shall be established for Federal estate tax purposes. Now suppose the assets of the estate which the fiduciary proposes to distribute in kind to the trust, when the trust is set up, were of the aggregate requisite value at the time of estate tax valuation, but have declined in market worth by the time of the distribution. If, by a possible interpretation of the terms of the will, it appears that the fiduciary may fund the trust with those assets, and no more, the allowance of a marital deduction is called into serious question. In such a case, the interest of the surviving spouse can be seen as terminable because the action of the fiduciary appears to divert or "appoint away" a portion of the marital deduction trust and make another disposition of it. ⁹ Moreover the eventual or total tax consequences of allowing the marital deduction trust to be funded with depreciated assets would not be in keeping with the policy of the deduction. ¹⁰ Under Revenue Procedure 64-19, the I.R.S. insists on one or the other of two alternative assurances if the marital deduction is to be preserved: "Where, by virtue of the duties imposed on the fiduciary either by applicable state law or by the express or implied provisions of the instrument, it is clear that the fiduciary, in order to implement such a bequest or transfer, must distribute assets, including cash, having an aggregate fair market value at the date, or dates, of distribution amounting to no less than the amount of the pecuniary bequest or transfer, as finally determined for Federal estate tax purposes, the marital deduction may be allowed in the full amount of the pecuniary bequest or transfer in trust. (This is the so-called 'minimum value' approach.) Alternatively, where, by virtue of such duties, it is clear that the fiduciary must distribute assets, including cash, fairly representative of appreciation or depreciation in the value of all property thus available for distribution in satisfaction of such pecuniary bequest or transfer, the marital deduction is equally determinable and may be allowed in the full amount of the pecuniary bequest or transfer in trust passing to the surviving spouse. (The 'ratable sharing' approach.)" Id. at § 2.02. (It is a significant feature of Revenue Procedure 64-19 that if the fiduciary should be found empowered to go down either alternative road at his election, the deduction would be in jeopardy because, again, the interest could be considered terminable. Id. at § 2.03.) ¹¹

Referring now to the present will, there is no language which expressly conforms to either of the alternatives mentioned in Revenue Procedure 64-19, and the I.R.S. could indeed point to language in paragraph VIII J inviting a "terminable" interpretation. Thus, with elipses, we read "In the administration . . . of the Trusts established under this Will, the Executors . . . shall have the following powers: J. . . . to make any division or distribution required under the terms of this will in kind or in money, . . . and to that end to allot to any part or share such stock, securities or other property, real or personal, as to them seems proper in their absolute judgment, and their judgment as to the value of such stock, securities, or other property so allocated shall be conclusive on all parties; . . ." ¹² This language, it could be argued, comprehends a power to distribute assets to the share No. 1 trust, upon its founding, at their value established for estate tax purposes, despite a decline in value by the date of the distribution.

But two principles of interpretation or of trust administration impinge on the language: First, in allocating assets in kind, a fiduciary as a general rule is to take them at their values as at the time of distribution and ordinarily at their then market values. See Boston Safe Deposit & Trust Co. v. Stone, 348 Mass. 345, 350, 203 N.E.2d 547 (1965); Restatement (Second) of Trusts § 347, Comment h (1959); 4 A. Scott, Trusts §§ 347, 347.6-347.7 (3d ed. 1967). Second, despite wording in a dispositive instrument which seemingly empowers the fiduciary to be fanciful or arbitrary in making valuations, he is held by the law to the exercise of an honest, objective judgment, which in practice will mean a reasonable judgment corresponding to reality, and in the case of traded-in properties will doubtless mean a judgment in terms of market values. See Boston Safe Deposit & Trust Co. v. Stone, supra at 350-353, 203 N.E.2d 547; Scott, Supra, § 347.4 at 2759; Restatement, Supra. Cf. Old Colony Trust Co. v. Silliman, 352 Mass. 6, 9-10, 223 N.E.2d 504 (1967).

Any doubt on these matters is cancelled by some pointed language of paragraphs III C and VIII J still to be quoted. The former paragraph ends with the words, "In no event shall any property or interest be allocated to this bequest of the residue of my estate which is a 'terminable interest' (as provided in § 2056(5) (now § 2056(b)(1)) of the Internal Revenue Code or any successor Statute)....