908 F. 2d 976 - First Trust Company of Montana v. United States

MEMORANDUM*

Margaret Lofing established by will a trust benefiting her husband and the Montana Childrens' Home and Hospital. Among other benefits, her husband is entitled to $20,000 per annum for life out of the principal of the trust. The district court granted summary judgment to her estate, holding that it was entitled to a federal estate tax marital deduction equal to the actuarial value of this annuity. We reverse.

The marital deduction reduces the value of a decedent's taxable estate by the value of certain interests in property that pass from the decedent to his or her surviving spouse. 26 U.S.C. Sec. 2056(a). However, terminable interests such as annuities are eligible for the marital deduction only if no one other than the surviving spouse may possess or enjoy the interest after the surviving spouse's interest terminates. Sec. 2056(b)(1); Example 3, 26 C.F.R. Sec. 20.2056(b)-1(g).

The district court and appellee liken the surviving husband's terminable interest to a purchased annuity separate from the corpus of the trust. They assert that because no third party enjoys an interest in that annuity when Mr. Lofing dies, it qualifies for the marital deduction. This view ignores that Mr. Lofing was paid, not out of a separate fund or annuity contract, but directly out of the trust fund. Because a third party retained an interest in that trust after his death, no marital deduction is allowed.

Authority is squarely against allowing a marital deduction here. Estate of Leach v. Commissioner, 82 T.C. 952, 957 (1984), aff'd 782 F.2d 179 (11th Cir.1986), is directly on point, disallowing a marital deduction for charitable remainder annuity trusts. See also Estate of Rubin v. Commissioner, 57 T.C. 817 (1972), aff'd 478 F.2d 1399 (3d Cir.1977); Sutton v. Commissioner, 535 F.2d 254 (4th Cir.1974), aff'g 32 T.C.M. 982 (1973). The Treasury Regulations on Estate Tax also argue against carving out Mr. Lofing's annuity as a separate, deductible property. They provide, following legislative history, that deductibility be evaluated based on the "underlying property," rather than on an "interest in property." 26 C.F.R. Sec. 20.2056(b)-1(e)(2). Here, the underlying property is the trust, and the annuity is merely one interest in it. Finally, the Supreme Court in an analogous case held that no portion of a surviving spouse's interest in a life insurance policy was eligible for a marital deduction when a third party might enjoy an interest after the widow's death. Meyer v. United States, 364 U.S. 410, 412 n. 3 (1960).

Appellee relies on Internal Revenue Service Revenue Rulings and a Third Circuit case which, since Meyer, is no longer good law. See Estate of Joseph E. Reilly v. Commissioner, 239 F.2d 797 (1957); Rev.Rul. 77-130, 1977-1, C.B. 289; Rev.Rul. 79-420, 1979-2, C.B. 335; Rev.Rul. 77-404, 1977-2 C.B. 333. Each is distinguishable from this case and does not control. Moreover, no arguments based on 1981 changes to the tax code, when a special rule for charitable remainder trusts was added, are available to the appellee since Mrs. Lofing died before the new rule entered into force.

We hold as a matter of law that Mr. Lofing's annuity is not eligible for a marital deduction. We reverse and remand to the district court to grant summary judgment to the United States.