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Uncertainty of residuary estate's value voids charitable deduction.

Doctor M made out a will in 1981, in which the residue of his estate was to go to the college and medical schools he had attended. In 1982, he added a codicil, which allowed his personal representatives, in their discretion, to compensate those persons who had contributed to M's well-being during his life. Each bequest was limited to a maximum of 1% of M's estate, with no limit as to the number of such bequests.

In 1984, M died. The personal representatives decided on two distributions: one to M's housekeeper and the other to a friend who had also served as M's guardian.

On M's estate tax return, a charitable deduction was taken for the remainder of M's estate. The IRS challenged this deduction, arguing that the value of the charitable bequest was not ascertainable at M's death. The Tax Court (opinion Wells, J.) holds for the Service.

The deductibility of an estate tax charitable contribution hinges on whether the amount the charity will receive is ascertainable at the decedent's date of death. The amount of the transfer to charity must be fixed in fact and capable of being stated in definite terms of money. The time when the charitable bequest must be definitely ascertainable is the date of the testator's death.

In the instant case, the value of the charitable bequest was not ascertainable at the time of M's death.

The specific language of M's codicil gives the personal representatives "sole and absolute" discretion to select and reward persons who contributed to M's "well-being" or who had "been otherwise helpful" to him during his lifetime. The codicil did not limit the number of such potential beneficiaries, each of whom could receive up to 1% of M's gross probate estate under the codicil. At the time of M's death, the exercise of that discretion in favor of discretionary beneficiaries conceivably could have consumed the entire residuary interest that otherwise would have gone to the schools. M limited each potential discretionary bequest under the codicil to 1% of his gross probate estate, but he also directed that debts, taxes and a number of specific bequests would be paid first. Thus, only the amount remaining after those payments was available for distribution to potential beneficiaries. Consequently, at the time of M's death, the potential existed for the personal representatives to exercise their discretion in the maximum amount--i.e., of 1% of the gross estate--in favor of considerably fewer than 100 beneficiaries and thereby consume the entire residue of the estate. In effect, M empowered his personal representatives to decide whether his entire estate should be given to private interests or to the specified charities. We think such a power is too broad and too uncertain to qualify an interest that is subject to the exercise of such power for the estate tax charitable deduction.

We also consider the fact that the language of M's will did not give the charitable beneficiaries any legal right at the time of M's death to demand payment of any amount from the estate that was fixed in fact and capable of being stated in definite terms of money, because the codicil did not limit the number of beneficiaries to whom the personal representatives could divert M's estate.

M's estate points to instances in which the courts have allowed the deduction of charitable bequest, despite the possibility that the bequest could be diverted from charity after the decedent's death.

However, in those situations, the value of the charitable bequest was ascertainable from the language of the testators' wills; the testators did not make the bequests to the charities subject to any discretion. Instead, the possibility of diversion arose from the operation of state law, a distinction the courts have long observed.

Indeed, we have stressed that a charitable bequest is deductible when the uncertainty as to the date of death value of the charitable bequest was not one caused by the testator. By contrast, the terms of M's codicil created the uncertainty at the date of his death.

We are mindful that M had confidence in his personal representatives to carry out his intentions. However, M gave his personal representatives discretion that was not subject to any ascertainable standard. M conferred so much discretion on his personal representatives that we are compelled to conclude that there was no way to ascertain, on the date of his death, the amount that would go to potential beneficiaries under the codicil and how much residue would be left. EST. OF DAVID MARINE, 97 TC NO. 26

REFLECTIONS: As noted by the court, there is a means by which a tainted power such as this one can be removed. Under Sec. 205(a), the termination of a power to consume the amount bequeathed to charity, and therefore the time for filing the estate tax return, may operate as a "disclaimer"; in such situations, Sec. 2055(a), coupled with the disclaimer provisions of Sec. 2518, would operate to treat the tainted power as if it had not existed. However, these actions were not taken in this case.
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Article Details
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Author:Fiore, Nicholas J.
Publication:The Tax Adviser
Date:Dec 1, 1991
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