Estate of Rexford H. Foster, Deceased, Margaret Foster,executrix, Appellant, v. Commissioner of Internal Revenue, Appellee, 725 F.2d 201 (2d Cir. 1984)

This appeal raises anew the question whether a bequest to a surviving spouse of property for her lifetime with power to invade principal "for her needs and the needs of my children as she in her discretion may deem necessary," with remainder over to the children, qualifies for the estate tax marital deduction. The United States Tax Court, Richard C. Wilbur, Judge, held that it did not qualify. Estate of Rexford H. Foster, Deceased v. Commissioner, T.C. Memo 1983-77 (Feb. 7, 1983). We agree, because under New York law such a power to consume is limited by a standard of good faith, thus not constituting a "power in the surviving spouse to appoint ... in all events." Internal Revenue Code of 1954, 26 U.S.C. § 2056(b) (5) (1979);¹  26 C.F.R. Sec. 20.2056(b)-5(g) (1) (i), (g) (3) (1983).² 

The decedent, a dairy farmer whose wife had worked with him on the farm, executed a will in 1963 bequeathing to his wife

the use, income and profits, of and from, all my personal property, including the dairy livestock and the farm machinery and equipment, for and during her lifetime, with the right to use so much of the principal thereof for her needs and the needs of my children as she in her discretion may deem necessary, and on her death I give all of such property then remaining to my children equally.

At the time of the execution of the will, as well as at the time of his death in 1977, he and his wife had three children.

The treasury regulation refers us to state law for purposes of determining whether the requirement that the power must be exercisable "in all events" is met. 26 C.F.R. Sec. 20.2056(b)-5(e) (1983).³  The applicable law in this case is the law of New York. As this court pointed out in United States v. Lincoln Rochester Trust Co., 297 F.2d 891, 893 (2d Cir. 1962), the "well settled rule of New York" is that "the right to consume [on the part of the life beneficiary] is limited by a standard of good faith." As the New York court stated in In re Britt's Will, 272 App.Div. 426, 429, 71 N.Y.S.2d 405, 408 (3d Dep't 1947):

[T]he rule is that the life tenant is given an absolute and unlimited power of disposition and he may dispose of the property as he pleases so long as he acts in good faith and does not waste or squander the property for the purpose of preventing the balance of the estate from going to the remaindermen.

See also In re Mitchell's Will, 15 Misc.2d 651, 181 N.Y.S.2d 436 (Surr.Ct.1959).

Lincoln Rochester distinguished the two cases relied upon by the taxpayer here, In re Springett's Estate, 25 Misc.2d 68, 206 N.Y.S.2d 48 (Surr.Ct.1960), and In re Woollard's Estate, 295 N.Y. 390, 68 N.E.2d 181 (1946). See 297 F.2d at 893. In Springett, the trustee was required to "pay over to my said wife, at any time, such portion of the principal of the trust as she may say that she requires for her proper maintenance and support and her statement in that regard shall be accepted by my trustee...." 25 Misc.2d at 68, 206 N.Y.S.2d at 49. A widow who made such a demand by a statement in writing was held entitled to all the principal of the estate. This right was said by the court to be "absolute." Id. In Woollard the widow was also entitled to invade the principal "whenever [she] shall deem it necessary for her maintenance, comfort and well being and shall so determine and state in writing to the Trustees...." 295 N.Y. at 394, 68 N.E.2d at 182. The Court of Appeals said that " [s]uch a statement is all that may be required from the widow, since the statement itself imports the exercise by her of good faith and honest judgment, and under the terms of the particular will no one may question or go behind such a determination and expression by her." Id.

The essential concern under New York law is thus whether a spouse has absolute discretion to invade his or her life estate at will, without regard to any good faith obligations toward the remaindermen. The precise form in which that absolute discretion is granted is not determinative. In Lincoln Rochester Judge Smith stated:

In Springett ..., the will permitted the widow to consume the corpus to the extent she said was required for her proper maintenance and support. The Surrogate in Springett apparently considered that the provision for her own certification was intended by the testator to establish the test to be applied of the obligation of good faith in the exercise of the power to invade. In Woollard ..., certification in writing was likewise held to meet the good faith requirement. No such specific provision to take the place of or fulfill the good faith requirement is found in this case.

297 F.2d at 893 (emphasis added). Thus, what is required is certification or some equally specific provision fulfilling the good faith requirement. Here, as in Lincoln Rochester, there is nothing "to take the place of or fulfill the good faith requirement," id. Accordingly we follow Lincoln Rochester which, when the estate tax statute was changed in respects not material here, was itself followed in Estate of Opal v. Commissioner, 450 F.2d 1085 (2d Cir. 1971).

Judgment affirmed.

VAN GRAAFEILAND, Circuit Judge, concurring:

I concur in the result.