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Florida Tax Review

Abstract

Currently, the treatment of contingent interests for estate tax purposes varies depending on what Code section is applicable. Consequently, there are instances when contingent interests are included in decedent's gross estate at different values. That is, some are included at the full fair market value of the property; some are included at a value discounted to reflect probabilities; and some are excluded altogether.

Inclusion with valuation adjustments, i.e., a purely mathematical rule, provides the most even treatment of contingencies. With such a rule, the remoteness or minimal value of a contingency is reflected in the general rule of discounting for unlikely contingencies so that there is no need for a de minimis exception to avoid what might be considered the harsh result of alternative full date-of-death value inclusion rule. Essentially, all valuation inherently involves approximation; contingencies complicate the mathematics of valuation and possibly increase reliance on expert appraisals but do not change any of the fundamental rules of valuation. Even that added difficulty is alleviated or eliminated by focusing on burden of proof.

Part of the difficulty inherent in formulating a consistent treatment of contingent property interests is a feeling that a too attenuated or too unlikely contingency should be disregarded. At common law, contingencies were indeed “disregarded” or “destroyed” because they resembled “mere ‘possibilities’” or expectancies. They were considered potential interests and were not alienable during the decedent's lifetime; they were descendible and devisable only if they survived the decedent's death. In a sense, de minimis contingent interests are only notches a little further along that continuum, greater than mere expectancies, but not much more so. Extending this perspective, a rule involving more likely probabilities, such as a "more-likely-than-not" rule, could also be imposed to subject to estate taxation only those property transfers that will probably vest and to ignore contingencies with a probability of 50% or less.

Alternatively, creating a uniform rule might well require an examination of how the issue of control, which is central to transfer taxes, applies to contingencies. Where contingencies are the product of the donor, or essentially the donor, perhaps contingencies should be ignored or interpreted against the interests of the donor. After all, the donor initially controls whether or not to insert a contingency and, even at that time, can decide whether or not to impose it after evaluating the probabilities of the interest returning to him. In a way, contingencies within decedent's control are not real contingencies. Since the donor controls whether or not to qualify an interest with a contingency, the risk factor is, to a great extent, undermined. An argument can be made that contingencies created by decedent have a potential for abuse that warrants no discounting to reflect risk. Thus, in constructing a rule about contingencies, one may want to distinguish between those contingencies within the decedent's control and those not within his control. More specifically, a rule might need to distinguish between those contingencies initially within the decedent's control (regardless of whether he creates a contingency that he cannot control) and those over which he has never had any control. Indeed, in the instance of donor-created contingencies, an artificial rule of full inclusion more successfully prevents tax avoidance. Thus, where there exists a great potential for donor manipulation, an artificially constructed rule, with its simplicity and clarity, could apply to ignore all uncertainty and to include the full value of the property in decedent's gross estate.

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