ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY D.C. Civil No. 46-72
Van Dusen, Adams and Hunter, Circuit Judges.
For purposes of the federal estate tax, there may be deducted claims against the estate that are paid by the estate and which are founded on promises or agreements, provided that such claims were, in the language of section 2053, "contracted bona fide and for an adequate and full consideration in money or money's worth . . . ."*fn1
This appeal poses the question whether the cost to an estate of settling a claim set forth in a lawsuit brought by third-party donee beneficiaries and grounded on an alleged breach of contract to make mutual and reciprocal wills qualifies as a deductible claim under section 2053 when the sole consideration supporting the contract passed between friendly spouses.
The genesis of this appeal is to be found in wills executed over twenty-five years ago by Manuel E. and Ellen G. Rionda. The Riondas were husband and wife, with no children. In 1948, when Mrs. Rionda had assets of at least $400,000 and Mr. Rionda had assets of at least $600,000, they each executed a will.
Mr. Rionda's will, dated May 14, 1948, left his entire estate to Mrs. Rionda, but provided that if she predeceased him, half of his personal effects, specified real estate and stocks, and 24 per cent of his residuary estate should pass to Enrique Ervesun, his second cousin. Further, in that event, 14 per cent of the residuary estate was to go to Mary Ellen Baldwin, the daughter of a family employee.
Mrs. Rionda's will, dated June 2, 1948, was substantially similar. It left her entire estate to Mr. Rionda, but provided, should Mr. Rionda predecease her, for dispositions to Mr. Ervesun, Mrs. Baldwin, and to other legatees identical to the dispositions in Mr. Rionda's will.
When Mr. Rionda died in 1950, his estate of more than $515,000 passed to Mrs. Rionda in accordance with his will of May 14, 1948. Thereafter, however, Mrs. Rionda executed several more wills and codicils before she died in 1966. Her last will was dated August 1, 1963, and was significantly different in its terms from her 1948 will. The primary beneficiaries of her 1963 will were Mrs. Rionda's physician, Dr. John J. Bolton, and his family. Mr. Ervesun was left $5,000 and Mrs. Baldwin was left nothing.
Presumably because they did not have standing as heirs, neither Mr. Ervesun nor Mrs. Baldwin filed a caveat to the probate of Mrs. Rionda's will or appealed from its probate. Each of them, however, swiftly brought suit against Mrs. Rionda's estate in the Chancery Division of the New Jersey Superior Court and these suits were consolidated. The complaints alleged: (a) that in 1948 Mr. and Mrs. Rionda had entered into a contract to make mutual and reciprocal wills, each devising substantially all of his estate to the survivor, who was in turn to leave his estate to certain legatees, including Mr. Ervesun and Mrs. Baldwin; (b) that Mrs. Rionda had not devised her estate in accordance with the agreement; and (c) that, consequently, Mrs. Rionda's estate was liable to Mr. Ervesun and Mrs. Baldwin, as third-party beneficiaries, for Mrs. Rionda's breach of the contract to make mutual and reciprocal wills.
The lawsuit was vigorously contested.*fn2 Then, in 1968 Mr. Ervesun and Mrs. Baldwin filed a second suit in New Jersey Superior Court against the estate, the Boltons, and the Bank of New York as executor, alleging fraud, duress, undue influence, and tortious interference with contract rights.
Trial on the breach of contract action began on September 17, 1968 and was settled the next day, along with the other suit. The settlement provided that Mrs. Rionda's estate would pay $250,000 to the complainants: two-thirds to go to Mr. Ervesun and one-third to Mrs. Baldwin. They, in turn, agreed to release all their claims against ...