## Facts

- James D. Galloway died and, under his estate plan, the residuary of his probate estate poured over into a revocable trust he had created during life.
- The trust named four equal beneficiaries: Galloway’s son, Galloway’s granddaughter, and two charitable organizations.
- Each beneficiary initially held a one-quarter beneficial interest in the trust.
- The trust directed that the trust assets would be distributed to the beneficiaries on scheduled future distribution dates.
- The trust contained survivorship provisions: if the son or the granddaughter died before the scheduled distribution dates, that deceased beneficiary’s share would be reallocated equally among the surviving beneficiaries, including the charitable beneficiaries.
- The estate filed a federal estate-tax return claiming a charitable deduction under the estate-tax charitable-deduction rules for the actuarial value of the two charities’ interests (reported as nearly $400,000).
- The IRS disallowed the charitable deduction and denied a refund.
- The estate (through the trust/son) brought a refund action in the United States District Court for the Western District of Pennsylvania; the district court ruled for the United States, and the estate appealed to the Third Circuit.

## Issues

1. Whether the estate was entitled to an estate-tax charitable deduction under 26 U.S.C. § 2055 for the two charitable beneficiaries’ interests in the revocable trust.
2. Whether, at Galloway’s death, the amount passing to the charitable organizations was sufficiently definite to be valued and deducted when the charities’ ultimate shares could change based on whether noncharitable beneficiaries survived to later distribution dates.

## Decision

- The Third Circuit affirmed the district court’s judgment for the United States.
- The court held the estate was not entitled to the claimed charitable deduction for the charities’ interests as valued at the date of death.
- The court concluded that the trust’s survivorship-based reallocations made the amount ultimately passing to charity uncertain in a way that prevented the charitable interests from being valued as required for an estate-tax charitable deduction.

## Legal Principles

- An estate-tax charitable deduction under 26 U.S.C. § 2055 is permitted only for amounts that will pass to qualifying charitable recipients and can be valued at the decedent’s death.
- When charitable and noncharitable beneficiaries have interests in the same property, a deduction is allowed only if the charitable interest is capable of measurement at death under the governing Treasury Regulations (commonly described as requiring the charitable portion to be “presently ascertainable” and “severable”).
- If the amount that will pass to charity may be increased or decreased by post-death contingencies affecting other beneficiaries’ shares (such as survivorship to future distribution dates), and those contingencies materially affect the charitable share, the charitable interest is not sufficiently definite for the claimed deduction.
- Actuarial valuation does not cure an arrangement where the governing instrument leaves the charitable beneficiaries’ ultimate shares subject to redistribution among beneficiaries in a manner that prevents a reliable determination, at death, of what portion will pass to charity.

## Conclusion

Because the revocable trust allowed the charities’ shares to shift depending on whether the noncharitable beneficiaries survived to scheduled distribution dates, the amount that would ultimately pass to the charitable organizations could not be determined with the certainty required at the time of death, so the Third Circuit upheld the IRS’s denial of the estate-tax charitable deduction.


Galloway v. United States, 492 F.3d 219 (2007)