125 N.J. Eq. 458 | N.J. Ct. of Ch. | 1939
The problems presented relate to estate taxes:
Joseph A. Ward, late of Orange, died in 1928, leaving a will under which complainant is surviving trustee. The will put the residuary estate in trust for testator's widow, Lucretia B. Ward, for life, and gave to her power of appointment in these terms:
"On the death of my said wife, the surviving trustee shall pay over and distribute the principal remaining in the trust to and among such persons as my said wife, Lucretia Ward, shall in and by her last will and testament designate and appoint to receive the same. If she shall fail to exercise such power of appointment then the remaining principal of the trust shall be paid over to and distributed among my next of kin according to the laws of the State of New Jersey as if I had then died intestate and possessed thereof."
Mrs. Ward died in 1937, leaving a will by which she disposed of her own estate — bequests of $11,166 and the residue to two nephews — and in which she exercised her power of appointment:
"In the exercise of the power of appointment given to me by the last will and testament of my late husband, Joseph A. Ward, I direct the surviving executor and trustee under the will of my said husband to distribute the trust fund held by it under said will as follows:" (then follow various appointments totaling $261,000 to twenty-four appointees — four of which are charitable organizations — and the balance thereof to be distributed equally between two nephews of the testatrix). *460
The value of the property subject to the appointment is $181,624, and of Mrs. Ward's individual estate $20,435.
The act of Congress requires inclusion in the gross estate of a decedent for the purpose of computing the estate tax, not only the individual assets of decedent, but also property over which he exercises a general power of appointment.
The principal question debated is whether the estate tax should be wholly borne by Mrs. Ward's estate, or should be shifted in part to the estate of her husband over which she exercised a power of appointment.
Let us first consider the situation as if her will contained no directions respecting taxes. Under the federal statute, the estate tax is primarily payable by the executor. 26 U.S.C.A. §422(b). Add that the Joseph A. Ward estate is no part of the assets in the hands of Mrs. Ward's executor (Seward v.Kaufman,
The federal statute in the analogous case of life insurance included for tax purposes in the estate, requires the beneficiary of the insurance to contribute to the tax.26 U.S.C.A. § 426(c). But there is no similar provision relating to an estate passing by appointment pursuant to a power. On the contrary, if any person other than the executor pays the tax, such person is entitled to reimbursement out of the estate of decedent. Id. § 426(a).
Mr. Justice Heher in Turner v. Cole,
While the estate tax is not technically a debt, "it is akin," said Mr. Justice Heher, "to such an obligation in respect to the ascertainment of the quantum of the residuum for distribution both in cases of testacy and intestacy."
Unless some direction to the contrary appears in one or other of the wills, the trustee of the Joseph A. Ward estate is not obliged to contribute to the tax on the widow's estate.
Her will contains direction for payment of taxes:
"I direct my executor and trustee to pay from the residue of my estate all inheritance or estate taxes, both state and federal, levied or assessed against gifts herein made, and should any such tax be not then due, I authorize my said executor and trustee, if it see fit so to do, to compromise with the proper officer of the state or United States Government such future tax, and to pay the amount so fixed and determined."
A testator's wishes respecting the distribution of the tax burden among the beneficiaries of his will, will govern to the extent of the property given to them. But, of course, testator's intention to charge the tax on property not owned by him is generally without influence. Mrs. Ward had no interest in her husband's estate that survived her death. She did have, however, power of appointment broad enough to permit her to appoint her own executor or her creditors. Crane v. Fidelity Union TrustCo.,
Mrs. Ward's legatees present the argument: that her disposition of her husband's estate was not one of the "gifts herein made." Therefore the estate tax levied or assessed because of her exercise of the power is not a tax directed to be paid out of her residue. Hence is implied that she intended it paid out of the husband's estate.
The appointees answer point by point. If Mrs. Ward made no direction for the payment of this particular tax, she presumably intended that the tax should rest where the law places it.Plunkett v. Old Colony Trust Co. (Mass.),
The fact that if the estate tax is paid in full out of Mrs. Ward's estate, her residuary bequests will be entirely nullified, is a circumstance which ordinarily would indicate that she did not intend the tax to rest wholly on her estate. But there is another circumstance — she directed specified sums totaling $261,000 to be paid out of her husband's estate to certain persons and the balance to be divided between the two nephews who are her own residuary legatees. As the gross assets of the Joseph A. Ward estate are only $181,624, she plainly over-estimated its size and she may have been equally mistaken as to her own financial worth. *463
In Gaede v. Carroll,
Vice-Chancellor Kays, in Commercial Trust Co. v. Millard,
The law of these two cases may, perhaps, be stated thus: Testator's express direction to pay out of residue a certain tax or part of tax impliedly requires that a different tax or another part of the tax be charged on the property in respect to which it was levied. Or in the event testator had no control over such property, then the tax must be satisfied from any legacy or devise to the person who owns the property in respect to which the tax was levied. For the purpose of this rule, the federal estate tax is treated as though it were levied proportionately on all the assets entering into the assessment. Now for the application to the case at hand. Mrs. Ward directed payment from residue of "all inheritance or estate taxes, both state and federal, levied or assessed against gifts herein made." Did she mean by "gifts herein made" to include the appointments to her husband's estate?
Mrs. Ward disposed of her own estate by the usual phrase "I give and bequeath." She disposed of her husband's estate in this wise: "In the exercise of the power of appointment *464 * * * I direct the surviving executor and trustee under the will of my said husband to distribute the trust fund held by it under said will as follows: (a) $50,000 thereof to my niece Edith Wilmore Suydam," c.
It is well established that the appointees take, not from the person who appoints but from the original testator. That is, the interest of Mrs. Suydam in the fund emanates from Joseph A. Ward, Mrs. Ward being only the indicator pointing out to whom his bounty should go. McCook v. Mumby,
It seems to me that the testatrix did not intend her express direction to pay taxes to cover so much of the federal estate tax as relates to the appointed property, and so the rule of theGaede Case applies. The tax should be borne by the two estates in proportion to the net assets of each for tax purposes. The tax will be considered in respect to each estate as if it were an administrative expense; that is, it will diminish the estate before distribution regardless of whether or not the distributees are charities. Young Men's Christian Association v. Davis,
A large part of the assets of the Joseph A. Ward estate are mortgages and mortgage participation certificates which cannot be liquidated at present without great loss, and which cannot well be distributed in kind among the beneficiaries. The trustee will be permitted, in its discretion, to hold this property undistributed for the present, but it will be directed, in the event it shall not liquidate these investments within two years, to apply then at the foot of the decree for further directions. *466