189 Misc. 136 | N.Y. Sup. Ct. | 1946
This is the final accounting of the executors. The apportionment of the Federal and New York estate taxes is the only matter in issue.
Deceased died on October 11, 1937, leaving a last will dated August 6, 1935, and a codicil dated June 24, 1937. Paragraph eleventh of the will states: “ I direct that all estate, inheritance, transfer and succession taxes imposed upon my estate
In the Federal estate tax proceedings the net taxable estate was valued at $8,208,947.81. The total Federal estate tax was assessed at $2,984,775.55.
On April 30, 1932, deceased created a trust for the benefit of his wife for life with remainders over. Among other things the trust instrument provided: “ * * * if my said wife shall die during my lifetime, the trust hereby created shall immediately cease and determine and the principal of the trust shall forthwith revert to and belong to me absolutely.” The Commissioner of Internal Revenue included in the gross tax estate the entire value — $515,753.01 — of the principal of this trust, acting under the decision in Helvering v. Hallock (309 U. S. 106), decided in January, 1940. The executors filed a protest, contending that under the decision in the Ealloch case (supra) only the value of the remainder interest in the trust principal after the death of Mrs. Mills was subject to tax. Thereafter the commissioner determined that there should be included in the gross tax estate only the value of such remainder, namely, $230,318.28.
The executors have apportioned 2.8057% of the total Federal estate tax or $83,743.85 against this trust remainder of $230,318.28. The trustees of this 1932 trust object to the proposed allocation, contending that paragraph eleventh of the will contains an absolute direction against such apportionment and an absolute direction that all estate, inheritance, etc., taxes imposed because of the inclusion of the trust in the gross tax estate shall be paid out of the residuary estate.
On August 2, 1935, just four days prior to the execution of his will, deceased created a second trust for the benefit of his wife for life with remainders over. There was no express reservation of any reversionary interest but there was a remote possibility that deceased would survive all the named remainder-men with the result that by operation of law the corpus of the trust would revert to him. The securities in this trust had a value at deceased’s death of $350,000. The Commissioner of Internal Revenue — again on the authority of Helvering v. Hallock (supra) — included in the gross estate the entire value of the principal of this trust after the death of Mrs. Mills and asserted a deficiency in tax of $66,998.62, Following a protest the commissioner included in the gross tax estate only $44,800 of the principal of this trust and assessed on account thereof a deficiency in tax of $20,000.
A special guardian for certain infants also objects to the allocation of the tax in respect of both trust funds and relies upon paragraph eleventh of the will.
In the New York estate tax proceedings the net taxable estate was valued at $8,719,746.63 and a tax was assessed in the sum of $1,095,653.12. The New York authorities did not include in the gross tax estate any part of the corpus of the 1935 trust. They did include in the gross tax estate the value at the decedent’s death of the remainder interest of the 1932 trust and in so doing relied on the rule laid down in June, 1941, in Matter of Pratt (262 App. Div. 240, affd. 289 N. Y. 621). The value of the remainder interest so included in the gross tax estate was $248,650. In the New York gross tax estate there was also included part of the corpus of a trust created on July 5, 1929, by George Winthrop Sands, a ward of deceased, as settlor, of which trust deceased was the trustee. Under this trust instrument income was payable to the settlor for life and the remainder passed as he should by will appoint. In default of appointment, the remainder would pass to others specified in the instrument. Deceased was in no event entitled to take either income or principal but had the limited right, as trustee only, to terminate the trust as to all or any part of the principal, but so much of the principal as was affected by any exercise of such power would become payable to the settlor, Sands. In 1930 deceased made a gift to the principal of the trust of securities which at the date of his death were of the value of $12,625. The value of the remainder interest in this addition to the trust was fixed at $3,938 and such amount was included in the gross tax estate. The Federal authorities did not include any párt of the Sands trust in the gross tax estate. Its inclusion in the New York tax estate is said to have been based on subdivision 4 of section 249-r of the Tax Law. But that section applies only when it is sought to include in the tax estate the corpus of a trust of which the deceased is settlor and has retained some power to alter, amend or revoke. Here deceased was not the settlor and although he had power to revoke the trust, such power was exercisable only as trustee. The fact that deceased had contributed funds to the trust corpus does
The executors propose to allocate 2.853% or $31,574.40 against the 1932 trust and .046% or $509.09 against the 1929 Sands trust. Objection to any proration against the 1932 trust is made by the trustees of that trust and by.the special guardian already mentioned in the comment on the Federal tax. The trustee of the 1929 trust objects to any proration against it. A special guardian for infants who take contingent interests under the will joins with the executors in urging.that all the trusts actually taxed must bear a proportionate share of each tax based upon the inclusion of the respective fund in either tax estate. Representing also a person in military service who is a contingent income beneficiary under paragraph twelfth of the will this special guardian urges that .the taxes be apportioned against the trusts.
Section 124 of the Decedent Estate Law requires apportionment against the inter vivas trusts. This section commands proration “ except in a case where a testator otherwise directs in his will ”. The direction against apportionment must be a clear direction. Lacking clarity in the language of the will the statute makes the rule and apportionment should be directed. That the direction against apportionment must be a “ clear ” direction is not a new concept. As the Court of Appeals noted in Matter of Duryea (277 N. Y. 310), this rule of clear expression was required in respect of transfers under the transfer tax law. As the court said (p..316): “ * * * a testator may by clearly expressed intention, charge his estate with the payment of transfer estate or succession taxes on gifts or devises made by him. ’’ (Emphasis supplied.] And in Jackson v. Tailer (41 Misc. 36, affd. 96 App. Div. 625, affd. 184 N. Y. 603) it was said that a testator may “ by apt words, direct that the tax upon a particular legacy , or class of legacies should be paid out of the residuary estate * * . (Emphasis supplied.)
The reason for this rule requiring clear direction is found in the fact that the effect of such direction by a testator is “to increase the legacy by the amount of the tax ” (Matter of Gihon, 169 N. Y. 443, 447). This idea is well stated in Sherman v. Moore (89 Conn. 190, 193) where the court said: “As the practical effect of a provision making a legacy or devise free of tax is to increase the gift, and to shift the burden which the legacy or devise would ordinarily bear on to the shoulders of the residuary beneficiaries, the intent of the testator to make
The legislative history of section 124 of Decedent Estate Law leaves no room for doubt that the statute makes apportionment of estate taxes the rule and permits deviation from the rule only if there be direction to the contrary. The verb “ direct ” is defined: “ to instruct authoritatively ” and “ to * * * order with authority ” (Merriam Webster New International Dictionary). In Funk & Wagnails’ New Standard Dictionary it is defined: “To instruct or guide with authority; order; command.” This dictionary gives .the synonyms for “ direct ” as 11 dictate ” and 11 govern ”. What the statute requires is certainty of expression. It is not enough that there be speculation as to what deceased may have meant. Those who resist apportionment must be able to point to affirmative language in the will directing that taxes be-not apportioned. In case of doubt as to what the will means on the subject of taxes the statutory direction to apportion is absolute.
The Commission to Investigate Defects in the Law of Estates said of this proposed new section: “ It provides for the first time in this State a statutory method of equitably apportioning the estate tax (both Federal and State), as against the respective benefits derived by the various persons interested in the estate. The great complaint against the estate tax has been that this burden falls upon the residuary legatees, who are, under most wills, the widow, children, or nearer or more dependent relatives. Cases have arisen where the residue has been greatly depleted by the imposition of the Federal Estate tax. Moreover, the residuary legatee under the present system is compelled not only to pay the tax assessed against the transfers passing by operation of the will, but is also compelled to pay the tax on other transfers to persons not participating in the decedent’s estate. Thus, if a gift in contemplation of death has been made, or a transfer under an inter vivas trust becomes effective by reason of the death of the settlor, the tax on all such transfers is imposed upon the residuary legatees. This new law provides for an equitable apportionment of all these transfers by the surrogate in an accounting or other appropriate proceeding on notice to all the parties. Thus the donee of a gift talcing effect at death will he compelled to hear T\is fair share of the tax upon the amount of the property which he derived and which was included in the general estate subjected to taxation. It is believed that this plan will present a
When section 124 of Decedent Estate Law was proposed for enactment by the commission a legislative note was appended. The note recites the evils which the legislation was intended to remedy and said that the new enactment would effect “ an equitable apportionment of the estate taxes — both Federal and State — as against all transfers of property included in the gross estate.”- (Emphasis supplied.) It was in the light of that declaration of the commission’s purpose that the Legislature passed the section. Its terms should be applied in their plain meaning. The question of allocation should not be approached as would a construction question where at all events the meaning of the text must be determined from the content of the will. In a tax allocation problem the text of the will is to be scanned only to see if there is clear direction not to apportion; and if such explicit direction is not found, construction of text ceases because the statute states the rule. As was said by a distinguished Judge: “ A provision in a will that all taxes be paid out of the residuary or general estate applies only to property passing under the will unless it specifically refers to other property, and has no effect upon inter vivas dispositions, which for one reason or another are drawn into the gross estate for tax purposes.” (Chase National Bank v. Tomagno, 172 Misc. 63, 65-66. Emphasis supplied.)
At best the language of deceased can be said to be obscure. Nowhere does he say that apportionment of taxes is not to be made. Nowhere does he refer specifically to any inter vivas transaction. The arguments based upon deceased’s supposed knowledge of tax'law and its application is an argument which defeats itself when examined. It is suggested that the text of the will quoted at the beginning of this decision was drawn with the design of freeing the inter vivas trust principals from any contribution to the tax. If it be conceded — as argued ■— that deceased was skilled in tax law, how simple would have been his course had he desired to exonerate the outside funds. Assuming his skill, he knew that he need only direct that no apportionment of taxes was to be made. Deceased’s will is dated 1935 and his codicil in the year of his death, 1937. By 1937 there had arisen scores of questions about tax apportionment. A few instances are Matter of Caswell (239 App. Div.
If one undertakes to explore the supposed prescience of deceased somewhat absurd results are reached. Did deceased know when he drew his will that the corpus of the 1935 trust would enter into his Federal tax estate but not into his New York State tax estate? Did he know that the donation which he made to the Sands trust in 1930 would be included in his New York State tax estate but not in his Federal tax estate? Did he know that under now current Federal decisions it may well be that the 1935 trust corpus was not properly included in his Federal tax estate? Of course he was bound by the law as it actually existed just as is every person who lives in an ordered community but the argument made is that deceased had special knowledge of tax decisions and of course that knowledge could relate only to such decisions as were extant while he lived. He knew that the courts had consistently enforced the provisions both of inter vivas agreements and of wills respecting the impact of taxes. While he did not know about the 1940 amendment to section 124 of the Decedent Estate Law (L. 1940, ch. 829, § 13) he must be assumed to know that such amendment merely recognized the fact that apportionment could be directed by any effective instrument, whether will or otherwise. If he had the special knowledge ascribed to him
Submit, on notice, decree providing for the apportionment of estate taxes as herein directed and otherwise settling the account.
