454 Pa. 539 | Pa. | 1973
Lead Opinion
Opinion by
On April 8, 1967, Harry Kleinhans died, leaving a will which, inter alia, divided his residuary estate
The first and final account was filed June 17, 1968, in the Orphans’ Court of Crawford County. It was confirmed on August 16, and distribution ordered. One-half of the residue, as directed by trust B, was distributed outright to testator’s grandsons, testator’s sister having died in the interval. The other half was distributed to testator’s executor as trustee for the widow pursuant to the terms of trust A. Although certain taxes, both federal and state, were paid out of the residue before distribution, no tax was paid on the value of either the life estate or the remainder of trust A.
Clara Kleinhans died January 7,1972, leaving a will which was probated in Allegheny County. Testatrix exercised in favor of her estate the general testamentary power of appointment in trust A. By her will those assets would in turn be distributed to three heirs of testatrix, collaterals as to testator. No party in interest challenges that this testamentary transfer is subject to a 15% tax at the collateral rate.
The estate of Clara Kleinhans argued in the orphans’ court that it was liable for only one-half of the 15% tax, because testator had directed that taxes be shared equally by the transferees of both trusts. In support of its argument, the estate relied upon the following provision in testator’s will. “First: I direct that all my just debts and funeral expenses be fully paid and satisfied as soon as conveniently may be after my decease and further direct that all Pennsylvania inheritance tax and Federal Estate tax be paid from my residuary Estate.” Rejecting the estate’s argument, the orphans’ court held that the full 15% tax was to be paid out of the assets of trust A before distribution to testatrix’s beneficiaries. The estate has appealed.
The question presented is whether the provision in testator’s will directing that “all Pennsylvania inheritance tax ... be paid from my residuary Estate” limits the tax liability of the remainder beneficiaries of trust A to one-half of the tax due on their inheritance. Appellant argues that this result is mandated by section 718 (c) of the Inheritance and Estate Tax Act of 1961,
Appellant’s argument is premised upon a misunderstanding of the effect and scope of section 718(c). That section merely affords a testator the privilege of shifting, in whole or in part, among his transferees their “ultimate liability for inheritance tax.” Section
In Zellefrow Estate, 450 Pa. 302, 299 A.2d 248 (1973), this Court dealt with a similar misconception of a companion provision, section 718(a).
By a parity of reasoning the same conclusion holds for section 718(c); it also merely designates the source of payment of the tax. Section 201 of the Inheritance and Estate Tax Act of 1961 provides: “An inheritance tax for the use of the Commonwealth is hereby imposed upon every transfer subject to tax under this act . . . .”
Finally, the estate argues that because property subect to a power of appointment is taxed in the don- or’s estate,
Section 718(c) does not remove from the principal of trust A the obligation of satisfying the full 15% inheritance tax imposed upon its transfer to the beneficiaries chosen by testatrix. Appellant is bound by
Decree affirmed. Each party pay own costs.
The Pennsylvania inheritance tax is imposed at two tax rates. A 6% inheritance tax is levied upon transfers to persons generally considered “direct heirs.” Act of December 29, 1967, P.L. 915, § 1, 72 P.S. § 2485-403 (Supp. 1973). The 6% rate applies to estates for all persons dying on or after Dec. 29, 1967, and to inter vivos transfers made by persons dying on or after that day regardless of the date of the transfer. Id. § 2. The 1967 amendment did not change the law in effect for persons dying before Dec. 29, 1967. See Act of June 15, 1961, P.L. 373, Art. IV, § 403, 72 P.S. § 2485-403 (1964) (2% rate on “direct heirs”). Transfers of property to any other person not designated in section 403 are taxed at 15%. Id. § 404, 72 P.S.
This Court’s jurisdiction attaches by virtue of the Appellate Court Jurisdiction Act of 1970, Act of July 31, 1970, P.L. 673, art. II, § 202(3), 17 P.S. § 211.202(3) (Supp. 1973).
Act of June 15, 1961, P.L. 373, Art. VII, § 718(c), 72 P.S. § 2485-718 (c) (1964).
Subsections (a) and (b) of § 718 provide: “(a) Outright Devises and Bequests.—In the absence of a contrary intent appearing in the will, the inheritance tax imposed by this act on the transfer of property which passes by will absolutely and in fee, and which is not part of the residuary estate, shaU be paid out of the residuary estate and charged in the same manner as a general administration expense. Such payment shall be made by the personal representative and, if not so paid, shall be made by the transferee of the residuary estate. (b) Transfer for Limited Period. In the absence of a contrary intent appearing in the will or other instrument of transfer, the inheritance tax imposed by this act, in the case of a transfer of any estate income or interest for a term of years, for life, or for other limited period, shall be paid out of the principal of the property by which the estate, income or interest is supported. Such payment shall be made by the personal representative and, if not so paid, shall be made by the trustee, if any, and, if not so paid, shall be made by the transferee of such principal.” Act of June 15, 1961, P.L. 373, Art. VII, § 718(a), (b), 72 P.S. § 2485-718(a), (b) (1964).
A power of appointment is exempt from taxation in the estate of the donee, Act of June 15, 1961, P.L. 373, Art. III, § 309, 72 P.S. § 2485-309 (1964), and “shall be taxed only as part of the estate of the donor.” Id. Art. IV, § 408, 72 P.S. § 2485-408 (1964).
The Commonwealth in its appraisement of testator’s estate, filed on October 18, 1967, put all parties in interest on notice of its statutory entitlement to inheritance tax by inserting the following. “In the event that any future interest in this estate is transferred in possession or enjoyment to collateral heirs of the decedent after the expiration of any estate for life or for years, the Commonwealth hereby expressly reserves the right to appraise and assess transfer inheritance taxes at the lawful collateral rate on any such future interest” A statutory procedure exists whereby “any party in interest may elect... to have the value of a future interest determined as of the date of decedent’s death and to pay the tax assessed thereon.” Act of June 15, 1961, P.L. 373, Art. VII, § 713(a), 72 P.S. § 2485-713(a) (1964), as amended, 72 P.S. § 2485-713(a) (Supp. 1973) (footnote omitted). See id. § 714, 72 P.S. § 2485-714 (1964), as amended, 72 P.S. § 2485-714 (Supp. 1973).
For the full text of § 718(a), see note 4, supra.
Act of June 15, 1961, P.L. 373, Art. II, § 201, 72 P.S. § 2485-201 (1964). “Transfer” is defined as including “the passage of ownership of any property, or any interest therein or income therefrom, in possession or enjoyment, present or future, in trust or otherwise.” Id. Art. I, § 102(22), 72 P.S. § 2485-102(22) (1964).
Act of June 15, 1961, P.L. 373, Art. II, § 211, 72 P.S. § 2485-211 (1964). See id. §§ 212-13, 72 P.S. §§ 2485-212 to -213 (1964).
Certain inter vivos transfers are also subject to inheritance tax. Id. §§ 221-26, 72 P.S. §§ 2485-221 to -226 (1964). See id. § 241, 72 P.S. § 2485-241 (1964). Other transfers of property have been exempted from the payment of inheritance tax. Id. Art. III, §§ 301-16, 72 P.S. §§ 2485-301 to -316 (1964).
See note 5, supra.
Act of June 15, 1961, P.L. 373, Art. VII, § 741, 72 P.S. § 2485-741 (1964), as amended, 72 P.S. § 2485-741 (Supp. 1973).
Section 741 sets forth the powers and duties of a fiduciary in respect to property the transfer of which is subject to inheritance tax. The thrust of the section is that the burden of the inheritance tax is upon the transferee. “Subject to the provisions of section 718, every personal representative, or other fiduciary in charge of or in possession of any property, or instruments evidencing owner
Appellant also contends that in section 741 the phrase “[s']ubject to the provisions of section 718” incorporates the language of section 718(c) “[i]n the absence of a contrary intent appearing in the will.” Even if this were the proper interpretation of section 741, our holding that section 718(c) cannot be read to limit the Commonwealth’s right to collect taxes nullifies appellant’s argument.
Nothing in our disposition prevents appellant from seeking contribution from the remaindermen of trust B. The orphans’ court adjudication was properly without prejudice to the assertion of this claim.
Dissenting Opinion
Dissenting Opinion by
I dissent. The effect of the majority decision is to require one citizen to pay taxes owed by another citizen. Such a requirement is a taking of property -without due process of law. The legislature granted the testator the authority to require that the estate pay all inheritance taxes owed. In effect, the testator has the power to limit the amount each devisee shall receive irrespective of favorable treatment which any devisee might otherwise receive by the state’s inheritance tax rate. For example, assume that a testator, who has an estate of $1,000, wishes that all inheritance taxes be paid from that sum before a distribution of one-half is made to his friend, X, and one-half to his son, B. If X’s tax rate, as a collateral heir, is 15% and his son’s rate, as a direct heir, is 2% and these amounts are deducted from the estate prior to distribution, both X and B would receive $457.50 from the residuary estate. That amount is computed as follows: $1,000 -1- 2 X 2% = $10 inheritance tax due on B’s share of the estate $1,000 -r- 2 X 15% = $75 inheritance tax due on X’s share of the estate $75 + $10 = $85.00 total inheritance tax due from the estate $1,000 — $85 = $915 residuary estate to be divided equally between X and B Therefore, X and B each receive $457.50 from the residuary estate. If, on the other hand, the tax had been payable by each devisee rather than by the estate, X would have received a net amount of $425 ($500—
The majority notes that the appellant may seek contribution from the other remaindermen. To force the appellant to absorb the cost of such litigation is to penalize him from the state’s error. Furthermore, we cannot require one citizen to pay another’s taxes simply because it is more convenient for the state. It should be the state’s responsibility, not the appellant’s, to seek the taxes due. This is especially true, where, as here, the appellant’s position as eventual devisee was not known to him at the time distribution was made. Appellant had no way to protect his interests. The state, however, was certainly able to protect itself at that time. For the state’s failure to take appropriate action, we should not now penalize the innocent appellant.
The majority is correct when it states section 718 designates the source of payment of the tax. That
