Estate of Greenfield

• Decision Date: 14 March 1979
• Citation: 484 Pa. 141,398 A.2d 983
• Court: Pennsylvania Supreme Court
• Parties: ESTATE OF Albert M. GREENFIELD, Deceased Appeal of Albert M. GREENFIELD, Jr. Appeal of Mervin J. HARTMAN, Esquire, Guardian and Trustee Ad Litem.

Page 983

398 A.2d 983

484 Pa. 141, 7 A.L.R.4th 980

ESTATE OF Albert M. GREENFIELD, Deceased

Appeal of Albert M. GREENFIELD, Jr.

Appeal of Mervin J. HARTMAN, Esquire, Guardian and Trustee Ad Litem.

Supreme Court of Pennsylvania.

Argued Nov. 14, 1978.

Decided March 14, 1979.

[484 Pa. 142] John A. Eichman, III, Philadelphia, for appellant at No. 116 and appellee at No. 118.

Mervin J. Hartman, Philadelphia, for appellant at No. 118.

John J. Lombard, Jr., Walter E. Nelson, Jr., Obermayer, Rebmann, Maxwell & Hippel, Robert K. Greenfield, Philadelphia, for appellees at Nos. 116 and 118.

Before EAGEN, C. J., and O'BRIEN, ROBERTS, NIX, MANDERINO and LARSEN, JJ.

OPINION OF THE COURT

ROBERTS, Justice.

We are asked to decide whether the executors of the Albert M. Greenfield estate properly allocated the increase in the value of estate principal, accrued over the estate's administration, between the electing spouse and the residuary trusts. The executors used the "changing fraction" method of allocation, which allocated appreciation to the electing spouse on the basis of her actual share of the principal fund. We reject appellants' contention that use of this method of allocation was improper.

Albert M. Greenfield died on January 5, 1967. His will directed, inter alia, that his wife receive a life interest in the income of, and a power of appointment over, one-third of his estate, and that his residuary estate be used to fund trusts of equal size for the benefit of his children and their issue. Testator's widow, appellee Elizabeth Greenfield Petri, a co-executrix of the estate and a co-trustee of the residuary trusts, elected to take against the will.

The executors filed their first account on May 31, 1971. The Court of Common Pleas of Philadelphia (per Bolger, J.) filed an adjudication dated May 22, 1972, and a supplemental adjudication dated October 10, 1972. Exceptions to the adjudication of May 22 were filed with respect to the directed distribution of paintings in decedent's art collection. The court en banc reversed the auditing judge and amended his adjudications. On appeal, this Court dismissed the exceptions and reinstated the adjudications of the auditing judge. Greenfield Estate, 457 Pa. 114, 321 A.2d 922 (1974).

The statement of proposed distribution submitted to the auditing court and reviewed in its adjudication of May 22, 1972, requested, in relevant part, the following distribution as between the electing widow and the residuary trusts.

                                                  "PRINCIPAL
                                                    ---------
                ELIZABETH M. GREENFIELD [PETRI]     One-Third (1/3) of the net probate Estate
                PROVIDENT NATIONAL BANK             Balance of Estate, after payment of
                ELIZABETH M. GREENFIELD [Petri]       Federal Estate Tax into equal
                ALBERT M. GREENFIELD, JR.             separate trusts for each of ALBERT M
                BRUCE H. GREENFIELD and               GREENFIELD'S Five (5) children
                GUSTAVE G. AMSTERDAM,                 namely
                Trustees                                GORDON K. GREENFIELD
                                                        ELIZABETH G. ZEIDMAN
                                                        CARLOTTA G. HOWARD
                                                        PATRICIA G. MARK
                                                        ALBERT M. GREENFIELD, JR."
                

"INCOME

------

Balance of Income in the Estate to be distributed to ELIZABETH M.

GREENFIELD [PETRI], and to each of the five Separate Trusts for the children

of ALBERT. M. GREENFIELD, PROVIDENT NATIONAL BANK, ELIZABETH M. GREENFIELD

[PETRI]. ELIZABETH G. ZEIDMAN, ALBERT M. GREENFIEDL, JR., BRUCE H. GREENFIELD

and GUSTAVE G. AMSTERDAM, Trustees, based on their respective interest in the

principal assets held from time to time by the Executors."

Thereafter, the executors filed a schedule of distribution for the period ending September 30, 1973, and adopted therein the "changing fraction" method of share allocation for both principal and income. The propriety in the distribution of the appreciation of principal is the subject of these appeals.

Appellant Albert M. Greenfield, Jr., a co-executor and co-trustee and a residuary trust beneficiary under his father's will, filed objections to the schedule. Appellant Mervin J. Hartman, guardian ad litem for minor beneficiaries and trustee ad litem for unborn and unascertained beneficiaries, joined appellant Greenfield's objections. Appellee filed objections to the calculation of her Pennsylvania inheritance tax obligation. The parties filed several stipulations of fact, ¹ hearings were held before Judge Pawelec and in a further supplemental adjudication of May 26, 1977, the court sustained Mrs. Petri's objections and dismissed appellants'. 28 Fiduc.Rep. 314 (O.C. Phila.1978).

In the supplemental adjudication, Judge Pawelec characterized the difference between the fixed fraction and changing fraction methods:

"When the fixed fraction method is used, the principal is distributed and the gains and losses are charged according to the statutory percentage. . . . In essence, the fixed fraction method treats the legacies and taxes which had been paid and the advance distributions which have been made as if they were still part of the corpus, when, in fact, they no longer are part of the estate. As a result, in many instances, the non-elective portion shares in gains and losses in a proportion which did not in fact exist when the gains or losses were realized.

"(T)he changing fraction method allocates the gains and losses realized on the principal of an estate among those who are in fact the owners of the principal at that time in the same proportions as their respective interests in the existing balance."

Id. at 325-327. ²

Judge Pawelec concluded, in his adjudication of May 26, 1977, that the prior adjudications did not direct the method for calculating the distributive shares of principal. The court then directed that appreciation in the value of the assets of the estate be allocated according to the changing fraction method, as the schedule requested. Appellants filed exceptions to that portion of the supplemental adjudication adopting the changing fraction method of allocation. The exceptions were dismissed by the court en banc and these appeals followed. ³ We affirm.

Appellant Greenfield argues that the supplemental adjudication of May 22, 1972, and Section 2508 ⁴ of the Decedents, Estates, and Fiduciaries Code, require the use of a fixed fraction method of allocating the growth of estate assets to distributive shares. We agree with Judge Pawelec that nothing in the 1972 adjudications or Section 2508 controls whether Mrs. Petri is limited to a one-third share of principal appreciation through the term of the estate's administration. ^{5 5} Appellant Greenfield, and appellant Hartman, further contend that on the facts of this case use of the changing fraction method is inequitable.

They argue that at the initial stages of the administration of the estate there was no notice that such a rule would control the distribution of principal appreciation. They maintain further that, as a result, parties withdrew disproportionate principal sums and did so in reliance on their reasonable belief that the fixed fraction method would be used. ⁶ Essentially, they argue that the May 26, 1977, decree of Judge Pawelec retrospectively applies "new law," unjustly enriching the electing widow at the expense of the trust beneficiaries. We do not agree. Use of the changing fraction method produces the equitable result of allocating growth in the assets of the estate in proportion to all parties' actual interests in the fund which generated the growth.

A surviving spouse who elects against the will creates a fractional share interest in the decedent's estate. See Rittenhouse Estate, 466 Pa. 378, 353 A.2d 404 (1976). Where such an interest is created by will (usually to take advantage of the maximum federal estate tax marital deduction), the commentators are unanimous that the spouse is entitled to share in estate appreciation calculated on the changing fraction rule. E. g., Casner, I Estate Planning, 3d ed., 800 n. 34 (Cum.Supp.1978, 1386) ("In the absence of compelling statutory language, the share of estate income payable to a residuary taker should vary from time to time as a residuary taker's share in the estate corpus held by the executor varies as a result of disbursements out of his or other shares which have become fixed. The sharing in gains realized by the estate should follow the same pattern."). Dole, "A Technique for Making Distribution of Principal and Income to Residuary Beneficiaries during the Administration with Application to Trusts," 79 H.L.R. 765 (1966); Polasky, "The Marital Deduction Formula Clauses in Estate Planning Estate and Income Tax Consideration," 63 Mich.L.R. 809; Shaiman, "The Widow's Election, Tax and Fiduciary Considerations," 40 T.L.Q. 1 (1966); Sheets, Estate and Gift Tax Branch, Internal Revenue Service, "Practical Solution to (Regulation) 64-19," Trusts and Estates, 71 (1965) cited in Appellee's Brief, page 48.

In Estate of Palitz, a New York surrogate court held that gains would be calculated by the changing fraction method where a testator created a fractional marital trust which was to share proportionally in appreciation or depreciation of estate assets between the dates of his death and the trust funding, and there were increases in the value of the estate assets during administration. 70 Misc.2d 136, 139, 331 N.Y.S.2d 929, 934-35 (1972). Palitz explains:

"The frequently cited decision in Matter of Meerbaum (Surr.Ct.Kings Co., N.Y.L.J. September 29, 1961, p. 14, col. 6) sets forth an equitable rule. (See Covey, The Marital Deduction and Use of Formula Provisions, p. 26; Casner, Estate Planning, 3rd ed., Supplement to p. 800, n. 34.) That case involved an intestate estate. Surrogate Moss said: 'The payment out of the estate (of) taxes assessable against the shares in the estate of the...