Estate Of James F. Sheppard v. Schleis

• Decision Date: 04 May 2010
• Docket Number: No. 2009AP1021.,2009AP1021.
• Citation: 324 Wis.2d 41,782 N.W.2d 85,2010 WI 32
• Parties: ESTATE OF James F. SHEPPARD, by its Co-Personal Representative,Michael E. McMORROW, Plaintiff-Appellant,v.Jessica SCHLEIS, James Schleis, Mary Jo Schleis and XYZ Financial Institutions, Defendants-Respondents.
• Court: Wisconsin Supreme Court

324 Wis.2d 41

782 N.W.2d 85

2010 WI 32

ESTATE OF James F. SHEPPARD, by its Co-Personal Representative,Michael E. McMORROW, Plaintiff-Appellant,^†v.Jessica SCHLEIS, James Schleis, Mary Jo Schleis and XYZ Financial Institutions, Defendants-Respondents.

No. 2009AP1021.

Supreme Court of Wisconsin.

Argued Feb. 11, 2010.

Decided May 4, 2010.

COPYRIGHT MATERIAL OMITTED

For the plaintiff-appellant there were briefs (in the court of appeals) by Michael E. McMorrow and the Law Offices of Michael E. McMorrow, Mequon; J. Lewis Perlson, Amy S. Kiiskila, and Michael Best & Friedrich, LLP, Milwaukee; and Jonathan V. Goodman and Goodman Law Offices, Milwaukee, and oral argument by J. Lewis Perlson and Michael E. McMorrow.

For the defendants-respondents there was a brief (in the court of appeals) by Elaine A. Shanebrook and Shanebrook & Falkowski Law Office, West Bend, James G. Pouros and the O'Meara Law Firm LLP, West Bend, and oral argument by Elaine A. Shanebrook.

¶ 1 SHIRLEY S. ABRAHAMSON, C.J.

This is an appeal of an order and judgment from the Circuit Court of Washington County, Patrick J. Faragher, Judge. This court granted the Estate's petition to bypass the court of appeals pursuant to Wis. Stat. §§ 808.05 and 809.60 (2007-08).¹

¶ 2 Jessica Schleis was named as the recipient of two accounts, one a “Payable on Death” (P.O.D.) account, the other a “Transfer on Death” (T.O.D.) account, totaling over $3 million in the name of James F. Sheppard, the decedent. For ease of discussion, we will refer to both accounts as P.O.D. accounts.²

¶ 3 This action was brought by the Estate of James F. Sheppard, deceased, against the defendants, Jessica Schleis (the named recipient of the two accounts); her parents, James Schleis and Mary Jo Schleis (who signed an agreement with the Estate stating that “required estate taxes” would be paid out of the accounts); and XYZ Financial Institutions (named under Wisconsin's Fictitious Name Statute, Wis. Stat. § 807.12, as the institutions that currently have on deposit the funds from the two P.O.D. accounts). The Estate seeks reimbursement from these defendants of the federal and state estate taxes generated by the P.O.D. accounts.

¶ 4 The circuit court granted summary judgment to the defendants, holding that “the obligation to pay estate and inheritance taxes rests on the estate and the personal representative, not the defendants.” As to the Wisconsin estate tax, the circuit court concluded that Firstar Trust Company v. First National Bank of Kenosha, 197 Wis.2d 484, 541 N.W.2d 467 (1995), “deals with the issue completely” and that the Estate's claim that the defendants were obligated to pay a portion of the Wisconsin estate tax generated by the P.O.D. accounts is not maintainable under state law. The circuit court also rejected the Estate's claim for apportionment of estate taxes because no Wisconsin apportionment statute exists and the court declined to create a common-law equitable apportionment rule. As to the Estate Tax Withholding Agreement signed by Mary Jo Schleis and James Schleis and the Estate for the “required estate taxes” to be paid from the P.O.D. accounts, the circuit court concluded that “the so called agreement does not provide a cognizable remedy,” because “there is no federal or state withholding procedure” for P.O.D. accounts.

¶ 5 On appeal from the judgment and order of the circuit court, this court must address four issues: (1) When a decedent dies leaving no will, must a recipient of a P.O.D. account reimburse the Estate for a portion of the federal estate taxes attributable to a P.O.D. account? (2) When a decedent dies leaving no will, must a recipient of a P.O.D. account reimburse the Estate for a portion of the Wisconsin estate taxes attributable to a P.O.D. account? (3) When a decedent dies leaving no will and no Wisconsin statute directs apportionment of estate taxes, does the court apply a common-law limited equitable apportionment rule requiring a recipient of a P.O.D. account to reimburse the Estate for a portion of the federal and state estate taxes attributable to a P.O.D. account? (4) Does an agreement signed by parents of a minor recipient of a P.O.D. account impose liability on the parents or the minor to reimburse the Estate for a portion of the federal and state estate taxes attributable to a P.O.D. account?

¶ 6 We conclude that payment of the federal estate tax is to be made by the Estate under 26 U.S.C. § 2002 (2006),³ which provides that an estate pays the estate tax on nonprobate property. The P.O.D. accounts at issue do not fall within 26 U.S.C. §§ 2207B and 2036 or any other exception to the general rule that an estate pays the federal estate tax generated by nonprobate assets.⁴ We further conclude that the Estate must pay the Wisconsin estate taxes generated by the P.O.D. accounts. In Wisconsin the court has applied the burden-on-the-residue rule for state estate taxes unless the testator directs otherwise. The court declines to establish a common-law equitable apportionment rule. Furthermore, the agreement signed by Mary Jo and James Schleis, parents of Jessica Schleis, to retain 50% of all sums payable on the P.O.D. accounts “for the purpose of paying required estate taxes” is not enforceable against the Schleises. Accordingly, we affirm the order and judgment in favor of the defendants.

I

¶ 7 For the purposes of this appeal, the facts are not in dispute.⁵ James F. Sheppard, the decedent, established two payable on death (P.O.D.) accounts prior to his death. Sheppard designated his goddaughter, Jessica Schleis, as the recipient of these two P.O.D. accounts on his death. James Sheppard died without a will on July 2, 2007, with a total estate valued at approximately $12 million. The P.O.D. accounts designating Jessica Schleis as the recipient were worth approximately $3.8 million at the time of Sheppard's death.⁶

¶ 8 Jessica Schleis was a minor, 17 years old, when James Sheppard died. Jessica's mother, Mary Jo Schleis, communicated with the attorney for the Estate on July 19, 2007. The Estate's attorney, who also represents the Estate before this court, advised Mary Jo Schleis that federal and Wisconsin estate tax obligations would attach to the recipient of the P.O.D. accounts.

¶ 9 At the suggestion of the Estate's attorney and with the advice of their own attorney, Jessica's parents signed, with Jessica's knowledge, an “Estate Tax Withholding Agreement,” dated September 3, 2007.⁷ The agreement provided that 50% of all sums would remain on deposit in the accounts for the purpose of paying “required estate taxes.” The Estate then supplied the Schleis family with information the Estate had regarding the P.O.D. accounts and with two death certificates, and refrained from taking any action to impede Jessica Schleis's ability to withdraw from the accounts.

¶ 10 Because Jessica Schleis was a minor, her parents petitioned the circuit court on September 13, 2007, to be appointed her guardians.

¶ 11 As part of the guardianship proceeding, the circuit court appointed a guardian ad litem for Jessica Schleis. The guardian ad litem advised the Estate's attorney that she had advised the Schleis family that Jessica Schleis was not responsible for payment of federal or state estate taxes because the P.O.D. accounts were not part of the residuum of the probate estate and that as guardians of Jessica's estate the Schleises could remove all funds from the P.O.D. accounts.

¶ 12 On October 30, 2007, Mary Jo Schleis and James Schleis were appointed guardians for Jessica. The Schleises withdrew the entire balance from the P.O.D. accounts on November 12, 2007. While guardianship proceedings were ongoing, the Schleises retained a second attorney who on November 26, 2007, advised the Estate's attorney that she believed the Estate Tax Withholding Agreement was not binding on her clients, Mary Jo and James Schleis.

¶ 13 On January 17, 2008, the Estate's counsel advised counsel for the Schleises that the Estate maintained the position that Mary Jo Schleis, James Schleis, and Jessica Schleis were responsible to pay their share of all federal and Wisconsin estate taxes and that their obligation was joint and several. The Estate brought this suit seeking reimbursement of estate taxes from Mary Jo Schleis, James Schleis, and Jessica Schleis.

¶ 14 Jessica Schleis reached the age of majority on February 18, 2008.

II

¶ 15 In reviewing a circuit court's decision granting summary judgment, this court applies the same methodology as the circuit court.⁸ Under Wis. Stat. § 802.08(2), summary judgment must be entered “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.”

III

¶ 16 The first issue is whether the Internal Revenue Code provides the Estate a right to recover a portion of federal estate taxes from the recipient of a P.O.D. account. We begin with a brief review of the applicable Internal Revenue Code provisions.

¶ 17 First, 26 U.S.C. § 2002 states that the executor of a decedent's estate shall pay federal estate taxes imposed by 26 U.S.C. § 2001 et seq., whether the taxes are attributable to probate or nonprobate property. Section 2002 simply states, “The tax imposed by this chapter shall be paid by the executor.” Section 20.2002-1 of the Regulations elaborates to explain that an executor's or administrator's duty to pay federal estate tax applies to the “entire tax, regardless of the fact that the gross estate consists in part of property which does not come within the possession of the executor or administrator....” 26 C.F.R. § 20.2002-1 (2009). Thus the probate estate (the portion of the estate within the executor's possession) pays all of the federal estate taxes even if a portion of the total tax is generated by property that has passed to a recipient through a...