Estate of McNicholas v. State, 49A04-9010-CV-483

• Decision Date: 12 November 1991
• Docket Number: No. 49A04-9010-CV-483,49A04-9010-CV-483
• Citation: 580 N.E.2d 978
• Parties: In the Matter of the ESTATE OF Martha F. McNICHOLAS, Deceased, Merchants National Bank & Trust Company, Executor, Appellant, v. STATE of Indiana, Appellee.
• Court: Indiana Appellate Court

Page 978

580 N.E.2d 978

In the Matter of the ESTATE OF Martha F. McNICHOLAS,

Deceased, Merchants National Bank & Trust Company, Executor, Appellant, v. STATE of Indiana, Appellee.

No. 49A04-9010-CV-483.

Court of Appeals of Indiana,

Fourth District.

Nov. 12, 1991.

Charles F. Cremer, Jr., John A. Cremer, Indianapolis, for appellant.

Linley E. Pearson, Atty. Gen., Jane E. Griffin, Deputy Atty. Gen., Indianapolis, for appellee.

MILLER, Judge.

After Martha McNicholas died, her three daughters were dissatisfied with the division of property in their mother's will and entered into an agreement, filed with and approved by the court, dividing the property into three equal shares. In her will, Martha provided for two daughters, Marlene and Katherine, to receive her home and personal property (valued at approximately $170,000); ¹ the remainder of the estate (approximately $1,500,000) was to be placed in trust for the benefit of the third daughter, Mary, who needed special nursing care. ² At Mary's death, the trust was to terminate and any remaining assets were to be distributed to Marlene and Katherine in equal shares. ³

The dispute in this appeal arose between the Executor of the estate and the State Inheritance Tax Division as to how the State inheritance tax should be assessed. The probate court held the property passed under the will and computed the tax at $91,399.54--as opposed to the amount of $69,661.20 based on the distribution in the settlement agreement. ⁴

We agree with the probate court that the agreement--made after Martha's death--to redistribute Martha's estate did not alter the State inheritance tax. Affirmed.

DECISION

Martha McNicholas died shortly after executing her will. The will was admitted to probate on July 7, 1988, and Merchants National Bank and Trust Company was appointed Executor and Trustee. The daughters contemplated filing a will contest action. Instead of filing a will contest (Ind.Code 29-1-7-17), they entered into a family settlement agreement, pursuant to IC 29-1-9-1, et seq., in which each daughter would take one-third of the net estate instead of the distribution provided for by Martha's will. ⁵ Merchants, as Executor and Trustee under the will, joined in the agreement, and the petition alleged that there were no other living persons with contingent interests who could be affected by the compromise.

On September 28, 1988, within the time period for filing a will contest, the probate court approved the agreement:

"[T]he Court, having examined said petition and being fully advised in the premises, now finds that the facts in said petition are true; that there appears to be no necessity for requiring notice; and that the prayer of said petition should be granted.

IT IS THEREFORE, CONSIDERED, ORDERED, ADJUDGED AND DECREED by the Court that the Family Settlement Agreement heretofore entered into by and between Mary K. McNicholas, Katherine A. McNicholas, and Marlene L. McNicholas, the heirs at law and legatees under the Will of Martha F. McNicholas, deceased, be, and it is hereby approved; that the bequests under Items III and IV of the decedent's Will are invalid and of no force and effect and that Mary K. McNicholas, Katherine A. McNicholas, and Marlene L. McNicholas shall share equally each taking one-third ( 1/3) of the decedent's net estate.... and; that the Merchants National Bank & Trust Company of Indianapolis, Executor herein shall acknowledge receipt of said Agreement and it is hereby directed to make all further disposition of the decedent's estate in accordance with the terms thereof; and this matter is continued until further order of the Court."

(R. 32-33, emphasis added, omitting description of the specific manner in which the estate is to be distributed between the daughters.)

Thereafter, the Executor calculated the inheritance tax on the basis of the shares each daughter actually received under the agreement--the same amount they would have received if Martha had died intestate. When the probate court denied Executor's petition to redetermine the tax, Executor appealed, claiming the inheritance tax should have been calculated on the basis of intestacy.

Executor contends that the legislature provided in the compromise statute an alternate mechanism for resolving will contests without the expense and delay of litigation and argues that when the court approved the family settlement agreement and held that all the provisions under Martha's will which purported to distribute her property (Items III and IV) were "invalid and of no force and effect," there was no property right to be taxed under the will. Because the inheritance tax is not a tax on a decedent's estate, but a tax on the transfer of property, Executor argues that the tax should have been calculated on the shares actually distributed to the daughters.

The State argues that the trial court correctly determined the amount of inheritance tax due consistent with the distribution under the will because the will was never invalidated. The State contends that once a will has been probated and declared to be duly executed, only a will contest action under Ind.Code 29-1-7-17 can challenge the validity of the will or its execution, citing Niemiec v. Niemiec (1982), Ind.App., 435 N.E.2d 999; Modlin v. Riggle (1980), Ind.App., 399 N.E.2d 767; and In Re Estate of Plummer (1966), 141 Ind.App. 142, 219 N.E.2d 917. The State asserts there was no basis for setting aside the will as contemplated by the will contest statute. While the State acknowledges that under Indiana law family settlement agreements are favored, it points out that the agreement is, in fact, a contract among living persons to distribute Martha's estate in a manner different from that chosen by Martha--an assignment of rights under the will. The State argues that while the parties are free to agree to any distribution they choose, it does not alter the manner in which the inheritance tax is imposed. Additionally, the State points to the legislative provision in IC 29-1-9-1--that no compromise shall in any way impair the rights of the taxing authorities--as evidence of the legislature's intent that a compromise would not alter the calculation of State inheritance tax.

In Indiana, the inheritance tax is not a tax on the property of decedent's estate, but a tax on the privilege of succeeding to property rights of the deceased. In Re Estate of Grotrian (1980), Ind.App., 405 N.E.2d 69. The inheritance tax is imposed upon the transfer of decedent's property to the legatee or beneficiary. Ind. Dept. of State Revenue, Inheritance Tax Div. v. Estate of Cohen (1982), Ind.App., 436 N.E.2d 832, citing IC 6-4.1-2-1 and 3A Henry's Probate Law and Practice, Chap. 41 Sec. 2 at 366 (1980). The inheritance tax accrues and becomes a lien on decedent's property at the time of decedent's death. IC 6-4.1-8-1. ⁶

If a will is admitted to probate and never set aside, the property is transferred under the will and must be taxed as such. Indiana Dept. of State Revenue, Inheritance Tax Div. v. Estate of Binhack (1981), Ind.App., 426 N.E.2d 714, citing Indiana Dept. of of State Revenue, Inheritance Tax Div. v. Kitchin (1949), 119 Ind.App. 422, 86 N.E.2d 96. Both parties assert that Binhack and Kitchin are controlling. In Binhack, Anna Binhack died testate naming her daughter, Betty, as the sole devisee. Anna's will was admitted to probate. The four children of Anna's deceased son contested the validity of the will. The parties executed a family settlement agreement providing that the will contest action would be dismissed and the grandchildren were to take certain real estate by virtue of inheritance. The probate court ordered that the distribution of the estate be made in accordance with the will and the family settlement agreement and redetermined the inheritance tax liability based upon the manner in which the property was actually distributed. The State appealed. This court reversed, holding that the inheritance tax must be calculated under the provisions of the will unless the will has been set aside.

The State argues that in the case before us the will was admitted to probate and, although the court held certain provisions of the will were invalid, the will was not set aside. Thus, it argues Binhack requires the inheritance tax to follow the terms of the will. Executor contends that in the present case, unlike Kitchin and Binhack, in which the wills were held to be valid, there was nothing left of Martha's will once all the sections of the will disposing of the property were invalidated--thus, the will was, in effect, set aside. Executor argues that, in this particular case, to require the formal revocation of the will or a will contest, as the State would require, would be to exalt form over substance.

We believe Executor misinterprets Binhack as authority that a trial court may, in approving a settlement agreement, set aside or invalidate a will. Executor relies on the following language from Binhack:

"[W]hile our equitable predilections might be to determine the inheritance tax on the basis of the actual distribution effected by the final property settlement agreement rather than on the basis of the distribution provided for by the will, we find that, at least so long as the will has not been set aside as invalid, the legislature has provided otherwise."

426 N.E.2d at 716, citing Kitchin, supra. ⁷ We do not think the language quoted above means that a trial court may, in approving a settlement agreement, set aside a will or otherwise determine the merits of a contest to determine a will's validity. Thus, when the probate court recited in its order approving the settlement that certain provisions of the will were "invalid," the court misspoke.

The compromise statute is broader than the will contest statute in that it provides for the settlement of issues which are not involved in determining the validity of the will. ⁸ For example, it provides for...