Estate of Tovrea v. Nolan

• Citation: 845 P.2d 494,173 Ariz. 568
• Decision Date: 21 July 1992
• Docket Number: No. 1,CA-CV,1
• Parties: In the Matter of the ESTATE OF Jeanne G. TOVREA, deceased, Edward Tovrea, Jr., Georgia Loy Tovrea and Priscilla Tovrea Holdcrafts, Creditors, Plaintiffs-Appellants, v. Deborah Ann NOLAN and Sandra G. Elder, Co-Personal Representatives, Defendants-Appellees. 90-669.
• Court: Arizona Court of Appeals

Page 494

845 P.2d 494

173 Ariz. 568

In the Matter of the ESTATE OF Jeanne G. TOVREA, deceased, Edward Tovrea, Jr., Georgia Loy Tovrea and Priscilla Tovrea Holdcrafts, Creditors, Plaintiffs-Appellants, v. Deborah Ann NOLAN and Sandra G. Elder, Co-Personal Representatives, Defendants-Appellees.

No. 1 CA-CV 90-669.

Court of Appeals of Arizona Division 1, Department A.

July 21, 1992.

Reconsideration Denied Sept. 8, 1992.

Review Denied Feb. 17, 1993.

[173 Ariz. 570] Thayer & Thayer, P.C. by Ted J. Thayer, Teresa S. Thayer, Alicia M. Lawler, Phoenix, for plaintiffs-appellants.

Jennings, Strouss & Salmon by Glenn J. Carter, James M. Ackerman, John R. Becker, Phoenix, for defendants-appellees.

OPINION

GERBER, Judge.

This appeal involves the interpretation of the tax clause in the will of Jeanne Gunter Tovrea ("decedent"). For reasons which follow, we affirm the trial court's grant of summary judgment in favor of the appellees, decedent's personal representatives.

FACTS AND PROCEDURE

At the time of her death decedent was the widow of Edward A. Tovrea. They had no children together. Decedent had a child from a previous marriage, appellee Deborah Ann Nolan ("Nolan"). Edward Tovrea had three children from a prior marriage: appellants Edward A. Tovrea, Jr., Georgia Loy Tovrea and Priscilla Tovrea Holdcrafts.

Edward Tovrea's will created a qualified terminable interest property ("QTIP") trust with all income to be paid to decedent during her lifetime. Upon her death, the principal of the QTIP trust, approximately $4 million, was to be distributed to appellants. Prior to decedent's death, appellants commenced a suit against her for breach of fiduciary duty as trustee of the QTIP trust.

On February 13, 1987, decedent designated Nolan as the sole beneficiary of her $2.7 million life insurance policy. She executed her will on November 24, 1987. She died on April 1, 1988.

Decedent's taxable estate totaled approximately $8.8 million. Her taxable estate included her probate estate of approximately $2.1 million in property and securities, and her nonprobate estate of the $2.7 million life insurance policy and the QTIP funds. Taxes on the probate estate and life insurance proceeds totaled approximately $2 million.

Article Three of her will, which is at issue here, states:

My personal representatives shall pay from the residue of my estate all expenses of my last illness and funeral, costs of administration, costs of safeguarding and delivering devises, and other proper charges against my estate. My personal representatives shall also pay from the residue of my estate all estate and inheritance taxes assessed by reason of my death other than those related to qualified terminable interest property contained therein. Interest and penalties relating to any tax shall be paid and charged in the same manner as the tax. (Emphasis added.)

Nolan and Sandra G. Elder, decedent's sister, were appointed co-personal representatives. In their accounting ("first account"), the personal representatives stated that the estate assets were insufficient to pay the estate taxes and interest.

Appellants objected to the first account. As creditors of the estate, appellants maintained that the intent of the co-personal representatives was to defraud appellants by depleting the estate of all assets and making it judgment-proof. Appellants specifically argued that the court should require Nolan to be personally responsible for payment of the estate taxes on the $2.7 million insurance proceeds she received.

Appellees then filed a motion for partial summary judgment in which they sought an order relieving them from any obligation to seek contribution from Nolan for estate taxes on the life insurance policy and ordering that any monies advanced by appellees to pay estate taxes would create an estate obligation with the same priority as the taxes themselves. They argued that Article Three expressly directed the personal representatives to pay "all estate and inheritance taxes" from the residue of decedent's estate and that the taxes on the life insurance proceeds assessed as the result of her death were to be paid from the residue of the estate.

Appellants also filed a motion for partial summary judgment seeking an order to compel appellees to pursue a claim against Nolan for her pro rata share of estate taxes attributable to the life insurance proceeds. They argued that the tax provision in decedent's will was not specific enough to indicate decedent's intent for the taxes on the insurance policy to be paid out of the estate residue. Appellants maintained that decedent could not have intended that her estate pay the taxes on nonprobate assets because such a plan would defeat her specific bequests in the will.

The probate court granted appellees' motion for partial summary judgment and denied appellants' motion. Following denial of their motion to vacate the judgment, appellants filed this appeal. We have jurisdiction pursuant to Ariz.Rev.Stat.Ann. section 12-2101(J) (1991).

DISCUSSION

The issue on appeal is whether the tax clause in decedent's will applies to the payment of estate taxes generated by the $2.7 million life insurance policy. Federal law provides for the apportionment of estate taxes arising from the proceeds of life insurance policies as follows:

Unless the decedent directs otherwise in his will, if any part of the gross estate on which tax has been paid consists of proceeds of policies of insurance on the life of the decedent receivable by a beneficiary other than the executor, the executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds of such policies bear to the taxable estate.

26 U.S.C. § 2206. (Emphasis added.) Accordingly, federal tax on life insurance proceeds must be paid out of those policy proceeds unless "otherwise directed" by the decedent. ¹

To determine whether the testator has "otherwise" directed, the language of the will controls. Brewer v. Peterson, 9 Ariz.App. 455, 460, 453 P.2d 966, 971 (1969); In re Armstrong's Estate, 56 Cal.2d 796, 17 Cal.Rptr. 138, 366 P.2d 490 (1961); In re Estate of Wheeler, 65 Ill.App.2d 201, 213 N.E.2d 35 (1965). The direction to shift the tax burden must be in clear and unambiguous language so as to avoid a contrary interpretation. In re Kelly's Estate, 41 Colo.App. 316, 584 P.2d 640, 641 (1978); Wendland v. Washburn University, 8 Kan.App.2d 778, 667 P.2d 915, 917 (1983); Central Trust Co. of Cincinnati v. Lamb, 74 Ohio App. 299, 58 N.E.2d 785, 788-89 (1944); In re Estate of Huffaker, 641 P.2d 120, 121 (Utah 1982). A few simple words may suffice provided that the language sufficiently indicates an intention against apportionment. In re Ogburn's Estate, 406 P.2d 655, 657-58 (Wyo.1965); see also Maurice T. Brunner, Annotation, Construction and Effect of Will Provisions Expressly Relating to the Burden of Estate or Inheritance Taxes, 69 A.L.R.3d 122, 144 (1976). Any ambiguity in the language regarding payment of taxes is resolved in favor of apportionment. In re Estate of Carley, 90 Cal.App.3d 582, 153 Cal.Rptr. 528, 531 (1979); In re Pergament's Estate, 29 Misc.2d 334, 218 N.Y.S.2d 831, 834 (Surrogate Ct.1961), aff'd, 19 A.D.2d 945, 245 N.Y.S.2d 312 (1963).

The operative language in decedent's will provided that "[m]y personal representatives shall also pay from the residue of my estate all estate and inheritance taxes assessed by reason of my death other than those related to qualified terminable interest property contained therein." Two previous Arizona cases, Brewer v. Peterson, 9 Ariz.App. 455, 453 P.2d 966 (1969), and In re Hayes, 129 Ariz. 174, 629 P.2d 1010 (App.1981), involve wills with similar language. Although the language in decedent's will differs from the language in the Brewer and Hayes wills, which specifically provided that taxes attributable to nonprobate property or property passing outside the will would be paid out of the residue of the estate, these cases remain instructive. The will in Brewer stated:

I further direct that all estate, transfer, succession, inheritance, legacy, gift and similar taxes upon, or with respect to, any property required to be included in my gross estate for tax purposes under the provisions of any tax law, and whether or not passing hereunder or upon or with respect to any devises or bequests made herein, or upon or with respect to any such property, shall be paid out of my residuary estate hereunder as an expense in the settlement of my estate.

9 Ariz.App. at 458-59, 453 P.2d at 969-70. (Emphasis added.) Brewer held that the testator clearly directed that estate taxes on a taxable gift made shortly before her death be charged to the residuary estate because the court found the direction clear with respect to "any property ..." Id. at 459-60, 453 P.2d at 970-71.

The will in Hayes stated:

I direct that all inheritance, estate or other death taxes that may by reason of my death be attributable to my probate estate or any portion of it, or to any property or transfers of property outside my probate estate, shall be paid by my Personal Representative out of the residue of my estate, ... and shall not be charged against or collected from any beneficiary of my probate estate, or from any transferee or beneficiary of any property outside my probate estate, ...

129 Ariz. at 176 n. 3, 629 P.2d at 1012 n. 3. (Emphasis added.) The Hayes court noted that the will directed the personal representative to pay all inheritance, estate and other death taxes out of the residue of the estate and not to collect any such taxes from any beneficiary of the probate estate or from any transferee or beneficiary outside the probate estate. Id. at 176, 629 P.2d at 1012.

The will at issue here does not contain language specifically providing for payment of taxes attributable to nonprobate assets from the estate residue as in Brewer and Hayes. We must decide if, in the absence of such language, the...