Estate of Tubbs, Matter of, 70975

• Decision Date: 04 August 1995
• Docket Number: No. 70975,70975
• Parties: In the Matter of the ESTATE OF Esther TUBBS, deceased.
• Court: Kansas Court of Appeals

Page 865

900 P.2d 865

21 Kan.App.2d 395

In the Matter of the ESTATE OF Esther TUBBS, deceased.

No. 70975.

Court of Appeals of Kansas.

Aug. 4, 1995.

Review Denied Sept. 26, 1995.

Syllabus by the Court

1. The generation-skipping transfer tax imposed by Internal Revenue Code § 2601 et seq. (1988), is based on the concept that intergenerational transfers of property should be taxed in each successive generation.

2. Transfers across nonsuccessive generations (a generation-skipping transfer) attempt to avoid the tax imposed in each successive generation, and the generation-skipping transfer tax recoups this attempted tax avoidance by imposing a tax on transfers which skip generations.

3. Internal Revenue Code § 2603(b) (1988) mandates that "[u]nless otherwise directed pursuant to the governing instrument by specific reference to the tax imposed by this chapter, the tax imposed by this chapter on a generation-skipping transfer shall be charged to the property constituting such transfer."

4. Any public policy of Kansas concerning the application of federal taxes among the decedent's property is clearly preempted by the wording of Internal Revenue Code § 2603(b) (1988) under the Supremacy Clause of the United States Constitution.

5. In this case there is an express federal statutory scheme which directly relates to and controls the source of payment of the generation-skipping transfer tax.

6. Where possible in construing federal statutes, state courts should seek direction from the decisions of federal courts interpreting similar language.

7. In interpreting federal statutes, state courts should assume in the absence of indications to the contrary that Congress intends the words in its enactments to carry their ordinary, contemporary, and common meanings.

8. A definitional analysis of the requirement in Internal Revenue Code § 2603(b) (1988) for a "specific reference" requires us to hold the generation-skipping transfer tax must be explicitly mentioned in the governing instruments to avoid the requirement that the tax is to be paid from the transfers generating it.

9. In this case, the only references to estate, inheritance, and death taxes in the testamentary documents are general in nature and clearly insufficient under the unambiguous wording of the Internal Revenue Code to be a specific reference to the generation-skipping transfer tax so as to require that the tax be paid from property other than that generating the tax.

10. Executors are required to act in a fiduciary capacity and owe their duty to the estate rather than to any particular legatee or devisee.

11. The powers granted to an executor should be liberally construed and never captiously drawn into question in such a way as to handicap the efficient discharge of his or her trust.

12. An executor's allocation of the $1 million exemption from application of the generation-skipping transfer tax contained in Internal Revenue Code § 2631 (1988) is to be made totally independent of and irrespective to the provisions of Internal Revenue Code § 2603(b) (1988) relating to the allocation of the tax.

13. Where an executor's allocation of the $1 million generation-skipping transfer tax exemption is consistent with the intent of the testatrix in light of directions of the testamentary documents, it cannot be considered inequitable so as to require or allow a reallocation.

14. An issue not presented to the trial court will not be considered on appeal.

Morgan Wright, Larned, for appellants.

Timothy P. O'Sullivan, of Fleeson, Gooing, Coulson & Kitch, L.L.C., Wichita, for appellees.

Before LARSON, P.J., GREEN, J., and DONALD L. WHITE, District Judge Retired, assigned.

LARSON, Presiding Judge:

Bert B. Lewis III and Tonya Lewis May, the residuary takers under the will of Esther Tubbs, appeal the total depletion of the estate's residuary by the payment therefrom of the Generation Skipping Transfer Tax (GSTT) imposed by the Internal Revenue Code § 2601 et seq. (1988).

The residuary takers contend: (1) The GSTT should have been paid by and charged against the transfers generating the tax, (2) the executor's allocation of the statutory $1 million GSTT exemption exclusively to transfers other than the residuary estate was improper, (3) the trial court erred in failing to reallocate the GSTT exemption, and (4) I.R.C. § 2631 is unconstitutional.

Our analysis of this appeal will require an understanding of both the facts and the mechanism by which federal law imposes the GSTT, which was last amended as a part of the Tax Reform Act of 1986, Pub.L. No. 99-514, 100 Stat. 2717; but has seldom been the subject of reported litigation.

Esther Tubbs was a wealthy Edwards County landowner whose husband predeceased her. She left no direct descendants when she died in August 1992. She executed a will in 1981 and a codicil thereto in 1988, leaving her property in the following manner:

Article II. One section of real property in trust for her niece, Gloria Kroll and her children, Pamela Kroll Pasho, Thomas Kroll, and Patrick Kroll with annual income to Gloria Kroll until the trust terminates 20 years after Esther Tubbs' death. Any funds on hand then are to pass to Gloria Kroll, and the real property to Gloria Kroll for life, if she is then living, and the remainder in fee to her children, or the survivor or survivors of them, share and share alike.

Under Article II(i) the testatrix stated: "[i]t is my will that all estate, inheritance and other death taxes, as well as all costs of administration and debts, be paid from the residue of my estate, until my estate is closed."

Article V. Fourteen quarter sections of real property to her nephews and nieces Douglas Burr, William Burr, Allyson Burr, and Elizabeth Williams, in equal shares, plus all of her interest in seven quarter sections of real property.

Article VI. A quarter section and all of her interest in a section of real property to Bert B. Lewis III and to his sister, Tonya Heit, who are also the residuary takers under Article XI of the will, which states:

"After payment of all of my estate, inheritance and other death taxes, and all costs and debts of administration, I give, devise and bequeath all the rest, residue and remainder of my property, real, personal and mixed, to my Godson, Bert B. Lewis, III, and to his sister, Tony A. Heit (nee Lewis)."

Article VII. All of her interest in one quarter section to her niece Gloria Kroll.

Article IX. All of her interest in two quarter sections to Charles Albert Ray, Jeffrey James Ray, and Jamie Lynn Ray, the grandchildren of her first cousin, Myrna Huff.

Article X. Three quarter sections to Lynn Barry Feldman and Peggy Feldman Strain and their heirs.

In addition to the real property, Esther Tubbs' estate consisted of bank accounts, investments, bonds, certificates of deposits, and other personal property. The real property was appraised at $1,923,720, with her gross estate for federal estate tax purposes being valued at $4,020,830.

The federal estate tax was computed as $1,326,825, and the Kansas inheritance tax was determined to be $270,892. No question or controversy existed that these amounts were properly chargeable to or payable out of the estate's residuary.

The controversy giving rise to this appeal arose when the executor also determined that $1,628,378 of the devises and bequests were additionally taxable under the GSTT. Even after a $1 million exemption of property subject to the GSTT was applied, the additional tax, assessed at a 55% rate, amounted to $345,608. The executor charged this tax to the residuary, which depleted the residuary entirely.

At this point it would be helpful to summarize the GSTT and explain in general terms why and how it is applied.

"Property transferred to an heir or donee and eventually transferred to such person's own heirs or donees is generally exposed twice to federal estate or gift taxes. To avoid the second round of taxation, grantors have sometimes created life interests, with remainder interests reserved for members of subsequent generations. The generation-skipping transfer tax is designed to tax these transfers of accumulated wealth to successive generations in much the same way that a gift or estate would have done if the property had been transferred outright by gift or inheritance." Fed.Est. & Gift Tax Reporter (CCH) § 9200.

In an April 23, 1983, letter to Steven D. Symms, Chairman of the Senate Finance Committee's Subcommittee on Estate and Gift Tax, John Chapoton, Assistant Secretary of the Treasury for Tax Policy stated:

"The generation-skipping tax is intended to be a 'back up' to the estate tax, as its purpose is to impose a tax on each generation of family members regardless of the ability of tax planners to otherwise keep the decedent's property from being deemed part of the decedent's gross estate for federal estate tax purposes." (quoted from Katzenstein, The New Generation-Skipping Tax: A Road Map, 65 Taxes 259 [1987] ).

The GSTT is based on the concept that intergenerational transfers of property should be taxed in each successive generation. Transfers across nonsuccessive generations (a generation-skipping transfer) attempt to avoid the tax imposed in each generation, and the GSTT recoups this attempted tax avoidance by imposing a tax on transfers which skip generations.

The GSTT was originally enacted in 1976, but was retroactively repealed and enacted in a substantially different form in 1986. Pub.L. No. 99-514, 100 Stat. 2717 (codified as amended at 26 U.S.C. § 2601 et seq. [1988] ). The 1976 tax was directed towards trusts which avoided gift and estate taxes at multigenerational levels, while the 1986 version in effect today taxes direct transfers across multiple generations even where the intervening generation had or has no beneficial interest or control.

A generation is defined by levels of consanguinity for close relatives, and by 25-year intervals in other cases. I.R.C. § 2651. As...