Fid. Union Trust Co. v. Suydam

• Decision Date: 11 May 1939
• Citation: 125 N.J.Eq. 458,6 A.2d 392
• Parties: FIDELITY UNION TRUST CO. et al. v. SUYDAM et al.
• Court: New Jersey Court of Chancery

6 A.2d 392

125 N.J.Eq. 458

FIDELITY UNION TRUST CO. et al.

v. SUYDAM et al.

Court of Chancery of New Jersey.

May 11, 1939.

Syllabus by the Court.

1. Testator's express direction to pay out of residue a certain tax or part of tax impliedly requires that a different tax or another part of the tax be charged on the property in respect to which it was levied. Or in the event testator had no control over such property, then the tax must be satisfied from any legacy or devise to the person who owns the property in respect to which the tax was levied. For the purpose of this rule, the Federal estate tax is treated as though it were levied proportionately on all the assets entering into the assessment.

2. Under the circumstances of this case, the Federal estate tax levied upon the death of testatrix should be borne proportionately by her estate and that of her husband over which she exercised a general power of appointment.

3. The tax will be considered in respect to each estate as if it were an administration expense; that is, it will diminish the estate before distribution, regardless of whether or not the distributees are charities.

Suit by the Fidelity Union Trust Company, trustee under the will of Joseph A. Ward, deceased, and others against Edith Wilmore Suydam and others to determine whether estate tax should be wholly borne by the estate of Lucretia B. Ward, the deceased wife of Joseph A. Ward, or should be shifted in part to the estate of Joseph A. Ward, over which she exercised a power of appointment.

Decree in accordance with opinion.

Alfred J. Grosso, of Orange and Robert E. Beck, of Livingston, for Proprietors of Rosedale Cemetery.

Child, Riker, Marsh & Shipman and Theodore McCurdy Marsh, all of Newark, for defendant New Jersey Orthopaedic Hospital (and dispensary).

Whiting & Moore and Ira C. Moore, Jr., all of Newark, for defendant Orange Orphan Soc.

David T. Wilentz, Atty. Gen., and William A. Moore, of Trenton, for defendant J. H. Thayer Martin, State Tax Commissioner.

Hood, Lafferty & Campbell and George H. Brown, all of Newark, for complainants.

J. Albert Homan and Ewald J. Smith, both of Trenton, for Edward L. Whelan, clerk, guardian ad litem.

Starr, Summerill & Lloyd and Alfred E. Driscoll, all of Camden, for W. Ralph Callaway and G. Leslie Callaway.

Harrison & Roche and Auguste Roche, Jr., all of Newark, for defendant Orange Memorial Hospital.

BIGELOW, Vice Chancellor.

The problems presented relate to estate taxes.

Joseph A. Ward, late of Orange, died in 1928, leaving a will under which complainant is surviving trustee. The will put the residuary estate in trust for testator's widow, Lucretia B. Ward, for life, and gave to her power of appointment in these terms:

"On the death of my said wife, the surviving trustee shall pay over and distribute the principal remaining in the trust to and among such persons as my said wife, Lucretia Ward, shall in and by her last will and testament designate and appoint to receive the same. If she shall fail to exercise such power of appointment then the remaining principal of the trust shall be paid over to and distributed among my next of kin according to the laws of the State of New Jersey as if I had then died intestate and possessed thereof."

Mrs. Ward died in 1937, leaving a will by which she disposed of her own estate,— bequests of $11,166 and the residue to two nephews,—and in which she exercised her power of appointment:

"In the exercise of the power of appointment given to me by the last will and testament of my late husband, Joseph A. Ward, I direct the surviving executor and trustee under the will of my said husband to distribute the trust fund held by it under said will as follows:" (then follow various appointments totaling $261,000 to twenty-four appointees—four of which are charitable organizations—and the balance thereof to be distributed equally between two nephews of the testatrix).

The value of the property subject to the appointment is $181,624, and of Mrs. Ward's individual estate $20,435.

The act of Congress requires inclusion in the gross estate of a decedent for the purpose of computing the estate tax, not only the individual assets of decedent, but also property over which he exercises a general power of appointment. 26 U.S.C. § 411(f), 26 U.S.C.A. § 411(f). Mrs. Ward's gross estate is therefore taken to be $202,059 and a Federal estate tax of $13,634 has been assessed against her executor. This tax, added to estimated administration expenses, etc., exceeds her residuary estate.

The principal question debated is whether the estate tax should be wholly borne by Mrs. Ward's estate, or should be shifted in part to the estate of her husband over which she exercised a power of appointment.

Let us first consider the situation as if her will contained no directions respecting taxes. Under the Federal statute, the estate tax is primarily payable by the executor. 26 U.S.C. § 422(b), 26 U.S.C.A. § 422(b). Add that the Joseph A. Ward estate is no part of the assets in the hands of Mrs. Ward's executor (Seward v. Kaufman, 119 N.J.Eq. 44, 180 A. 857) and it becomes clear that the whole tax in the first instance is payable out of her estate. Then arises the query whether the trustee of the husband's estate must reimburse in part the wife's executor.

The Federal statute in the analogous case of life insurance included for tax purposes in the estate requires the beneficiary of the insurance to contribute to the tax. 26 U.S. C. § 426(c), 26 U.S.C.A. § 426(c). But there is no similar provision relating to an estate passing by appointment pursuant to a power. On the contrary, if any person other than the executor pays the tax, such person is entitled to reimbursement out of the estate of decedent. Id. sec. 426(a), 26 U.S.C.A. § 426(a).

Justice Heher in Turner v. Cole, 118 N. J.Eq. 497, 179 A. 113, 114, dealt with the contention that the estate tax should not fall altogether on the residue but should be shared by the legatees and devisees. "The federal estate tax falls upon the residuary estate, while the state transfer tax is assessed against the inheritance, and is chargeable against the recipient. Although this court did not pass upon the question when the case came before it, we concur in the view expressed by Vice Ordinary Backes in the Roebling Case [In re Roebling's Estate], 89 N.J.Eq. 163, 104 A. 295, 296, dismissed 91 N.J.Eq. 72, 108 A. 359, that 'there is no apportionment' of the federal estate tax 'among the various transferees,' and that 'the real estate, devised or descending,' is not liable to contribution. The federal death duty is significantly dominated an 'estate tax.' It is not a property tax; it is a tax 'imposed upon the transfer of the net estate' of the decedent. 26 U.S.C.A. § 1092 [26 U.S.C.A. § 410]. It is not an inheritance tax. It is calculated on the net estate, and not on the legacies or distributive shares."

While the estate tax is not technically a debt, "it is akin", said Justice Heher, "to such an obligation in respect to the ascertainment of the quantum of the residuum for distribution, both in cases of testacy and intestacy."

Unless some direction to the contrary appears in one or other of the wills, the trustee of the Joseph A. Ward estate is not obliged to contribute to the tax on the widow's estate.

Her will contains direction for payment of taxes:

"I direct my executor and trustee to pay from the residue of my estate all inheritance or estate taxes, both state and federal, levied or assessed against gifts herein made, and should any such tax be not then due, I authorize my said executor and trustee, if it see fit so to do, to compromise with the proper officer of the state or United States Government such future tax, and to pay the amount so fixed and determined."

A testator's wishes respecting the distribution of the tax burden among the beneficiaries of his will, will govern to the extent of the property given to them. But, of course, testator's intention to charge the tax on property not owned by him is generally without influence. Mrs. Ward had no interest in her husband's estate that survived her death. She did have, however, power of appointment broad enough to permit her to appoint her own executor or her creditors. Crane v. Fidelity Union Trust Co., 99 N.J.Eq. 164, 133 A. 205. So the question under Mrs. Ward's will is simply this,...