Gellerstedt v. United Missouri Bank of Kansas City, N.A.
| Decision Date | 07 September 1993 |
| Docket Number | No. WD,WD |
| Parties | Marie GELLERSTEDT, Appellant, v. UNITED MISSOURI BANK OF KANSAS CITY, N.A., Respondent. 46341. |
| Court | Missouri Court of Appeals |
Clem W. Fairchild, Fairchild Stang Beal Barber & Sanders, P.C., Kansas City, for appellant.
Christopher S. Gahagan, Kuraner & Schwegler, Kansas City, for respondent.
Before SMART, P.J., SHANGLER, Senior Judge, and FENNER, J.
This appeal presents, as an issue of first impression, the issue of whether Missouri law applies as to the allocation of the federal estate tax burden when a decedent's will was executed in Kansas and the decedent died in Missouri. Plaintiff Marie Gellerstedt appeals from the trial court's judgment applying Kansas law, causing the burden of the estate tax to fall on the residue of the estate.
The judgment is reversed and the case is remanded to the trial court for further proceedings.
Ada LaFrenz ("Decedent") died testate on November 22, 1988, while residing in a nursing home in Jackson County, Missouri. She had executed her will seventeen years earlier while domiciled in Johnson County, Kansas. Three years after the will was executed, she executed a codicil. At the time the codicil was signed, she remained domiciled in Johnson County, Kansas. These documents were executed in 1971 and 1974 respectively.
On May 8, 1979, Mrs. LaFrenz was moved from her home in Kansas to a nursing home in Kansas City, Missouri by a family member. Two days later decedent's nephew, Roy Moore, petitioned the probate court for the appointment of a guardian for the person and estate of decedent. On June 5, 1979, Mrs. LaFrenz was adjudicated incompetent by the probate court, and guardians were appointed. Mrs. LaFrenz remained a resident of the nursing home in Missouri nine years until her death.
Both decedent's will and codicil are silent as to the allocation of the burden of the state and federal taxes. Decedent's gross taxable estate amounted to $3,266,263.18. Her total tax liability amounted to $1,184,028.30, which included federal estate taxes of $977,811.57, Missouri estate taxes of $168,279.85, and Iowa inheritance taxes of $37,936.98. Decedent's gross taxable estate included the assets of her probate estate valued at $1,945,977.31 and her interest in a marital trust established by her late husband (apparently valued at approximately 1.3 million dollars), as to which she had a power of appointment.
Mrs. LaFrenz's will made certain specific bequests amounting to approximately $65,000 in cash. Her will also included a specific bequest of a lot at the Lake of the Ozarks, her jewelry, and country club memberships. After making the specific bequests, the will made the following residuary bequests: (1) fifty percent of decedent's residuary estate up to a maximum of $200,000.00 to be distributed to her nephew, Roy Moore; and (2) fifty percent of decedent's residuary estate and any excess over the maximum gift to Roy Moore to be distributed to Marie Gellerstedt, decedent's niece.
In early 1990, the federal estate taxes were paid and United Missouri Bank of Kansas City ("the Bank") thereafter made distributions to specific distributees under the will without deducting a pro rata portion of the estate tax liability. The Bank also made a distribution of the sum of $200,000 to Roy Moore.
On March 1, 1991, Plaintiff Gellerstedt filed her petition for declaratory judgment requesting that the trial court find that the federal estate tax liability should have been prorated among recipients under the will in proportion to the amount of property each received, rather than imposed on the residue. 1 1 Plaintiff sought an order from the court declaring that Defendant Bank was liable to plaintiff in an amount equal to the collective taxes attributable to the distribution of $278,500 made to specific distributees by the Bank. On cross-motions for summary judgment, the trial court concluded that Kansas law governed the allocation of the tax liability, and that Kansas law causes the tax burden to fall on the residue. The court found that therefore it was not necessary to allocate the tax burden pro rata, and granted summary judgment in favor of Defendant Bank. Plaintiff Gellerstedt appeals from this judgment.
Internal Revenue Code § 2002 () and § 2205 () merely determine the method of tax payment. They do not determine the "ultimate liability" for the tax which is determined according to state law. 2 Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. 106 (1942).
The intent of the federal estate tax is that it shall be paid out of the estate before distribution, but the federal statute does not designate out of what fund the tax is payable. It is intended that state law determine the ultimate thrust of the tax and who is to bear the burden.
In re Estate of Nease, 643 S.W.2d 97, 100 (Mo.App.1982). A testator may provide for payment of estate and inheritance taxes from a specific fund in his or her will if testator so desires. In re Estate of Boder v. Albrecht Art Museum, 850 S.W.2d 76, 78 (Mo. banc 1993). However, when no provision for the payment of estate and inheritance taxes is made in the will or subsequent codicil to the will, the probate court must look to state law for the appropriate tax allocation. Id.; Carpenter v. Carpenter, 364 Mo. 782, 267 S.W.2d 632, 637 (1954). Missouri has no statute concerning the allocation of the burden of estate taxes. Missouri has adopted the rule of "equitable apportionment" for the payment of estate taxes when there is no clearly expressed intention of the testator as to where the burden should fall. Carpenter, 364 Mo. 782, 267 S.W.2d at 637; Nease, 643 S.W.2d at 100; In re Estate of Johnson, 803 S.W.2d 619, 620 (Mo.App.1990). Kansas, on the other hand, follows the "burden on the residue" rule which imposes the entire tax burden on that part of the estate which remains after the making of any specific bequests. 3 In re Estate of West, 203 Kan. 404, 454 P.2d 462, 465 (1969).
In determining the allocation of the estate tax burden, careful attention should be given, first of all, to a thorough examination of the will or trust. Boder, 850 S.W.2d at 78. Ordinary principles of construction, such as the principle that an attempt should be made to harmonize all provisions of the instrument, should be applied. Id. If the decedent's intent can be discerned from the instrument, such intent should be given effect. Id.; In re Estate of Wahlin, 505 S.W.2d 99, 198 (Mo.App.1973). In Boder, the testator created a substantial charitable trust along with a trust for family members. Although the rule of equitable apportionment would ordinarily have exempted a decedent's charitable trust from the tax burden, the court held that careful interpretation of the will showed the intent that the charitable trust and the family trust should bear the burden equally. Therefore, the court did not exempt the charitable trust from the burden of the tax. Accordingly, the courts should allocate the burden according to whatever intent can be determined from the instrument, applying principles of construction and sound logic. If no intent can be discerned from the instrument, then it becomes simply a matter of application of the appropriate law.
For the first twenty-five years after the enactment of the federal estate tax in 1916, most courts assumed the burden of the federal estate tax should fall on the property which bears the other debts and expenses of the decedent's estate--the residue. Wahlin, 505 S.W.2d at 104. This was partially because of the widespread belief that Congress intended that the burden of the tax fall on the residue. Id. In 1942, the United States Supreme Court in Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. 106 (1942), declared that Congress intended that the matter should be settled by state law. Since that time, many states have adopted, by statute or judicial decision, a rule of equitable apportionment, in which all of the property which forms the taxable estate (whether or not part of the probate estate) bears the burden of the tax proportionately. While the trend is toward equitable apportionment, the Kansas "burden on the residue rule" is still considered the majority rule. Carpenter, 267 S.W.2d at 639-40; see Annotation, Ultimate Burden of Estate Tax in Absence of Statute, Will or Other Provision, 68 A.L.R.3d 714 (1976). At least thirteen states have adopted equitable apportionment by statute, adopting the Uniform Estate Tax Apportionment Act, which provides for equitable apportionment. See 8A Unif.Laws Ann.; Bogert, Trusts and Trustees § 286.5 (Rev.2d Ed.1992). Critics of the "burden on the residue" rule point out that the rule is arbitrary and often defeats the will of the typical testator in that it puts the greatest burden on the very persons who are most likely to be the residuary legatees--the testator's family. They also argue that since the taxable estate may often include much property outside the probate estate, including transfers before death, that the "burden on the residue" rule may work a great injustice in some cases. See, e.g., Succession of Jones, 172 So.2d 312 (La.App. 4th Cir.1965), cert. denied, 247 La. 718, 174 So.2d 131 (1965); New York Trust Co. v. Doubleday, 144 Conn. 134, 128 A.2d 192 (1956).
Where the will or other estate planning document does not express the testator's intent, the general rule in Missouri is that the principle of equitable apportionment is applied, placing the burden proportionately on the property subject to taxation. Carpenter, 267 S.W.2d at 637. Wahlin, 505...
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Missouri Dept. of Soc. Serv. V. Roper
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