In re Proceeding of FEIL, 2009 NY Slip Op 33096(U) (N.Y. Surr. Ct. 12/23/2009)
| Decision Date | 23 December 2009 |
| Docket Number | Dec. No. 966.,No. 307981.,307981. |
| Citation | 2009 NY Slip Op 33096 |
| Parties | Proceeding of CAROLE FEIL for a Decree Apportioning Estate Taxes with Respect to the Marital Trust Created Under Article FIFTH of the Last Will and Testament of LOUIS FEIL, Deceased. |
| Court | New York Surrogate Court |
Submitted for decision is the issue of estate tax apportionment in the estate of Gertrude Feil but governed by the terms of the will of her pre-deceased husband, Louis Feil. The issue arises from the interaction of several factors: 1) an apportionment clause in Louis's will that varies EPTL 2-1.8 by requiring estate taxes be paid from the residuary estate; 2) intra-residuary bequests in Louis's will to both charitable and non-charitable beneficiaries; and 3) the nature of charitable bequests and their favored status vis-a-vis tax apportionment. One might also include a fourth issue — the complications that arise when the dispute arises in one spouse's estate but the bequests are governed by the testamentary plan of her pre-deceased spouse. For the reasons that follow, it should become clear that on these facts the "pass through" issue is moot.
Louis Feil died a resident of Nassau County on February 3, 1999. His will, dated November 5, 1996, was admitted to probate by this court on June 10, 1999. Mr. Feil was survived by his wife, Gertrude, and by their four (4) adult children: Marilyn, Judith, Carole, and Jeffrey. Carole and Jeffrey are the co-executors of Louis's estate as well as the co-trustees of the trusts established by Louis's will. Carole is the petitioner and Jeffrey is the respondent in this proceeding to determine the proper way to apportion estate taxes.
The dispute arose when Gertrude Feil died on January 4, 2006, and her will was admitted to probate by this court. Although Gertrude's death triggered the estate tax apportionment dispute, the issue originates and remains in the testamentary plan of Louis, whose estate passed free of estate taxation.1 Because Louis predeceased Gertrude, his entire estate of approximately $250,000,000.00 passed through the residuary clause in his will. The residuary clause created a marital trust for the benefit of Gertrude and upon her death, gave the remainder to two classes of continuing trusts, one set of continuing trusts for the benefit of issue and one set of charitable lead annuity trusts (CLATs). The two co-executors of Louis made a QTIP election on the federal estate tax return and the marital trust was fully funded with the $250,000,000.00, all of which was free of estate taxes in the estate of Louis. However, the QTIP election merely deferred the estate tax until the death of the surviving spouse because the Internal Revenue Code considers a marriage to be a single economic unit. In this regard, the QTIP marital trust provides a temporary safe harbor from the immediate application of the terminable interest rule (cf. IRC § 2056[b] and 2056 [b][7]) that would otherwise prevent a marital deduction for bequests to a spouse in trust that do not also give the surviving spouse a general power of appointment over the remainder.
For the purposes of this decision, the following provisions in the will of Louis Feil are relevant:
FOURTH: DOLLAR AMOUNT LEGACIES TO INDIVIDUALS.
If Gertrude dies before I do, I give Twenty Million Dollars ($20,000,000) to my issue, subject to the Continuing Trust provisions of Article SEVENTH.
A. GERTRUDE SURVIVES. If Gertrude is living, I give my Residuary Estate to my Trustees, IN TRUST, as follows:
NAME OF THE TRUST
The trust shall be known as the "Marital Trust."
. . .
When the Marital Trust ends [upon Gertrude's death], my Trustees shall pay the trust fund as follows:
1. An amount equal to Twenty Million Dollars ($20,000,000) to my issue, subject to the Continuing Trust provisions of Article SEVENTH; and
2. The balance to the Trustees of the Charitable Lead Annuity Trusts established under Article SIXTH.
B. GERTRUDE PREDECEASES. If Gertrude dies before I do, I give my Residuary Estate to the Trustees of the Charitable Lead Annuity Trusts established under Article SIXTH.
CHARITABLE DISTRIBUTIONS
My Trustees shall pay the annuity amount to such one or more Qualified Charities as my Trustees shall select ... in each taxable year of the trust until the expiration of the Trust Term. The annuity amount is the smallest amount that could be provided under the terms of the trust to produce a Federal estate tax deduction in my estate equal to one hundred percent (100%) of the Federal estate tax value of the assets constituting the trust . . .
TWELFTH: DEATH TAXES.
A. IN GENERAL. I direct that my Death Taxes with respect to property passing under this Will and property passing under any trust or trusts included in my gross estate under Section 2044 of the Code (i) with respect to which an election under Section 2652(a)(3) of the Code has been made and (ii) that is for the primary benefit of one or more of my issue, shall be charged, without apportionment, entirely against my Residuary Estate.
If Gertrude predeceased Louis, a pre-residuary specific bequest of $20,000,000.00 would pass to the continuing trusts of Article SEVENTH for the benefit of the issue of Louis Feil. That bequest would pass free from estate taxation because Article TWELFTH requires nonapportionment, thereby requiring taxes to be paid from the residuary estate which was the sole remaining beneficiary of the will. If Gertrude survived Louis, as she did, then the entire estate passed to Gertrude in the residuary estate, albeit in a marital trust subject to a QTIP election. However, even in the event that Gertrude survived Louis, the $20,000,000.00 bequest to the continuing trusts from Article FOURTH for the benefit of issue does not disappear. Instead, it survives in the residuary clause, lurking inchoate in the Marital Trust as one of two classes of remainder beneficiaries of the marital trust when Gertrude died. The other class of remainder beneficiaries upon the termination of the Marital Trust are the series of Charitable Lead Annuity Trusts, or CLATS.
Carole Feil (as co-executor and co-trustee) takes the position that the $20,000,000.00 bequest to the continuing trusts retains its tax-favored position regardless of either its status as a pre-residuary bequest (if Gertrude predeceased Louis) or as the remainder of the Marital Trust (if Gertrude survived Louis).
Jeffrey Feil (also as co-executor and co-trustee) disagrees with his sister and takes the position that as the non-charitable portion of the residuary estate of Louis Feil, it must bear the burden of the estate taxation that came due on remainder of the Marital Trust when Gertrude died.
For the reasons that follow, the court finds Carole's position as the correct construction of the intent of Louis Feil.
There are two related rules of testamentary construction that have been developed over the years: one, that a will must be interpreted to reflect the actual intention of the testator; and two, that this intention be ascertained from a sympathetic reading of the document as a whole. (See e.g. Matter of Biely, 91 NY2d 520 [1998]; Matter of Dammann, 12 NY 2d 500, 504-505 [1963]; Matter of Fabbri, 2 NY 2d 236, 240 [1957]; Williams v Jones, 166 N Y 522, 532-533 [1901]). If a "general scheme" can be found within the four corners of the document itself, then it is the duty of the courts to carry out the testator's purpose, notwithstanding that "general rules of interpretation" might point to a different result (Williams v Jones, 166 NY 522 [1901]). If this process were as simple as described, there would be no occasion for the many cases illustrating these principles. Because each will is a unique document there is a corollary to these broad principles. A court may "give effect to an intention or purpose, indicated by implication, where the express language of the entire will manifests such an intention or purpose" and the testator has simply neglected to provide for the exact contingency which occurred or thought that he or she had made such intention clear in the context (Matter of Selner, 261 AD 618, 620 [2d Dept 1941], affd 287 NY 664 [1941]; see also Matter of Gulbenkian, 9 NY2d 363, 370 [1961]). Hence, "[i]ntent is not to be gleaned by focusing upon any one particular word, sentence, or provision; rather, it must be ascertained from a perusal of the entire will by a reader mindful of the particular facts and circumstances under which the provisions of the instrument were framed" (Matter of Bellows, 103 AD2d 594, 597 [2d Dept 1984]). Added on to this common-law edifice is the strong policy in favor of statutory apportionment and the requirement that those who would seek to stray from such policy must produce a clear and unambiguous direction to the contrary in the will (Matter of Mann, 186 AD2d 500 [1st Dept 1992]).
The issue of estate tax apportionment is an issue that is governed by the intent of Louis Feil and based upon a fair reading of his will as a whole it is clear to the court that he intended the $20,000,000.00 to survive intact both his death and his wife's death.
EPTL 2-1.8 governs issues related to the apportionment of estate taxes. It is a default statute and provides that unless the testator has expressed an intent to the contrary, the estate tax is to be paid by all beneficiaries according to their interest in the gross tax estate — unless the beneficiary is a qualified charity. The deduction that the estate receives for charitable gifts must benefit the charity and therefore the charity is generally not liable for tax on the amount it receives. Therefore, charitable dispositions are "not taxable and in consequence may not be burdened with any part of the estate tax deficit" (Matter of Volckening, 70 Misc 2d 129 [Sur Ct, Kings County [1972]; see EPTL 2-1.8[c]). These rules...
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