King's Estate, Matter of

• Citation: 278 N.W.2d 171
• Decision Date: 19 April 1979
• Docket Number: Nos. 12345,12347,s. 12345
• Parties: In the Matter of the ESTATE of Mary Greifenhagen KING, a/k/a Mary G. King, Deceased. DAKOTA MIDLAND HOSPITAL and Shriners Hospital for Crippled Children, Twin Cities Unit, Minneapolis, Minnesota, Appellants, v. George PAGEL, Executor and Respondent, and Robert Knickrehm, Leonard Olson, Carl Nilsson, Don Mertz, William Tewksbury, Marvin Hausvik, Berthold Lenling, Marvin Erdman, Maurice Samuelson, Louis Pesall, Marie Ellingson, and Donald Ellingson, Respondents.
• Court: Supreme Court of South Dakota

Page 171

278 N.W.2d 171

In the Matter of the ESTATE of Mary Greifenhagen KING, a/k/a

Mary G. King,

Deceased. DAKOTA MIDLAND HOSPITAL and Shriners Hospital for

Crippled Children, Twin Cities Unit, Minneapolis, Minnesota, Appellants, v. George PAGEL, Executor and Respondent, and Robert Knickrehm, Leonard Olson, Carl Nilsson, Don Mertz, William Tewksbury, Marvin Hausvik, Berthold Lenling, Marvin

Erdman, Maurice Samuelson, Louis Pesall, Marie Ellingson,

and Donald Ellingson, Respondents.

Nos. 12345, 12347.

Supreme Court of South Dakota.

April 19, 1979.

Kennith L. Gosch of Bantz & Gosch, Aberdeen, for appellant Dakota Midland Hospital.

James A. Wyly of Richardson, Groseclose, Kornmann & Wyly, Aberdeen, for appellant Shriners Hospital for Crippled Children.

Raymond M. Schutz of Siegel, Barnett, Schutz, O'Keefe, Jewett & King, Aberdeen, for executor and respondent, George Pagel.

Richard H. Battey of Gallagher & Battey, Redfield, for respondents Robert Knickrehm, Leonard Olson, Carl Nilsson, Don Mertz, William Tewksbury, Marvin Hausvik, Berthold Lenling, Marvin Erdman, Maurice Samuelson, Louis Pesall, Marie Ellingson, and Donald Ellingson.

WOLLMAN, Chief Justice.

Mary King, the decedent, died January 21, 1975. A petition for probate of her will was filed in circuit court on January 22, 1975. On December 6, 1976, the executor, George Pagel, petitioned the court for authority to mortgage or sell property from the estate in order to pay the remaining federal taxes, and for a determination whether the taxes were to be paid from the share of the estate going to the charities, appellants herein Dakota Midland Hospital and Shriners Hospital for Crippled Children, Twin Cities Unit, Minneapolis, Minnesota or whether the taxes should be apportioned between the charities and other devisees. The trial court rendered a memorandum opinion directing the executor to take those steps necessary to raise the funds to pay the taxes and to pay all taxes from the residuary estate, in other words that portion going to the charities. Findings of fact, conclusions of law and judgment were duly entered.

On April 4, 1973, testatrix executed her will and a codicil and on that same day gave real and personal property to George Pagel with a gift tax value of $293,650. These transfers were noted on the gift tax return as transfers without value and were included in the estate at a value of only $39,500, representing the value of a life estate retained by testatrix. As a result of an Internal Revenue Service audit of the estate tax return, it was determined that additional taxes were owed; an additional gift tax of $14,874.24 on the April 4, 1973, gift to Pagel; and an additional estate tax of $166,433.57 was assessed because the gift to Pagel was considered a gift causa mortis and should have been included in the estate for tax purposes at its value on the date of death.

In her will testatrix granted to the tenants of her farmland an option to purchase approximately twenty-two quarters of land at a price of $150 per acre. The difference between this price and the fair market value of the land was considered a gift and constitutes the remaining tax burden on the estate.

The principal question in this case is whether SDCL 29-7-1 and 29-7-2 ¹ relating to the apportionment of tax burden among the beneficiaries of an estate should be applied to the taxes involved here. ² SDCL 29-7-1 requires that the taxes be equitably apportioned among those persons interested in the estate unless otherwise directed by the decedent's will.

Article I of decedent's will provides:

First, I direct my executor to pay out of the principal or income, or both, of the property coming into his possession as executor, all debts allowed in the course of administration, expenses of last illness and funeral, administration expenses and all estate, inheritance, legacy and succession taxes levied upon or in connection with any property or interest either passing under this Will or treated as a part of my estate for the purpose of any such tax or subjected, for any reason, to any such tax.

The sole issue on appeal is whether the language of Article I provides sufficient direction to escape the operation of the statute. ³

All parties agree that George Pagel was not to pay any taxes on the gifts that were transferred to him De hors the will. Appellants contend that the language concerning the duty of the tenants to pay a portion of the taxes of the estate is ambiguous and must be construed, citing Matter of Estate of Nelson, S.D., 250 N.W.2d 286. They urge application of the rules found in In re Burns' Estate, 78 S.D. 223, 100 N.W.2d 399. Respondents assert that there is no need for construction of the will but rather mere interpretation. Matter of Estate of Nelson, supra, notes that distinction, stating:

If through interpretation of the writing the intent is clear from the words used, in light of the surrounding circumstances, that intent controls. If after the process of interpretation doubt remains as to the decedent's intent, the language used and the circumstances surrounding the execution of the writing will again be examined in light of pertinent rules of construction. (footnote omitted) 250 N.W.2d at 288.

The trial court found that the language of Article I discloses decedent's intention that her estate bear the burden of taxation. We agree.

It appears that although this problem has not previously been addressed by this court, other courts have had occasion to rule upon the efficacy of tax apportionment clauses. In Johnson v. Hall, 283 Md. 644, 392 A.2d 1103, the Maryland Court of Appeals grappled at length with this problem. In that case, testatrix left an estate in excess of one-half million dollars. She made a number of specific bequests to friends and relatives, leaving the residue in trust for the benefit of her mentally ill son. The tax clause in that will provided:

FIRST: I direct that all lawful debts I owe at the time of my death, including funeral and administration expenses and the expense of my last illness (but not including debts secured by mortgages on real property, except matured obligations as they fall due), and All estate and inheritance taxes, be paid as soon after my death as can lawfully and conveniently be done. (emphasis supplied by the Maryland Court) 283 Md. at 650, 392 A.2d at 1107.

The Prince George's County Orphans' Court concluded that the taxes should be apportioned among the beneficiaries; however, the Maryland Court of Special Appeals reversed that judgment and placed the entire tax burden upon the residuary legatee. Hall v. Johnson, 38 Md.App. 589, 382 A.2d 332. The Maryland Court of Appeals reversed the Court of Special Appeals and directed that the judgment of the Orphans' Court be reinstated. The Maryland Court of Appeals acknowledged that of the courts faced with this issue under apportionment statutes similar to theirs and ours the vast majority conclude that such a tax clause operates to shift the tax burden. ⁴ The most common principle among these cases is that where taxes are grouped along with other expenses of administration of an estate the tax burden is shifted to the fund required by statute to pay estate expenses. In most cases, these expenses are a charge against the general estate and hence have the practical effect of reducing the residuary estate. Starr v. Watrous, 116 Conn. 448, 165 A. 459. The majority of the Maryland Court then concluded that those cases are not soundly reasoned and proceeded to align Maryland with the small minority. ⁵ That minority now consists of two courts of last resort, including Maryland, and several inferior courts, some of which appear to be at variance with their own courts of last resort.

The Maryland Court's attack on the logic of the majority view is based primarily upon the premise that the reasoning in the majority rule cases works equally well to uphold or defeat a tax clause and that the result is to give precedence to one legal presumption that absent a provision in the will to the contrary, debts and expenses are charged to the residue over another legal presumption that absent an expression in the will to the contrary, taxes are charged to the persons receiving the gifts.

Whatever the merits of the Maryland Court's reasoning, we conclude that the present case can be distinguished from the Maryland case through review of the language of the tax clauses involved. The clause in the Johnson will merely directed "all estate and inheritance taxes" to be paid promptly, whereas the clause we consider directs the executor to pay "out of the principal and income, . . . all estate, inheritance, legacy and succession taxes levied upon or in connection with Any property or interest either Passing under this Will or treated as a part of my estate for the purpose of any such tax . . .." (emphasis supplied) Appellants contend that the sole purpose of this language is to protect the gift to Mr. Pagel from taxes. We agree that the clause has that effect; however, we are unable to ascertain how it can be said that the tenants are not shielded from taxes as well when it is recognized that no property or interest passed to Mr. Pagel under the will, ⁶ while the tenants clearly received an interest that passed under the will. Actually the only word in the tax clause that needs interpretation is the word "principal" in the phrase identifying the fund to bear the burden of taxes. We hold that in this context the word refers to the residue of the estate remaining after the bequest to the tenants has been satisfied. That word has been so interpreted elsewhere. Franz v. Schneider, 14 Ill.App.2d 464, 144 N.E.2d 798.

In view of the language contained in Article I of decedent's will, we conclude that decedent intended to defeat the operation of the apportionment statute. Accordingly, the trial court did not err in ordering the executor to pay the taxes due out of the residue of the estate.

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