King's Will, In re

• Decision Date: 02 July 1968
• Citation: 239 N.E.2d 875,22 N.Y.2d 456,293 N.Y.S.2d 273
• Parties: , 239 N.E.2d 875, 23 A.F.T.R.2d 69-1848, 69-1 USTC P 12,577 In the Matter of the Construction of the WILL of Albert L. KING, Deceased. Leon SCHAEFLER, as Executor of Albert L. King, Deceased, et al., Appellants, v. UNITED JEWISH APPEAL OF GREATER NEW YORK, INC., et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 273

293 N.Y.S.2d 273

22 N.Y.2d 456, 239 N.E.2d 875, 23

A.F.T.R.2d 69-1848,

69-1 USTC P 12,577

In the Matter of the Construction of the WILL of Albert L. KING, Deceased Leon SCHAEFLER, as Executor of Albert L. King, Deceased, et al., Appellants, v. UNITED JEWISH APPEAL OF GREATER NEW YORK, INC., et al., Respondents.

Court of Appeals of New York.

July 2, 1968.

Richard H. Pershan and Leon Schaefler, in person, New York City, for appellants.

Herbert B. Rose and Joseph T. Arenson, New York City, for United Jewish Appeal of Greater New York, Inc. and others, respondents.

Leonard Wacksman, Rene Loeb and Charles J. Block, New York City, for A.R.I.F., respondent.

No appearance for Salvation Army, respondent.

SCILEPPI, Judge.

Albert and Grace King executed their respective wills on October 1, 1958. Paragraph Eighth of Grace's will created a marital-deduction trust the income of which was payable to her husband, Albert, for life. Albert was given a testamentary power of appointment over the principal of the trust which could only be exercised by a will executed after Grace's death. The principal of the trust, in default of a valid exercise of the power of appointment was payable, one third to four named charities (the respondents herein) and two thirds to a secondary trust for the benefit of their daughter Louise. Grace King died on April 2, 1963 and her will was admitted to probate by the Surrogate's Court, New York County.

As previously stated, Albert King executed a will, dated the same day as his wife's, disposing of his assets located in New York County. This will is the subject of the instant dispute. By his will, testator left all of his property located in New York County to his daughter outright. The will expressly declares that it is not to operate as an exercise of Albert's power of appointment. Testator recognized, however, that the appointive property would be included in his estate for estate tax purposes (Internal Revenue Code, § 2041), and he made the following provision regarding the tax burden. 'SEVENTH: All taxes payable by reason of my death on my estate and on any transfer or other item of value (exclusive of any property over which I may have power of appointment, whether exercised, not exercised or released) shall be paid, without apportionment, as an administration expense out of my residuary estate and shall be limited to the amount which would have been payable on my estate without such appointable property. The entire excess of such taxes over the amount payable in accordance with the provisions of the preceding sentence shall be paid from the principal of the property over which I have power of appointment by the Trustees thereof.'

Testator died on March 8, 1966 leaving a gross estate of approximately $88,000. Since testator never exercised his power of appointment, the principal of the marital-deduction trust valued at approximately $2,500,000, passed pursuant to the terms of Grace King's will.

The entire tax on Albert's estate (exclusive of the appointive property) is approximately $1,600. When the appointive property is added to the gross estate for estate tax purposes, however, the tax amounts to about $697,000. Albert's executor and the trustees of the secondary trust for the daughter, relying on article Seventh of Albert's will, concluded that: (a) the appointive fund should bear the entire excess tax generated by the power, (b) the fund's share of the tax should be paid one third by the charitable recipients and two thirds by the secondary trust. When some of the charities disagreed with this conclusion, this construction proceeding was brought.

The Surrogate concluded that the testator could not shift the excess tax burden which was generated by the power of appointment to the appointive property. Consequently, he held that the entire tax must be ratably apportioned between the testator's residuary estate and the appointive fund. He also held that the appointive fund's share of the tax must be borne by the secondary trust and the charities must receive their appointive share completely free of tax.

The Appellate Division affirmed. Justice McGIVERN dissented in part, being of the opinion that the testator could validly direct that the appointive fund bear the taxes generated by the power of appointment.

We have concluded that the courts below were in error and consequently the order appealed from should be reversed.

Generally speaking, apportionment of taxes among the beneficiaries of an estate, or among persons receiving property which is included within an estate for tax purposes, is a matter of State law (Matter of Zahn, 300 N.Y. 1, 10, 87 N.E.2d 558, 561, 10 A.L.R.2d 652). There are, however, two exceptions to this general rule. The apportionment of taxes attributable to nonexempt insurance proceeds and property subject to a power of appointment is governed by Federal law (Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. 106, 142 A.L.R. 1131; National State Bank of Newark v. Nadeau, 57 N.J.Super. 53, 153 A.2d 854; Kintzinger v. Millin, 254 Iowa 173, 117 N.W.2d 68; Scoles, Apportionment of Federal Estate Taxes and Conflict of Laws, 55 Col.L.Rev. 261, 286).

Section 2207 of the Internal Revenue Code deals with the apportionment of taxes generated by a power of appointment. It provides:

'Liability of recipient of property over which decedent had power of appointment.

'Unelss the decedent directs otherwise in his will, if any part of the gross estate on which the tax has been paid consists of the value of property included in the gross estate under section 2041, the executor shall be entitled to recover from the person receiving such property by reason of the exercise, non-exercise, or release of a power of appointment such portion of the total tax paid as the value of such property bears to the sum of the taxable estate and the amount of the exemption allowed in computing the taxable estate, determined under section 2052, or section 2106(a), as the case may be. If there is more than one such person, the executor shall be entitled to recover from such persons in the same ratio. In the case of such property received by the surviving spouse of the decedent for which a deduction is allowed under section 2056 (relating to marital deduction), this section shall not apply to such property except as to the value thereof reduced by an amount equal to the excess of the aggregate amount of the marital deductions allowed under section 2056 over the amount of proceeds of insurance upon the life of the decedent receivable by the surviving spouse for which proceeds a marital deduction is allowed under such section.'

The Surrogate correctly concluded that section 2207 controlled, but he was of the opinion that the testator could not burden the appointive property with the excess tax without exercising his power of appointment. To cull from his opinion:

'(T)he testator did not avail himself of the opportunity to exercise the power of appointment either partially or otherwise and under the circumstances the court doubts the validity of his attempt to shift the tax burden to nontestamentary assets over which he had no dominion or control.

'When the testator executed his will on October 1, 1958, he could not exercise any dominion over the appointive property as his power to do so was limited, by the terms of Grace's will, to the execution of a will After her death. Only after her death on April 2, 1963 did the testator have the power to dispose of the property by will (Real Property Law, section 148; Farmers' Loan & Trust Co. v. Mortimer, 219 N.Y. 290, 114 N.E. 389; Matter of Kennedy's Will, 279 N.Y. 255, 18 N.E.2d 146; Matter of Cary's Will, 44 Misc.2d 929, 255 N.Y.S.2d 419). At that time there was vested in him as an agent of the donor, his wife, only the right to designate the beneficiaries of the fund which would pass directly to the appointees (Matter of Walbridge's Estate, 178 Misc. 32, 33 N.Y.S.2d 47; Matter of Baldwin's Will, Sur., 139 N.Y.S.2d 413; Hirsch v. Bucki, 162 App.Div. 659, 148 N.Y.S. 214). The testator chose not to exercise the power vested in him and in making that decision the court holds that he lost the right to shift the excess tax burden on his estate to the appointive property. The tax must, therefore, be ratably apportioned between the decedent's residuary estate and the appointive fund' (52 Misc.2d 1021, 1024--1025, 277 N.Y.S.2d 281, 284).

We are of the opinion that the Surrogate's interpretation of section 2207 of the Internal Revenue Code is far too restrictive. There is no doubt that...