Kleinhans' Estate, In re

Decision Date26 November 1973
Citation454 Pa. 539,312 A.2d 366
Parties, 69 A.L.R.3d 113 In re ESTATE of Clara G. KLEINHANS, Deceased. Appeal of Lois B. McMANUS.
CourtPennsylvania Supreme Court

Alexander H. Lindsay, Lindsay, McGinnis, McCandless & McCabe, Pittsburgh, for appellant.

Donetta Ambrose, Asst. Atty. Gen., John M. Duff, Deputy Atty. Gen., Pittsburgh, Israel Packel, Atty. Gen., for appellee.

Before JONES, C.J., and EAGEN, O'BRIEN, ROBERTS, POMEROY, NIX and MANDERINO, JJ.

OPINION OF THE COURT

ROBERTS, Justice.

On April 8, 1967, Harry Kleinhans died, leaving a will which, inter alia, divided his residuary estate equally into two trusts. His will provided that the income of trust A would be payable to testator's wife, Clara G. Kleinhans, for life. His wife was given a general testamentary power of appointment over the principal of trust A. The income of trust B was to be paid to testator's sister for life, with the remainder to two grandsons of testator.

The first and final account was filed June 17, 1968, in the Orphans' Court of Crawford County. It was confirmed on August 16, and distribution ordered. One-half of the residue, as directed by trust B, was distributed outright to testator's grandsons, testator's sister having died in the interval. The other half was distributed to testator's executor as trustee for the widow pursuant to the terms of trust A. Although certain taxes, both federal and state, were paid out of the residue before distribution, no tax was paid on the value of either the life estate or the remainder of trust A.

Clara Kleinhans died January 7, 1972, leaving a will which was probated in Allegheny County. Testatrix exercised in favor of her estate the general testamentary power of appointment in trust A. By her will those assets would in turn be distributed to three heirs of testatrix, collaterals as to testator. No party in interest challenges that this testamentary transfer is subject to a 15% Tax at the collateral rate. 1

An account was filed in the Orphans' Court of Allegheny County on November 21, 1972. Included was the principal of trust A, which was distributed to the estate at the termination of the widow's life tenancy. At audit the Commonwealth asserted its claim against the estate for the 15% Tax.

The estate of Clara Kleinhans argued in the orphans' court that it was liable for only one-half of the 15% Tax, because testator had directed that taxes be shared equally by the transferees of both trusts. In support of its argument, the estae relied upon the following provision in testator's will.

'FIRST: I direct that all my just debts and funeral expenses be fully paid and satisfied as soon as conveniently may be after my decease and further direct that all Pennsylvania inheritance tax and Federal Estate tax be paid from my residuary Estate.'

Rejecting the estate's argument, the orphans' court held that the full 15% Tax was to be paid out of the assets of trust A before distribution to testatrix's beneficiaries. The estate has appealed. 2 We agree with the determination of the orphans' court and affirm its decree.

The question presented is whether the provision in testator's will directing that 'all Pennsylvania inheritance tax . . . be paid from my residuary Estate' limits the tax liability of the remainder beneficiaries of trust A to one-half of the tax due on their inheritance. Appellant argues that this result is mandated by section 718(c) of the Inheritance and Estate Tax Act of 1961, 3which provides:

'In the absence of a contrary intent appearing in the will or other instrument of transfer and except as provided in subsections (a) and (b) of this section, the ultimate liability for inheritance tax imposed by this act shall be upon each transferee. 4

If appellant's interpretation of section 718(c) were to prevail, the Commonwealth would have to attempt to collect the other half of the tax from the remainder beneficiaries of trust B, who received their legacy prior to the termination of the widw's life tenancy. 5 We conclude that section 718(c) does not justify such an unsound result.

Appellant's argument is premised upon a misunderstanding of the effect and scope of section 718(c). That section merely affords a testator the privilege of shifting, in whole or in part, among his transferees their 'ultimate liability for inheritance tax.' Section 718(c) does not in any way abridge the right of the Commonwealth wealth to collect from a transferee the full inheritance tax imposed upon the transfer. 6

In Zellefrow Estate, 450 Pa. 302, 299 A.2d 248 (1973), this Court dealt with a similar misconception of a companion provision, section 718(a). 7 In that case, we were required to determine whether taxes due on specific bequests could be deducted from the residue before the tax on the residue was computed. The orphans' court held that such tax could be deducted on the theory that section 718(a) directed that the inheritance tax due on specific bequests 'shall be paid out of the residuary estate and charged in the same manner as a general administrative expense.' We disagreed and stated:

'Such an interpretation fails to recognize that Section 718(a) merely designates the source of payment of the tax as between the devisees of the specific gifts and those of the residue. . . . Section 718(a) does not deal with the imposition of the inheritance tax; that is provided for in Section 201.'

Id. at 305, 299 A.2d at 250 (footnote omitted). See Remmel Estate, 425 Pa. 325, 330 n.6, 228 A.2d 889, 892 n.6 (1967); Lengel Estate, 33 Pa. D. & C.2d 1 (O.C. Berks County 1963); cf. Frick's Estate, 277 Pa. 242, 121 A. 35 (1923), rev'd on other grounds, 268 U.S. 473, 45 S.Ct. 603, 69 L.Ed. 1058 (1925).

By a parity of reasoning the same conclusion holds for section 718(c); it also merely designates the source of payment of the tax. Section 201 of the Inheritance and Estate Tax Act of 1961 provides:

'An inheritance tax for the use of the Commonwealth is hereby imposed upon every transfer subject to tax under this act . . ..' 8

The mandate of that section is further fleshed out by section 211.

'All transfers of property . . . by will . . . from a resident of this Commonwealth, are subject to tax under this act.' 9

This Court has often recognized that the inheritance tax is imposed upon the privilege of receiving decedent's property, or alternatively, is 'a tax on the right of seccession in the estate of the decedent.' Remmel Estate, 425 Pa. 325, 328, 228 A.2d 889, 891--892 (1967); Belefski Estate, 413 Pa. 365, 269--370, 196 A.2d 850, 852 (1964); Hoffmann Estate, 399 Pa. 96, 100, 160 A.2d 237, 239 (1960); Tack's Estate, 325 Pa. 545, 191 A. 155 (1937); Shugars v. Chamberlain Amusement Enterprises, Inc., 284 Pa. 200, 205, 130 A. 426, 427 (1925); Orcutt's Appeal, 97 Pa. 179, 185 (1881).

Although the testator may allocate the tax burden of his bequests among his beneficiaries, in doing so, he cannot thereby prejudice or diminish the Commonwealth's right to its total tax entitlement. The present situation is analogous to the one in which the source designated by a testator for the payment of taxes is insufficient to pay the taxes. In such a case, each transferee is liable for the tax on his legacy. See Bryant's Estate, 315 Pa. 151, 155, 173 A. 190, 191 (1934); Folwell's Estate, 12 Pa. D. & C.2d 552, 553 (O.C. Montgomery County 1958); Mertz Estate, 5 Pa.D. & C.2d 262 (O.C. Lehigh County 1955); Thomson's Estate, 19 Pa. D. & C. 289, 292 (O.C. Philadelphia County 1933).

Finally, the estate argues that because property subject to a power of appointment is taxed in the donor's estate, 10 and because the donee's estate is not the personal representative of testator (donor), it has no duty to pay the 15% Inheritance tax. To answer this contention, it is necessary to turn to section 741, which in pertinent part provides:

'Subject to the provisions of section 718, every personal representative, or other fiduciary in charge of or in possession of any property, or instruments evidencing ownership thereof, the transfer of which is subject to a tax imposed by this act . . . shall deduct the tax from the property, if money, or shall collect the tax from the transferee.' 11

Section 741 affirmatively contradicts appellant's limiting construction. 12 This section does not confine its scope to personal representatives or fiduciaries of a particular decedent or testator, rather it imposes a statutory duty on 'every' personal representative or fiduciary. Moreover, the fiduciary need merely be 'in charge of' property. And the property is not restricted to property of a specified testator, but, more universally, is 'any property . . . the transfer of which is subject to (inheritance) tax.'

Section 718(c) does not remove from the principal of trust A the obligation of satisfying the full 15% Inheritance tax imposed upon its transfer to the beneficiaries chosen by testatrix. Appellant is bound by section 714 to deduct from the assets of trust A this inheritance tax. 13

Decree affirmed. Each party pay own costs.

MANDERINO, J., filed a dissenting opinion.

MANDERINO, Justice (dissenting).

I dissent. The effect of the majority decision is to require one citizen to pay taxes owed by another citizen. Such a requirement is a taking of property without due process of law. The legislature granted the testator the authority to require that the estate pay all inheritance taxes owed. In effect, the testator has the power to limit the amount each devisee shall receive irrespective of favorable treatment which any devisee might otherwise receive by the state's inheritance tax rate. For example, assume that a testator, who has an estate of $1,000, wishes that all inheritance taxes be paid from that sum before a distribution of one-half is made to his friend, X, and one-half to his son, B. If X's tax rate, as a collateral heir, is 15% And his son's rate, as a direct heir, is 2% And these amounts are deducted from the estate...

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7 cases
  • Neamand's Estate, In re, 29
    • United States
    • Pennsylvania Supreme Court
    • April 23, 1974
    ...privilege of shifting, in whole or in part, among his transferees their 'ultimate liability for inheritance tax. " Kleinhans Estate, 454 Pa. 539, 543, 312 A.2d 366, 369 (1973). Accord, Zellefrow Estate, 450 Pa. 302, 299 A.2d 248 (1973) (construing § 718(a)). The Legislature clearly intended......
  • Estate of Kunkel v. United States, Civ. A. No. 78-1278.
    • United States
    • U.S. District Court — Middle District of Pennsylvania
    • July 23, 1981
    ...the parties. 2 While the court is of the opinion that this proposition is not well settled in Pennsylvania law (see Estate of Kleinhaus, 454 Pa. 539, 312 A.2d 366 (1973)), the position is supported by case law (McCord's Estate, 276 Pa. 459, 120 A. 413 (1923) and unopposed by The court takes......
  • Fleishman's Estate, In re
    • United States
    • Pennsylvania Supreme Court
    • July 14, 1978
    ...on or after January 1, 1962, to allocate tax burdens in manner other than that prescribed by statutory presumptions; Kleinhans Estate, 454 Pa. 539, 312 A.2d 366 (1973) (interpreting § 718(c) of Act); Zellefrow Estate, 450 Pa. 302, 299 A.2d 248 (1973) (interpreting § 718(a) of Act); cf. Neam......
  • Smith's Estate, In re
    • United States
    • Pennsylvania Supreme Court
    • January 24, 1974
  • Request a trial to view additional results

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