Morristown Trust Co. v. Childs

• Decision Date: 11 December 1940
• Docket Number: 129/73.
• Parties: MORRISTOWN TRUST CO. v. CHILDS et al.
• Court: New Jersey Court of Chancery

17 A.2d 559

128 N.J.Eq. 524

MORRISTOWN TRUST CO.

v. CHILDS et al.

129/73.

Court of Chancery of New Jersey.

Dec. 11, 1940.

Syllabus by the Court.

I. Decedent left a testamentary estate and a will wherein he directed his executor to pay out of the residuary estate "every federal or state transfer, inheritance or estate tax or taxes of whatever nature there may be imposed against my estate or against any gift, devise or bequest herein provided." He had earlier made at different times two deeds of trust, disposing of large portions of his assets, both of which transfers are, or may be determined to be, taxable as made in contemplation of death. Held,

1. Although the taxes imposed by the New Jersey transfer inheritance tax statute are ordinarily payable by the respective beneficiaries, those imposed on the testamentary transfers are, in the instant case, by reason of the testamentary direction to that effect, to be borne by the residuary testamentary estate.

2. There is no such testamentary direction as to payment of such taxes imposed on the transfers by the inter vivos deeds, but, instead, an implied direction to the contrary; hence the New Jersey taxes on the latter transfers are to be borne by the respective beneficiaries under such deeds and to be paid by the trustees out of the corpora of those respective trusts.

3. The taxes imposed under the federal estate act are ordinarily payable out of the residuary testamentary estate; and there is also a testamentary direction in the instant case to the same effect, so far as concerns such tax as is imposed by reason of the testamentary gifts; hence such portion of the federal estate tax as is based on the testamentary estate is to be borne by the residuary testamentary estate.

4. There is in the instant case an implied testamentary direction that such portions of any federal estate tax as are based on the property comprised in either of the inter vivos trust deeds are not to be borne by the residuary testamentary estate, hence they are to be borne by the beneficiaries of the respective inter vivos trusts, and paid by the respective trustees out of the corpora of the respective trusts.

5. The total federal estate tax is to be apportioned among the testamentary estate and the two trust estates in the same proportion as exists among those three estates with respect to the assets of each which enter into that total tax.

6. The charitable institutions which are remaindermen of one of the inter vivos trusts are not entitled to any exoneration by, or reimbursement from, the beneficiaries of the preceding interests in that trust, in respect to the amount by which the said estates in remainder are diminished by reason of the liability of that trust for federal estate tax.

Suit by Morristown Trust Company, executor of William Childs, deceased, and trustee under trust deeds, against Grace Van Ness Childs and others, for a determination as to the rights of the several parties in interest under the will and trust deeds, and for instruction as to the complainant's rights and duties thereunder.

Entry of decree reserved.

Bowers & Rinehart, of Somerville, for complainant.

King & Vogt, of Morristown, for defendant Grace Childs.

Owen F. O'Donnell, of Morristown, for defendant All Souls Hospital.

Arthur T. Vanderbilt, of Newark, for defendant Amy Wolfe.

Kalisch & Kalisch, of Newark, for defendants Ellsworth Childs, et al.

Reger & Smith, of Somerville, for defendant Somerset Hospital.

Raymond T. Parrot, of Elizabeth, for defendants Matthew O'Neil and others.

BUCHANAN, Vice Chancellor.

The bill is filed by Morristown Trust Company, as executor under the will of William Childs, deceased, and also as trustee under certain deeds of trust executed by decedent in his lifetime, and prays determination as to the rights of the several parties in interest under said will and deeds of trust and instruction as to its rights and duties thereunder. All interested parties have been brought into court.

One of the deeds of trust was executed February 7, 1929; the other on December 9, 1937; and decedent died testate, a resident of this state, on May 22, 1938. By his will he directs his executor "to pay out of my residuary estate every federal or state transfer, inheritance or estate tax or taxes of whatsoever nature there may be imposed against my estate or against any gift, devise or bequest herein provided."

Complainant, as executor, is liable in the first instance for the payment of the federal and state inheritance and estate taxes, and also federal gift tax, if there be any liability for such with respect to the trust of 1929. The question involved herein is as to whether or not the executor is entitled to reimbursement from the two trust funds, or either of them, for the whole or any part of the taxes aforesaid for which it is liable in the first instance.

The only taxes which appear to be, or which it is suggested are or may be, involved in the present situation are those under the New Jersey Transfer Inheritance Tax Act, N.J.S.A. 54:33-1 et seq., the Federal Estate Tax statute, 26 U.S.C.A. Int.Rev.Code § 800 et seq., and the Federal Gift Tax statute, 26 U.S.C.A. Int.Rev.Code, § 1000 et seq. The latter indeed is not presently involved, because the federal tax authorities have not imposed any tax thereunder and it seems unlikely or at least doubtful that they will do so.

The taxes provided for under the New Jersey Transfer Inheritance Tax Act are legacy or succession taxes imposed on the right or privilege of succession; they are payable by the respective beneficiaries out of the testamentary gifts or intestate shares, Turner v. Cole, 118 N.J.Eq. 497, at 500, 179 A. 113; and if paid in the first instance by the executor or administrator the latter has the right of reimbursement from the beneficiary. Commercial Trust Co. v. Millard, 122 N.J.Eq. 290, 193 A. 814. Where, however, in a testate estate the will makes provision for such taxes in a manner different from that which would otherwise be the case, such provision is valid and controlling. Righter v. Fidelity Union Trust Co., 110 N.J.Eq. 169, 159 A. 393; (and see also Gaede v. Carroll, 114 N.J.Eq. 524, at 533, 169 A. 172, holding that a testamentary direction that federal estate taxes shall not be paid out of the residuary estate, is valid and controlling). In substance and effect such provisions constitute separate additional legacies, Chemical Bank & Trust Co. v. Barnett, 114 N.J.Eq. 4, 168 A. 173, if they provide for payment by the testamentary estate of taxes otherwise payable by beneficiaries.

In the instant case the testamentary direction to the executor to pay out of the residuary estate every tax imposed against "any gift, devise or bequest herein provided," does make a change with regard to the persons upon whom will fall the burden of the New Jersey taxes on the testamentary gifts. It diminishes thereby the property passing to the residuary beneficiaries, and relieves the other respective testamentary beneficiaries therefrom.

No difficulty arises in this regard, so far as concerns the several legacies and devises specifically mentioned in the will. In addition to assessing tax on these legacies and devises, however, the state tax commissioner determined that both the 1929 and 1937 inter vivos transfers were taxable and assessed tax with respect to the property passing under each. In the absence of testamentary provision to the contrary, such taxes are ultimately payable by the donees of such transfers, and if the executor pay them in the first instance, he is entitled to reimbursement. Fidelity Union Trust Co. v. Hall, 125 N.J.Eq. 419, at 430, 6 A.2d 124.

There is in the present will no direction for the payment of these taxes by the executor out of the residuary estate (or any other fund), certainly not as to the 1929 transfer. The direction is only for the payment of taxes imposed against "my estate" or against "any gift * * * herein provided." The New Jersey tax assessed upon the trust conveyances is not imposed against testator's estate,—it is imposed against the transferees on the property transferred; nor against any gift provided in the will,—the inter vivos conveyances are not gifts provided in the will.

This is clearly true in regard to the 1929 transfer, but perhaps not quite so immediately apparent in regard to the 1937 transfer, because of the eighth paragraph of the will. In that paragraph the testator says that "in the event" that the 1937 trust conveyance "is declared, considered or adjudicated invalid or not of the full force and effect it was intended by me to have, and" the property comprised in that deed "is held to and does pass as a part of my estate, then I give * * * all the said property to said Morristown Trust Co." upon the same trusts as in said deed.

This provision is only for a contingent gift. Nothing passed or passes under it because the contingencies did not (nor did either of them) happen. The 1937 deed has not been declared, considered or adjudicated as invalid or not of full force and effect, and it is not even contended that it ever will or can be so adjudicated; and the property comprised in that deed has not been held to pass as a part of testator's estate, nor is it contended that it ever will or can be so adjudicated. On the contrary, under the proofs here sub judice, it can and should be here adjudicated that that property passed under and by virtue of the trust deed and did not pass as a part of decedent's testamentary estate. No tax was assessed against any such testamentary gift, contingent or otherwise; the tax was assessed against the transfer by the inter vivos deed, and there is no testamentary direction for the payment of such tax out of the residuary estate (or otherwise). This tax, therefore, like the tax on the 1929 transfer, is payable by the donees of that transfer, as between them and the executor or residuary beneficiaries under the will.

It is...