National Newark and Essex Bank v. Hart

• Decision Date: 06 September 1973
• Citation: 309 A.2d 512
• Parties: NATIONAL NEWARK & ESSEX BANK v. Percy Grier HART et al.
• Court: Maine Supreme Court

Page 512

309 A.2d 512

67 A.L.R.3d 260

NATIONAL NEWARK & ESSEX BANK v. Percy Grier HART et al.

Supreme Judicial Court of Maine.

Sept. 6, 1973.

Collins & Crandall, by Samuel W. Collins, Jr., Wayne R. Crandall, Rockland, for plaintiff.

David A. Nichols, Camden, Peter P. Sulides, Rockland, Richardson, Hildreth, Tyler & Troubh by Edwin A. Heisler, Portland, for defendants.

Before DUFRESNE, C. J., and WEATHERBEE, POMEROY, WERNICK and ARCHIBALD, JJ.

POMEROY, Justice.

This case comes to us on report.

Halsey Tichenor Adams died on February 26, 1971. His Will, including three Codicils thereto, was allowed by the Knox County Probate Court on March 16, 1971.

Because the Will and Codicils did not specify what beneficiaries should bear the tax and state inheritance tax, National Newark & Essex Bank, as executor, commenced an action for instructions from the Knox County Probate Court on January 26, 1972.

That Court directed the National Newark & Essex Bank as executor,

'. . . to pay the state inheritance tax on each of the bequests and legacies under the Will of Halsey Tichenor Adams and to deduct the inheritance tax attributable to each of the specific legacies before making distribution.'

The Court further directed the executor,

'. . . to pay the inheritance tax attributable to the temporary interest of Dorothy Blanck Hokkanen, Percy Grier Hart, and James Leigh Dinsmore, out of corpus, without reimbursement by the same Dorothy Blanck Hokkanen, Percy Grier Hart, and James Leigh Dinsmore.'

With respect to the federal estate tax, the Court directed the executor,

'. . . to pay the entire amount of the federal estate tax out of residue, and charge the proportionate share of the federal estate tax to each of the specific legatees under Item I of the Third Codicil of Halsey Tichenor Adams. The income beneficiaries under Paragraph Second of the Third Codicil of Halsey Tichenor Adams, dated October 30, 1964, are not required to reimburse corpus for the federal estate tax attributable to the temporary estates.'

Upon appeal from that decree the presiding Justice in the Superior Court, sitting as the Supreme Court of Probate, reported the action directly to the Law Court, pursuant to Rule 72(b), M.R.Civ.P.

The single issue before us is whether or not the burden of federal estate and state inheritance taxes should be imposed upon an income beneficiary.

Within the factual framework of this case we hold that an income beneficiary is not liabie for any portion of the federal estate tax.

With regard to the state inheritance tax, we hold that, absent statutory or testamentary direction, Maine law does not require an income beneficiary to bear the burden of that tax.

The terms of Halsey Adams' Will and Codicils, when viewed in their entirety, reveal the following testamentary scheme:

After providing for payment of 'just debts, funeral charges and expenses of administration,' Testator disposed of the remainder of his estate in trust, the income therefrom to be paid quarterly to appellee during her lifetime. At her death, the remainder was to be divided as follows: $1,000.00 to the Knox County General Hospital, and all of the residue to the General Mission of the Episcopal Church.

The first Codicil to the Will added three general legacies and altered the disposition of the charitable remainders so that the Knox County General Hospital's share was increased from $1,000.00 to one-third of the principal, the original residuary remainder interest was decreased to one-third of the principal, and three Episcopal Churches in Knox County were given the remaining one-third to be divided equally.

The second Codicil eliminated the legacy to the General missions of the Episcopal Church, and increased that of the Knox County General Hospital to two-thirds of the remainder. More significant for this case, however, was the modification of appellee's share, which limited her income interest to her lifetime 'but not beyond December 31, 1999.'

In the third and last Codicil, the Testator finally limited appellee's interest to the year 2000, increased some general legacies, added others, and designated several other minor income beneficiaries. ¹

The Will and Codicils were silent as to which of the beneficiaries should bear the burden of the federal estate and state inheritance taxes.

Citing our decision in Old Colony Trust Co. v. McGowan, et al., 156 Me. 138, 163 A.2d 538 (1960), the Judge of Probate said:

'While the Law Court has concluded that equitable contribution is proper in certain circumstances, it has never required an income beneficiary to contribute to the payment of State inheritance taxes and the Federal estate tax.'

Accordingly, he ordered the executor to deduct the inheritance tax attributable to each specific bequest before distribution, but to make no deduction in the case of the income beneficiaries. Similary, the executor was directed to charge the proportionate share of federal estate taxes to each of the specific legatees, but to impose no such burden on the income interests.

The charitable remaindermen appealed.

This report followed.

Appellee's position rests on four arguments. She correctly asserts that neither this Court nor any other court has ever required an income beneficiary to bear the burden of federal estate taxes, absent statutory or testamentary direction.

Secondly, she argues that imposition of such a burden on her interest, would be violative of the intention of Testator.

Thirdly, she maintains that the very nature of a temporary interest and the computational problems inherent in its valuation for tax purposes makes it inequitable and impractical to require an income beneficiary to contribute to payment of estate taxes.

And lastly, she construes the Maine statutes to require payment of inheritance taxes but of corpus without reimbursement from an income beneficiary.

The issues here before us are of first impression in this State.

This Court has never had occasion to discuss what apportionment, if any, of estate taxes, should be made between income and remainder interests.

In 1945, the Legislature amended R.S. 1944, c. 142, § 39, to provide for equitable apportionment of estate taxes in certain specified circumstances. ² However, the last paragraph of that statute directed that,

'. . . in cases where a trust is created or other provision made whereby any person is given an interest in income . . . the tax on both such temporary interest and on the remainder thereafter shall be charged against and be paid out of the corpus of such property or fund without apportionment between remainders and temporary estates.'

This statute, creating a rule of equitable apportionment but expressly excluding its application as between temporary income interests and remainder interests, was repealed two years later. ³

We think it significant that even when the Legislature had occasion to adopt a rule requiring equitable apportionment in some situations, ⁴ they expressly rejected its application as between an income beneficiary and remainder interests.

There is no express provision of the Internal Revenue Code for apportionment of the federal estate tax. ⁵ The Supreme Court of the United States has held that applicable state law should govern the distribution and ultimate burden of the tax. Riggs v. Del Drago, 317 U.S. 95, 63 S.Ct. 109, 87 L.Ed. 106 (1942).

Prior to Riggs, the general rule with respect to imposition of the federal estate tax, was that it must ultimately fall on the residuary estate, unless the Will or statute was to the contrary. Amoskeag Trust Co. v. Dartmouth College, 89 N.H. 471, 200 A. 786 (1938); First National Bank v. Hart, 383 Ill. 489, 50 N.E.2d 461 (1943); Plunkett v. Old Colony Trust Co., 233 Mass. 471, 124 N.E. 265 (1919).

Support for the burden-on-the-residue principle has been based, in part, on the courts' interpretation of the nature of the federal estate tax, and in part on what the courts believed to be the Congressional intention. Since Sec. 2002 of the Internal Revenue Code (26 U.S.C. § 2002) requires an executor to pay the tax, and directs him to pay it before distribution of the estate, some courts have viewed the tax as in the nature of an expense of administration, a charge against the decedent's estate, to be borne by the residue. 37 A.L.R.2d, Later Case Service 169.

This Court followed such reasoning when it construed the phrase 'charges of settlement' under R.S.1954, Ch. 170, Sec 20 (now 18 M.R.S.A. 851) to embrace 'all of the ordinary costs and expenses of administration of the estate,' including the federal estate tax. Old Colony Trust Co. v. McGowan, 156 Me. 138, 145, 160 A.2d 538, 542 (1960).

This Court in Old Colony observed that 'there can be no 'residue' for 'distribution' until after the depletion caused by the federal estate tax has occurred,' and consequently concluded that the tax must first be deducted as a charge of settlement before the 'distributable assets' from which a widow's statutory share is taken may be computed.

We believe the reason no court has ever required an income beneficiary to contribute to payment of federal estate taxes in the absence of statutory or testamentary direction, lies in the nature of the tax, particularly as it is distinguished from an inheritance tax.

The federal estate tax is a tax on the transfer of a whole estate by a decedent.

It is a tax on the privilege and process of transmitting testator's entire property.

It is clear that Congress contemplated payment of such a tax from the gross estate before distribution.

By contrast, an inheritance or succession tax is one which attaches to the taking of property by specific legatees designated by testator. Y.M.CA. v. Davis, 264 U.S. 47, 44 S.Ct. 291, 68 L.Ed. 558 (1924). Such a tax is not one on the general estate of a decedent, but on the right or privilege of receiving or taking it from the decedent's estate. Merrill Trust Co. v. Johnson, 159 Me. 45, 118 A.2d...