Olson's Estate, In re

• Decision Date: 01 March 1974
• Citation: 77 Misc.2d 515,353 N.Y.S.2d 347
• Parties: In re ESTATE of Albin R. OLSON, Deceased. Accounting of FIRST NATIONAL CITY BANK, as Executor of the Estate of Albin R. Olson, Deceased. Surrogate's Court, Kings County
• Court: New York Surrogate Court

Page 347

353 N.Y.S.2d 347

77 Misc.2d 515

In re ESTATE of Albin R. OLSON, Deceased Accounting of FIRST NATIONAL CITY BANK, as Executor of the Estate of Albin R. Olson, Deceased.

Surrogate's Court, Kings County.

March 1, 1974.

Wingate & Cullen, Brooklyn, for petitioning executor (First National City Bank).

Kevin Patrick McGovern, Brooklyn, for objectant, Arthur H. Anderson.

Wilford L. Wilson, New York City, for Augustana Lutheran Home for the Aged, Inc.

Vollmer, Wildermuth & McCarty, Brooklyn, for the Salvation Army.

NATHAN R. SOBEL, Surrogate.

Submitted for determination as a matter of law in this executor's account is an issue of estate tax approtionment among the will beneficiaries. Specifically, the Court is requested by the parties to determine the method of apportionment of estate taxes among the intra-residuary dispositions when testator has directed in his will that all estate taxes are to be paid out of the residuary. As it has in this proceeding, the problem is created when one or more of the intra-residuary dispositions qualify for the marital or charitable deduction.

Mr. Olson in his will made substantial pre-residuary dispositions among family, friends and charities.

In paragraph 'TENTH' he made fractional distributions of his residuary estate of which 55 percent was divided among 'family' and 45 percent among charities.

Paragraph 'TWELFTH' then provided:

'I direct that all estate, inheritance, succession and other taxes which may become due and payable by reason of my death, with respect to any and all property passing on my death either under this my Last Will and Testament or otherwise be paid out of my residuary estate . . ..'

None of the parties disputes that this is a direction that all estate taxes on both the pre-residuary dispositions and on nontestamentary assets passing outside the will must be paid 'off the top' of the residuary Before the division of the residuary into the fractional shares. The dispute concerns the apportionment of the taxes among the fractional dispositions Within the residuary itself.

Because 'local law', i.e., state statutes and decisions govern in many respects the availability of both the marital and charitable deductions a brief discussion of New York's tax apportionment statute is helpful.

The rule in New York (and most other States) prior to 1930 was that all estate taxes on all property included in the gross estate whether passing under the will or nontestamentary property passing outside the will must be paid out of the residuary estate.

Decedent Estate Law § 124 recommended by the Foley Commission and enacted in 1930 (L.1930, c. 709) was an innovation for New York. Many other States have since followed New York's lead. The new statute reversed the established rule of 'burden-on-the-residuary' and placed the 'burden-on-the-recipient' whether the recipient was the beneficiary of a pre-residuary or a residuary disposition or the recipient of nontestamentary property. The Foley Commission justified the reversal on the ground that the collective experience of the Surrogates established that the new statutory rule represented the intention of most testators who failed in their wills to give other directions for estate tax apportionment. (See Combined Reports of the Decedent Estate Commission, Reprint Edition p. 338.) There has been some disagreement with the Foley Commission's conclusion. (See Sixth Report (1967) Bennett Commission on Estates (App. L 1; Not a Recommendation of the Commission) pp. 253--266.) Whatever the fact, testators and their draftsmen have been on notice for 44 years that the statutory rule requiring each beneficiary to pay his share of the taxes will apply unless a specific direction otherwise to apportion taxes is included in the will. A legatee of tangible personal property such as jewelry, fur coats, etc., will be required to contribute to the estate tax as will all legatees of dollar dispositions and all devisees of real property. If testator wishes to exonerate any such dispositions he must so provide in explicit terms in his will.

The present tax apportionment statute EPTL 2--1.8 (as did its predecessor Decedent Estate Law § 124) provides: (a) that the statutory rule of 'burden-on-the-recipient' shall apply unless testator 'otherwise directs in his will' (subd. a); (b) that such an 'otherwise direction' will apply only to property passing under the will and not to property passing outside the will unless testator specifies his intention to exonerate such nontestamentary property (subd. d); and (c) that any exemption or deduction allowed under the estate tax laws (e.g. marital deduction, charitable deduction, insurance deduction etc.) shall inure to the benefit of the recipient of such disposition or nontestamentary benefit 'unless otherwise provided in the will' (subd. (c)(2); emphasis added). The italicized provision is emphasized for it is presumed that all testators desire whenever possible to preserve all allowable estate tax exemptions and deductions. This is particularly true of the substantial allowable marital and charitable deductions.

With respect to such deductions, it is observed:

1. When the will does not include any tax exoneration provision and the statutory rule of 'burden-on-the-recipient' applies, a disposition to a surviving spouse or a charity will receive the benefit of the tax deduction by virtue of the express provision of the tax apportionment statute (EPTL 2--1.8(c)(2)). That statute directs that the marital deduction or charitable deduction 'shall inure to the benefit' of the spouse or charity. This is as it should be. Such qualified dispositions are deducted from the gross estate reducing the taxable estate to those assets passing to beneficiaries other than the spouse or charity. In consequence total estate taxes are reduced and the taxes as reduced are apportioned solely against the recipients of dispositions not entitled to the marital or charitable deduction.

2. When the will contains a tax exoneration clause exonerating only specified dispositions, whether so exonerated or not, a disposition to the spouse or charity is exonerated by the express provision of the statute (EPTL 2--1.8(c) (2)). The other recipients bear the burden of the estate tax on the specifically exonerated dispositions.

3. When the will contains a general tax exoneration provision directing that all estate taxes be paid out of the 'residuary estate', 'general estate', 'principal of the estate' or words of like import, such a direction for reasons detailed Infra does not exonerate a residuary disposition or multiple intra-residuary dispositions. Within the residuary the tax apportionment statute (EPTL 2--1.8) must be applied. The executor is required first to compute the estate tax on the pre-residuary dispositions, and deduct that sum 'off the top' of the residuary thus reducing the residuary estate.

When the residuary includes a pecuniary disposition In a fixed sum qualifying for the marital or charitable deduction, such disposition will pay no part of the estate taxes. The remaining non-exonerated intra-residuary dispositions will bear the burden of all estate taxes including those on the exonerated pre-residuary disposition and those on the residuary dispositions. This again is by virtue of the tax apportionment statute (EPTL 2--1.8(c)(2)) which directs that all tax deductions shall inure to the benefit of the qualifying dispositions.

A somewhat different consequence results when the will contains a general tax exoneration provision directing that all taxes shall be paid out of the 'residuary estate', the 'general estate' or words of like import And the residuary contains multiple residuary dispositions In fractional shares including such an intra-residuary disposition to a spouse or charity. As noted, for reasons soon to be discussed, the general tax exoneration provision is held to exonerate only pre-residuary dispositions and not intra-residuary dispositions. The executor is first required to compute the estate taxes on the pre-residuary dispositions and deduct that sum 'off the top' of the residuary estate. The residuary estate is reduced by the amount of such taxes. In consequence the beneficial share of each fractional intra-residuary beneficiary, including the share of the spouse or charity is reduced. Observe that estate taxes are not apportioned against the fractional marital or charitable share. These are simply reduced in amount. By virtue of the tax apportionment statute (EPTL 2--1.8(c)(2)) the marital and charitable deduction, although in a reduced amount, inures to the benefit of the qualifying spouse or charity. The non-exonerated intra-residuary dispositions bear part of the burden of the estate tax on the pre-residuary and the total burden of such taxes on the intra-residuary non-qualifying dispositions.

We consider the principles governing the construction of general tax exoneration provisions directing that estate taxes be paid out of the 'residuary estate', 'general estate', etc.

In general experience, the residuary is the largest part of the estate and is generally disposed of to the next of kin, often the spouse. Because it disposes 'of all the rest of my property' it is usually an indefinite sum disposed of in fractional shares rather than fixed pecuniary sums. Also, as previously mentioned it is presumed that testators desire to take full advantage of all available tax deductions in marital and charitable residuary dispositions. As with the construction of all dispositions, testator's intention governs construction of tax exoneration provisions. The constructional preference is toward favoring the spouse and toward limiting estate taxes.

That principle is obliquely expressed in the leading case of Matter of Shubert, 10 N.Y.2d 461, 225 N.Y.S.2d 13, 180 N.E.2d 410. Mr. Shubert's tax apportionment clause, like Mr. Olson's, directed that all estate taxes 'shall be paid out...