Persky v. Hutner

• Decision Date: 31 October 1975
• Citation: 336 N.E.2d 865,369 Mass. 7
• Parties: , 37 A.F.T.R.2d 76-1597 Mae G. PERSKY et al., executors and trustees, v. Etta HUTNER et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 865

336 N.E.2d 865

369 Mass. 7, 37 A.F.T.R.2d 76-1597

Mae G. PERSKY et al., executors and trustees,

v. Etta HUTNER et al.

Supreme Judicial Court of Massachusetts, Worcester.

Argued Sept. 16, 1975.

Decided Oct. 31, 1975.

Saul A. Seder and James F. Queenan, Jr., Worcester (George H. Mason, Worcester, with them), for Mae G. Persky and others, executors and trustees.

Francis X. Bellotti, Atty. Gen. and Richard C. Donovan, Asst. Atty. Gen. for the Division of Public Charities, submitted a brief.

Before TAURO, C.J., and REARDON, QUIRICO, HENNESSEY, KAPLAN and WILKINS, JJ.

WILKINS, Justice.

The judge below has reported for our consideration the correctness of his interpretation of the will and a trust indenture of Abraham S. Persky (Persky) on a question of State law which has a bearing on the amount of Federal estate taxes to be paid by the Persky estate. Although no person having an interest under the Persky will or trust challenges the judge's interpretation of those documents, this petition for a declaratory judgment has been reported to us because the Federal Courts and taxing authorities need not follow an interpretation of State law made by a lower State court. Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967). See Mazzola v. Myers, 363 Mass. 625, 633--634 ^a, 296 N.E.2d 481 (1973). We express no opinion on issues which are unrelated to the apparent area of disagreement between the Persky estate and the Internal Revenue Service. ¹

The basic question appears to be whether the trustees under Persky's trust indenture had discretion to pay debts, expenses, and death taxes from a trust whose assets, after a life interest in his wife, were given to various charities. If so, the amount of the charitable gifts was not sufficiently ascertainable at Persky's death to permit his estate to claim the present value of the remainder interests as a charitable deduction on his Federal estate tax return. See Merchants Nat'l Bank v. Commissioner, 320 U.S. 256, 261, 64 S.Ct. 108, 88 L.Ed. 35 (1943).

We agree with the judge below that the Persky trustees did not have the right to pay debts, expenses, and death taxes from the charitable trust before exhausting other available assets which were sufficient to meet all such obligations. Consequently, the funds to be placed in the charitable trust were not subject to invasion to pay debts, expenses, or taxes.

In his will, Persky gave tangible personal property to his wife and the residue of his estate to the trustees of the Abraham S. Persky Revocable Trust Indenture (trust indenture) to be added to and held as part of the trust property. In Article III of his will, Persky acknowledged that the trustees under the trust indenture were authorized to pay all debts, expenses, and Federal and State taxes 'arising or owing on or as a result of' his death. He expressed hope that his executors and those trustees would cooperate to the fullest extent possible with respect to the payment of debts, expenses, and taxes. He directed that all taxes should be paid out of the general assets of his probate estate or out of the assets held under the trust indenture 'as provided for thereunder.' He added that no taxes should 'be apportioned among the persons who receive or have received any of my property, either prior to my decease or under this Will or otherwise.'

The trust indenture provided (1) for the creation of two trusts at Persky's death, (2) for the distribution of pecuniary gifts to numerous people and for charitable purposes, and (3) for a residuary trust for members of his family. Under item seventh of the trust indenture, the two trusts were created from property having a total initial value of one-half of Persky's adjusted gross estate, reduced by the value of any other property which qualified for the marital deduction. One trust, which he called the Abraham S. Persky Marital Trust (the marital trust), was to consist of up to $400,000. Its income was payable to his widow during her life; $20,000 of its principal was payable to her each year; and she had a testamentary general power of appointment over the trust assets.

The other trust, which Persky called the Abraham S. Persky Charitable Trust (charitable trust,) was to consist in amount of the balance, if any, of the property set aside under item sevent. ² The net income of the charitable trust was payable to or for the benefit of Persky's widow during her life; she was given a lifetime power to appoint up to ten per cent of the initial value of the assets of that trust to charitable institutions; and at her death the trust assets were to be distributed for various charitable purposes.

Item eighth of the trust indenture provided for pecuniary gifts to various persons and charitable objects to be satisfied from those assets not placed in either the marital trust or the charitable trust. Persky stated in the introduction to item eighth that the 'Settlor desires that no such distribution be made under this item EIGHTH unless it reasonably appears to the Trustees hereunder that the total assets under this (trust indenture) will be sufficient: A. To establish the trusts provided for the benefit of my wife . . . under Item SEVENTH above; B. Pay the administration expenses of the Settlor's estate; C. And pay all Federal Estate Taxes and State Inheritance Taxes which may be owing as a result of the Settlor's decease' (emphasis supplied). If the word 'desires' in the quoted language may be treated in this context as a direction to his trustees, it seems likely that Persky intended both the marital and the charitable trusts to be funded and maintained without any diminution for administration expenses or death taxes, assuming that the other trust assets were sufficient to meet those obligations.

In item eighteenth of the trust indenture, Persky authorized the trustees to pay debts and expenses and all Federal and State taxes 'arising or owing on or as a result of the Settlor's decease.' He provided that these items 'shall be apportioned to and paid out of property other than property allocated to the (marital trust) under Item SEVENTH . . ..' ³ Persky then stated, in language which is set forth verbatim in the margin, ⁴ that all property in his estate which passes to his wife 'either outright or as a beneficiary of a trust' shall be received by her undiminished by any debts, expenses, and taxes paid by the trustees. ⁵

Persky had a gross estate for Federal estate tax purposes of approximately $5,300,000. More than $4,300,000 of that amount was attributed to assets owned by the trustees under the trust indenture. Of the approximately $1,000,000 of his gross estate not held by the trustees, over $740,000 was either life insurance not payable to his estate or property held jointly with his wife with a right of survivorship in her. Thus Persky's probate estate had a value of approximately $260,000, and the debts, expenses, and death taxes of Persky's estate far exceeded the value of his probate estate.

Persky's Federal estate tax return, as filed, showed that approximately $1,684,000 would be placed in the charitable trust. ⁶ The present value of the charitable remainder in that trust was computed to be $1,317,865.86 and was claimed as a charitable deduction on the return.

In explanation of its disallowance of the charitable deduction of $1,317,865.86, the Internal Revenue Service said that after debts, expenses, and death taxes, 'there are no funds available for ultimate distribution to charity.' This explanation, set forth in a single sentence, is not comprehensible. ⁷ It assumes that the trustees are compelled to pay all debts, expenses, and death taxes from the assets of the charitable trust before turning to any other trust assets (and that the assets of the charitable trust will be fully dissipated in that endeavor). We see no basis for concluding that the Persky trustees must expend the assets of the charitable trust first in satisfying debts, expenses, and taxes. Therefore, the statement that 'there are no funds available for ultimate distribution to charity' (emphasis supplied) seems wrong.

We assume that the Internal Revenue Service's appropriate position is that, in their discretion, the Persky trustees might have used all the assets of the charitable trust to satisfy his estate's debts, expenses, and taxes and, therefore, viewing the situation at the time of his death, as we and they must (Ithaca Trust Co. v. United States, 279 U.S. 151, 155, 49 S.Ct. 291 (1929)), there was no certainty that any assets intended for the charitable trust would be available to go to a charitable beneficiary at the death of Mrs. Perksy. We turn then to a question of State law, calling for us to interpret the trust (and perhaps the will) to determine in the circumstances whether the trustees could have used all or any part of the asserts of the charitable trust to pay debts, expenses, and taxes. ⁸

Because the trustees had authority to pay all taxes, Persky's will did not establish whether or how tax obligations would be satisfied out of his residuary estate or the assets held under the trust indenture. However, because his probate estate was very small in comparison to the value of his gross estate, clearly funds held under the trust indenture would have to be used to pay taxes. The Persky will expressed an antipathy to the apportionment of taxes to 'persons who...