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petitioner Seeks Interpretation of Tax Clause in Will


The executors have requested construction of several provisions of Mrs. VK’s will admitted to probate in 1969.
Probate Lawyers said the principal problem concerns the meaning of the tax clause. Since the bulk of the estate consists of stock in a family corporation, construction of the tax clause in turn may require a section 303 Internal Revenue Code stock redemption to meet the tax obligation.
In this State the statutory tax apportionment rule is ‘burden-on-the-recipient’. Testator may of course make an ‘otherwise direction’. The common otherwise direction is ‘burden-on-the-residuary’.

We consider what Mrs. VK provided in her will:

‘SECOND: I do hereby authorize and direct that all State and Federal Estate and/or Inheritance taxes shall be paid out of my estate and the same shall not be chargeable to or paid by any devisee or legatee herein named.’

A New York Estate Lawyer said the provision is construed by the court as an otherwise direction. Further it is construed as a direction to pay the taxes out of the residuary. No extended discussion is necessary since the provision is meaningless if otherwise construed. Meaningless because of necessity estate taxes must be paid by the estate: what is obviously meant is the Residuary or General estate. Meaningless because legatees and devisees include residuary legatees: what is meant is that estate taxes shall not be chargeable to any devisee or legatee Other than the residuary legatees.
Nassau County Probate Lawyers said that although estate taxes have not been finally determined the executors estimate these will be approximately $983,000. They estimate that the residuary after debts, funeral and administration expenses will be approximately $589,000. There will be a resulting federal and state estate tax deficit of $394,000. The executors ask ‘How should estate taxes that are unpaid after the residuary estate is exhausted be allocated?’

Staten Island Probate Lawyers said as noted the statutory rule of EPTL 2–1.8 is ‘burden-on-the-recipients’. But Mrs. VK made an otherwise direction of ‘burden-on-the-residuary’. The otherwise direction is effective but only to the extent that it can be effectuated. To the extent that the residuary is insufficient the statutory rule of ‘burden-on-the-recipients’ must be substituted.

This principle has heretofore been fully accepted. It is placed in question by a new statute EPTL 13–1.3(c). The new statute is an ‘abatement’ statute effective September 1, 1967. New EPTL 13–1.3 for the first time includes estate taxes with debts, funeral and administration expenses and labels these collectively ‘estate obligations’. The statute then provides for sequential abatement (not apportionment) ‘whenever such property (estate assets) is insufficient to satisfy both the estate obligations–and all dispositions under the will’. The sequence of abatement required is (1) intestate property; (2) residuary dispositions; (3) general dispositions; and (4) specific dispositions.

The contention that section 13–1.3 not 2–1.8 should be applied to a tax deficit after exhaustion of the residuary is rejected. It is basically unfair and not consistent with the intention of most testators. There is no supporting study of section 13–1.3 of the Commission on Estates which recommended it and there is no certainty that any change was intended.

However, the problem need not concern the executors for two reasons. First, all dispositions in Mrs. VK’s will are general, there are no Specific dispositions as all parties assume. Second, abatement is required when no other intent is expressed in the will.
The $12,000 of dispositions in paragraph Fourth are dispositions for charitable purposes. Under EPTL 2–1.8(c)(2) such dispositions are not taxable and in consequence may not be burdened with any part of the estate tax deficit.
Staten Island Probate Lawyers said the paragraph 6 W trust must bear its proportionate share of the estate tax deficit. That share is to be charged solely against the trust principal of $400,000.
The initial payment of $15,000, the annual payments of $12,500 and the periodic payments of $15,000 every five years are to be paid out of income of the trust corpus reduced by its share of the tax deficit. If in consequence of the reduction of the corpus income is insufficient then the payments are to be made out of principal as directed by Mrs. VK.

In the absence of a direction to accumulate or a disposition of accumulated income, the executor-trustees request advice concerning the ultimate distribution of accumulated income. The Court does not wish to make that determination at the present time without some knowledge of the extent of income which will be accumulated. It is simply noted that EPTL 9–2.3 provides that in a case such as this accumulated income passes to the persons ‘presumptively entitled to the next eventual estate’. The remaindermen are Mrs. W’s children. As this Court observed in Matter of Schoenborn (N.Y.L.J. 6/10/71, p. 18, col. 8) such income is presently payable to Mrs. W’s children and it does not matter that subsequent events may cause the income to be paid to additional children or even diverted to other beneficiaries.
For the foregoing reasons as well as to avoid ‘throwback’ consequences it may be desirable to pay the excess income presently to Mrs. W’s children via Mrs. W as guardian. The Court will entertain and grant such a request whenever presented.

The paragraph 9th, S Trust, is a discretionary trust. The income received is to be paid to the income beneficiaries in the sole discretion of the trustees subject of course to direction from the court if income is unreasonably withheld. By creating a discretionary trust, Mrs. VK impliedly directed that income reasonably withheld be accumulated.

The executor-trustees request advice concerning the ultimate distribution of accumulated income. In view of the nature of the corpus of the trust, dependent as it is for income on stock dividends, the court gratuitously but with respect suggests that many problems would be avoided if all income is currently distributed. The court’s answer however is that it will not presently give such advice for the reason that there may not be any income to distribute or accumulate.

It is observed that it is not clear as the executors suggest that EPTL 9–2.3 is ever applicable to a discretionary trust for in a sense the grant of authority to trustees to withhold income is a direction to accumulate. The statute may not be applicable where such a direction is made albeit only impliedly. As the executor-trustees observe, the income beneficiaries are also the remaindermen presumptively entitled to the next eventual estate and currently entitled to accumulated income. The statute is mandatory and if so applied contradicts the discretionary power in the trustees to withhold income. Even without advice and direction, the court is confident that the trustees for practical as well as income tax reasons will decide to distribute all income currently or reasonably so.

For good reason this Court need not decide whether the VNM stock was part of a general or specific disposition.

Mrs. VK clearly intended that the VNM stock be included in the paragraph 9th trust. In that case, the liquidating dividend should be so included. The family corporation was liquidated during Mrs. VK’s lifetime. After her death the liquidating dividend was received by the estate executors. If there had been a stock split or stock dividend the paragraph 9th trust would have been entitled to the benefit irrespective of whether the disposition was general or specific. A liquidating dividend is a partial return of capital. It should be treated as a reverse stock split, the dividend substituting for the stock. This conclusion is reached without consideration of the tax treatment of the corporate dissolution by the decedent or on her behalf by the estate.

The foregoing construction of the several issues appears to be in accord with Mrs. VK’s intention. If the executor-trustees are not in accord, they may request a conference.

If you problem understanding and properly interpreting the provision of a will, give the matter to the Kings County Estate Attorneys of Stephen Bilkis & Associates.

At Stephen Bilkis, we have expert estate and probate lawyers who can give you the proper interpretation of a will. No matter how difficult the provision may be, it will be ascertained clearly and with particularity. Call our Kings County Estate Lawyers now and receive legal consultation at no cost.

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