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Court Decides Apportionment of Estate Taxes


Probate Lawyers said that according to sources, in two of three consolidated proceedings the trustees under two indentures of Inter vivos trusts, seek judicial settlement of their accounts and construction of certain provisions of the trusts. Specifically, as holders of shares of stock of a regulated investment company (sometimes called a ‘mutual fund’), they seek instructions whether within the purview of the provisions of the trusts, capital gains distributions made by the company are income distributable to the income beneficiaries of the trusts or are principal allocable to the corpora of the trusts. They also request instructions concerning the allocation of estate taxes and attorneys’ fees among the persons interested in one of the trusts. In the third proceeding the executors of the will of the settlor of the trusts request instructions concerning the allocation of estate taxes and attorneys’ fees insofar as they are referable to one of the trusts and other property. The parties have stipulated, with the approval of the court, that examination and settlement of the trustees’ accounts shall be deferred pending determination by the court of the issues on which instructions are sought. There shall be considered first the treatment of capital gains distributions, as between principal and income, paid to the trustees on the shares of stock of the regulated investment company. At the time of the institution of these proceedings the trustees held 81,247 shares of stock of an investment company in the corpus of the 1931 trust and 120,000 shares in the corpus of the 1935 trust.

An Estate Lawyer said that the investment company has qualified as an open-end regulated investment company, having registered under the provisions of the Investment Company Act of 1940, as amended. Each of its investors own a pro rata share of the securities held in its portfolio. Its earnings are acquired from dividends and interest paid on securities in its portfolio which are classified as ordinary income, and also from the net profits realized on the sale or exchange of its investments which are designated as capital gains. As required by the Investment Company Act, its statements to its shareholders and the public specifically characterize the source of the earnings. It is not disputed that ordinary income is properly treated as income distributable to the income beneficiaries. The issue arises as to the allocation of the capital gains distributions. The petitions of the trustees allege that each year the Investment company pays capital gains dividends which are payable at the election of the owner of such shares in cash or in additional shares of the corporation’s stock. They are uncertain as to whether such capital gains dividends are income and distributable to the income beneficiaries of the trusts or are principal to be retained by the petitioners in the corpora of the trusts. The income beneficiaries maintain that they should be treated as income and distributed to them. The guardian ad litem appointed to represent the infant remainder men on this issue contends that they are principal and should be added to the corpora of the trusts. Initially, consideration must be given to the trust instruments to determine whether the settlor’s intention concerning the distribution can be ascertained therefrom. If it can, it would be controlling.

Queens Probate Lawyers said the paramount rule in the construction of Inter vivos trust indentures is to ascertain the settlor’s intention as expressed in the instruments in the light of the circumstances surrounding and attending their execution, and when ascertained to effectuate that intention unless contrary to public policy or an established rule of law. Other than those heretofore related, the record is devoid of any extrinsic circumstances existing at the time of the execution of the instruments which would shed light on the settlor’s intentions concerning the allocation, as between principal and income, of the capital gains dividends with which we are here concerned. There is no evidence that at the time of the amendment of the 1931 trust in 1935 and the creation of the 1935 trust that the settlor was familiar with the corporation of regulated investment companies or the nature of their dividend distributions. As a medium of investment those companies grew in popularity as a result of the enactment of the Investment Company Act of 1940, and the tax advantages accruing to the companies and shareholders under sub-chapter M of the Internal Revenue Code of 1954 where the company submits to federal regulation thereunder. It was not until the settlor decided in 1958 to exchange Pine’s assets for the shares of an investment company that the evidence discloses the settlor’s awareness of their form of distribution of income and capital gains dividends. Looking to the trust indentures the only reference to the treatment to be accorded to corporate dividends is found in the provisions that ‘any and all dividends payable in the stock of the corporation or association declaring or authorizing the same, and declared and authorized in respect of any stock constituting in whole or in part the principal of the trust fund, as well as all rights to subscribe for new or additional stock, shall be wholly principal and not income of the trust.’ However, those provisions do not contain any express direction concerning the allocation of dividends payable at the election of the trustees in cash or in additional shares of the Investment company. It is so conceded by the guardian. Nor may the distribution by the Investment Company be considered as a right to subscribe for new or additional shares of stock. Implicit in the term ‘rights to subscribe’ as used in the law there is contemplated an increase in the capital of the corporation giving its shareholders the right to subscribe to new shares at less than the market value of the shares. When capital gains distributions are made by the investment company, they are not accompanied by any increase in its capital stock, nor are their shareholders required to pay for the additional shares they may elect to receive. Being unable to glean the settlor’s intention concerning the treatment to be given those capital gains distributions guidance must be sought in the presumptive canons of interpretation adopted by the courts and the Legislature ‘to fill such gaps and to supply that for which the settlor has not lawfully provided.’

Long Island Probate Lawyers said there the issue requiring determination involved Investment company shares, the court determined that capital gains distributions of regulated investment companies were allocable to principal. Without conceding the omission of the New York courts to analyze all of those factors, as shall be seen, they were the subject to extensive consideration by a legislative commission and to a large extent motivated the commission in recommending to the Legislature the departure from the judicial rule as to trusts created after the effective date of the enactment.The question remains whether the Legislature intended that the judicial rule then in effect should govern the administration of trusts created prior to the effective date of the statute. If so, recognition should be given to it. If not, only then should consideration be given to changing the judicial rule. To resolve the question a court may invoke ‘the history of the passage of a statute; that is, the change and proposed changes in the original bill, as recorded in the legislative journals.’

Against that historical background the question is posed, should we now, by judicial rule, give retroactive effect to the statute when the Legislature, which was empowered to do so, deliberately refrained from so doing? The question must be answered in the negative. Confronted with the same question the Supreme Court of Vermont, when urged to change a judicial rule and thereby give retroactive effect to a statute which limited its application prospectively, expressed its attitude in In re Valiquette’s Estate, as follows: ‘Certainly our Legislature was in a position to do all that we can do and it chose not to do more than it did; it did not set out to change the law retroactively. We think that although the legislative action was not pre-emptive in nature, it was close to it, and that this Court, or any other Vermont court, ought to be very reluctant about stepping into the situation and enlarging the scope of the enactment’. ‘The general rule is that an original statute, or an amendment, will be construed as prospective only, unless the language clearly and plainly indicates a contrary purpose, and it will not be given a retroactive effect when it is capable of any other construction.’ Here, in view of the positive actions of the Legislature, the reason for adherence to the general rule is more pronounced. Having initially given the statute both prospective and retrospective effect, it thereafter, but prior to its effective date, deliberately annulled the retroactive feature of the statute and limited its application prospectively. Were this court now to change the judicial rule and give retroactive effect to the statute it would enlarge its scope thereby contravening the clear and plain intent of the Legislature. Such change should be made by the Legislature, not by the courts.

The Legislature clearly intended that the judicial rule in effect at the time of the enactment of section 27–e(7) and (13) of the Personal Property Law should govern the administration of trusts such as those here involved which were created prior to the effective date of the enactment. In consequence, the factors which motivated the courts in Tait v. Peck, and In re Estate of Brock, to change the judicial rules in those states, by deciding that capital gains dividends of regulated investment companies are allocable to principal, need not be considered.

There remains for determination the issue involving the apportionment of estate taxes and attorneys’ fees among the persons interested in the 1935 trust. Other than the property passing under the decedent’s will, there are three distinct items of property contributing to the decedent’s gross taxable estate. The decedent’s son, was the sole beneficiary of the proceeds received by the trust from insurance policies on the decedent’s life which had a value for estate tax purposes. The proceeds were fully taxable in the estate. The trust terminated on the decedent’s death and each of the decedent’s three children, received one-quarter of the principal. The decedent’s widow received the remaining one-quarter free of tax. The value for estate tax purposes of the portion of the trust which was distributed equally among the decedent’s three children was includable in the decedent’s gross estate for estate tax purposes.

Under the particular circumstances of survivorship which existed at the time of decedent’s death, the 1935 trust provided that the corpus thereof be divided in four shares for the benefit of his three children and his niece. In effect, he directed that the respective four shares be determined by allocating such amounts of the corpus to each of the four beneficiaries so that the share of his niece would consist of such an amount that the share of each of the children ‘when added to the share accrued to each such child or issue by virtue of the aforesaid Indenture of Trust dated the 21st day of March, 1929, and accrued to the son by virtue of an aforesaid insurance. Neither the 1935 trust indenture nor any other instrument makes provision for the manner of apportionment of estate taxes or other proper charges against the respective interests of the four beneficiaries of the trust.

If you are facing proceedings such as probate, will contest, or estate litigation, it is better to consult with a legal team who will provide you remedies and advice you of the proper process. Stephen Bilkis & Associates, with offices throughout New York, has the services of its Richmond County Estate Administration Lawyers or its New York Estate Attorneys. Don’t hesitate in soliciting legal advice.

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