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NEAMAND ESTATE (04/23/74)

SUPREME COURT OF PENNSYLVANIA


decided: April 23, 1974.

NEAMAND ESTATE

Appeals from decree of Court of Common Pleas, Orphans' Court Division, of Bucks County, No. 40541, in re estate of Vincent Neamand, deceased.

COUNSEL

Robert J. Stern, with him Richard F. Stern, Charles M. Marshall, and Stern, Maxmin & Stern, for appellants.

Robert W. Valimont, with him Power, Bowen & Valimont, for appellees.

Jones, C. J., Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Opinion by Mr. Justice Roberts. Mr. Justice Eagen dissents.

Author: Roberts

[ 456 Pa. Page 24]

This case presents the issue whether a surviving spouse who elects to take against her husband's will is to have the benefit of a pay-tax clause in that will. The Orphans' Court Division of the Court of Common Pleas of Bucks County answered the question affirmatively. Neamand Estate, 24 Bucks County L. Rptr. 221 (Pa. O.C. 1973). We agree and affirm.

Vincent Neamand died September 1, 1967, survived by his wife Janet Neamand (appellee here) and two children, Constance J. and David Vincent. His will, properly admitted to probate, made certain specific bequests, and set up a marital deduction trust for his wife and a residuary trust for his children. Testator named as executors of his estate and trustees of the two trusts, his wife, his attorney, and the Girard Trust Bank.

Janet Neamand, however, elected to take against the will.*fn1 The executors (Girard Trust dubitante) awarded her one-third of the estate without deducting any sum for inheritance or estate taxes. The executors' proposed distribution was predicated on Item 12th of testator's will, a pay-tax clause, which provides: "Twelfth: All federal, state, and other death taxes payable, because of my death, with respect to the property forming my gross estate for tax purposes -- whether

[ 456 Pa. Page 25]

    or not it passes under this Will -- shall be paid out of the principal of my general estate as if they were my debts, so that the full burden of such taxes shall fall upon my residuary estate passing under Article Seventh hereof, and no part of such taxes shall be charged against the gifts under other Articles of this Will or against any beneficiary. All such taxes on present or future interests shall be paid at such time or times as my Executors or my Trustees may think proper, regardless of whether such taxes are then due." The two children objected,*fn2 their objections were overruled, and this appeal ensued.*fn3

Two questions inhere in our resolution of this appeal. Is it within a testator's power to direct that his residuary estate pay the taxes due on the surviving spouse's elective share? Did Vincent Neamand by appropriate language so direct?

The statutory scheme surrounding a spouse's elective share strongly suggests that a testator may relieve his or her surviving spouse's elective share from tax liability. Appellee's right to take against the will was provided for by 20 P.S. § 180.8.*fn4 Subsection b entitles

[ 456 Pa. Page 26]

    a surviving spouse in appellee's situation "to one-third of the real and personal estate of the testator . . . ." The statute does not mandate that the fractional share be arrived at after taxes are deducted, or that the elective share can never be taken tax free. The language used by the Legislature does authorize a surviving spouse, if a testator so provides, to take an elective share free of any taxes.

Section 718(c) of the Inheritance and Estate Tax Act of 1961,*fn5 places the ultimate liability for inheritance

[ 456 Pa. Page 27]

    tax on each transferee "[i]n the absence of a contrary intent appearing in the will . . . ." Recently, in interpreting section 718(c), this Court held that it "affords a testator the privilege of shifting, in whole or in part, among his transferees their 'ultimate liability for inheritance tax.'" Kleinhans Estate, 454 Pa. 539, 543, 312 A.2d 366, 369 (1973). Accord, Zellefrow Estate, 450 Pa. 302, 299 A.2d 248 (1973) (construing § 718(a)). The Legislature clearly intended that the decision for allocating liability for inheritance taxes could be made, if desired, by a testator.

The same conclusion holds for a testator's power in regard to apportionment of estate taxes. Section 736 of the Inheritance and Estate Tax Act of 1961,*fn6 captioned "Source of payment," sets forth how estate taxes should be apportioned "unless otherwise provided . . . in the instrument of transfer." Here, too, the Legislature has given a testator the option of directing how estate taxes are to be allocated.

Moreover, the Legislature has granted a testator the power to allocate federal estate taxes. Section 3(a)

[ 456 Pa. Page 28]

    of the Estate Tax Apportionment Act of 1951*fn7 provides: "Powers of Testator or Settlor. A testator, settlor, or possessor of any appropriate power of appointment may direct how the estate tax shall be apportioned or allocated or grant a discretionary power to another so to direct. Any such direction shall take precedence over the provisions of this act insofar as the direction provides for the payment of the estate tax or any part thereof from property, the disposition of which can be controlled by the instrument containing the direction or delegating the power to another."

Neither section 718(c), nor section 736, nor section 3(a) (now 20 Pa. S. § 3703(a)) contains any limitation as to those who, receiving property from a testator's estate, may be included within the ambit of a pay-tax clause. There is no restriction that those who may benefit by testator's "contrary intent," "provision otherwise," or "direction to allocate" must take under a testamentary document and not by operation of law.

It is clear, also, that by taking against the will a spouse does not lose the benefit of all provisions in a will. An electing spouse may continue to serve, if designated by testator, as either an executor of his estate or a trustee of a trust he may have established. Crawford's Estate, 340 Pa. 187, 192-93, 16 A.2d 521, 524 (1940).*fn8 Indeed, Janet Neamand continues to serve as both an executor and a trustee under testator's will. No challenge has been made to her competency to carry out these responsibilities or her right to assume them.

A spouse who takes against the will may exercise a special testamentary power of appointment given her

[ 456 Pa. Page 29]

    by her husband. See Grange Estate, 63 Pa. D. & C. 2d 770 (1973). See Brachman Estate, 57 Schuylkill Legal Rec. 19, 23, 11 Fid. Rptr. 310, 315-16 (Pa. O.C. Schuylkill County 1960). In Huddy's Estate, 236 Pa. 276, 84 A. 909 (1912), testatrix had earlier been given the income of a trust for life with a testamentary power of appointment over its principal. In her will she exercised the power in favor of her husband, among others. Because the husband elected to take against her will, the orphans' court concluded that he could not receive any part of the property disposed of by the power of appointment. This Court reversed and held that the husband was "entitled to share the trust fund with the other residuary legatees named in his wife's will." Id. at 282, 84 A. at 911.*fn9 These cases refute any contention that an election to take against a will invariably renders inoperative all provisions in the will favoring the electing spouse.*fn10

[ 456 Pa. Page 30]

A pay-tax clause by its very nature is not the sort of provision that election against the will nullifies.

[ 456 Pa. Page 31]

Directing that a legatee receive a tax-free bequest does not amount to an additional gift to the extent of the tax benefit. Loeb Estate, 400 Pa. 368, 162 A.2d 207 (1960),*fn11 expressly rejected the Commonwealth's attempt to treat a tax-free legacy as creating an additional bequest. This Court held that removing the tax burden from a bequest did not constitute a testamentary disposition subject to tax. Our conclusion was reached despite recognition that the recipient of a tax-free gift received an economic benefit. Nevertheless, this Court was unwilling to equate receipt of an economic benefit with receipt of a bequest.

Since, under Loeb Estate, providing that a bequest be taken free of tax is not part of a testator's dispositive scheme, it must therefore be in the nature of an administrative direction. Cf. In re Barnhart Estate, 102 N.H. 519, 524, 162 A.2d 168, 172 (1960). The elective share was established by the Legislature to ensure that a surviving spouse had the option of choosing a legislatively-determined reasonable share, if there was either no or inadequate provision for him or her in the deceased spouse's will.*fn12 Being an alternative to dispositive provisions, the elective share, once chosen, was meant to preclude the electing spouse from taking

[ 456 Pa. Page 32]

    a bequest under the will. However, by taking against the will, the surviving spouse does not renounce administrative provisions. See Crawford's Estate, supra.

Courts of other jurisdictions have regularly concluded that a spouse taking against the will may receive the benefit of a pay-tax clause. In the leading case of In re Barnhart Estate, 102 N.H. 519, 162 A.2d 168 (1960), the Supreme Court of New Hampshire resolved the exact issue presented here in favor of the surviving spouse. The reasoning of Mr. Chief Justice Kenison of that court is compelling.

"The further contention is made that the widow by waiving the will and taking her statutory share cannot receive any benefit or rights under the will direct or indirect, state or federal, taxwise or otherwise. This sweeps with too broad a brush. The fact that the testator designated his wife as coexecutor and co-trustee is not changed because she took her statutory rights rather than her testamentary bequests . . . . If a provision of the will in the widow's favor is ineffective because of a widow's renunciation of such provision, it does not follow that other provisions of the will lose their efficacy . . . . If it may be to the widow's financial advantage to take her statutory share, she is not to be penalized by taxation or otherwise for taking a course of action which the state law expressly allows." Id. at 523, 162 A.2d at 171-72 (citations omitted). Accord, Cox v. United States, 421 F.2d 576 (5th Cir. 1970) (interpreting Alabama law); Snodgrass v. United States, 308 F. Supp. 440 (N.D. Ala. 1968), aff'd, 427 F.2d 150 (5th Cir. 1970) (per curiam) (same); Robertson v. United States, 281 F. Supp. 955, 963-64 (N.D. Ala. 1968) (same); Marler v. Claunch, 221 Tenn. 693, 430 S.W.2d 452 (1968); Commerce Union Bank v. Albert, 201 Tenn. 631, 301 S.W.2d 352 (1957).

[ 456 Pa. Page 33]

In this Commonwealth, the Legislature has explicitly given the testator the right to allocate the taxes due on his bequests. It has not required that a testator only apportion the taxes of those who take under the will. And it has provided that a surviving spouse may receive a fractional share of an entire estate before the payment of taxes. Moreover, taking against the will does not vitiate all will provisions favoring the electing spouse. Like the New Hampshire Supreme Court, we are of the opinion that a surviving spouse is not to be deterred by taxation from pursuing a course that our statutes expressly allow. We therefore hold that a testator may, by appropriate language in the testamentary instrument, remove the tax burden from the surviving spouse's elective share.*fn13

[ 456 Pa. Page 34]

The question next arises whether testator by clear and unambiguous language, Erieg Estate, 439 Pa. 550, 556, 267 A.2d 841, 845 (1970), provided by Item 12th of his will that the elective share of his wife was to be free of all taxes. The answer is found in the well-reasoned analysis of President Judge Satterthwaite: "We believe that Item 12th does overcome this presumption [in favor of statutory proration]. It applies to all death taxes, with respect to any property which is includable in the gross estate for tax purposes, 'whether or not it passes under this Will'; it mandates that the full burden of such taxes shall fall on the residuary estate; it precludes the charging of taxes, not only against non-residuary gifts under the will, but equally and conjunctively against any beneficiary, whether or not taking under the will. More all-inclusive language would be difficult to imagine. It manifestly is broad enough to extend to taxes attributable to the spouse's elective share, and there is not the slightest intimation of intention to exclude such an interest from its all-encompassing scope." 24 Bucks County L. Rptr. at 229 (emphasis in original). To this reasoning we need only add that "every married testator knows, or is presumed to know, that his surviving spouse may elect to take against the will." Schmick Estate, 349 Pa. 65, 70, 36 A.2d 305, 308 (1944).*fn14

[ 456 Pa. Page 35]

Testator's pay-tax clause clearly and unambiguously expressed his intent that his wife's elective share was to be included within its scope. It was within his power so to direct.

Decree affirmed. Each party pay own costs.

Disposition

Decree affirmed.


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