COMMON PLEAS COURT OF PHILA. CO., ORPHANS' COURT
May 26, 1977
ESTATE OF ALBERT M. GREENFIELD, DECEASED
Robert K. Greenfield, Esquire, for Accountants
John A. Eichman, III, Esquire for Albert M. Greenfield, Jr.
John J. Lombard, Jr., Esquire, for Elizabeth Petrie
Mervin J. Hartman, Esquire, Guardian and Trustee ad Litem
Pawelec, Adm. J.
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The matter before the court arises by virtue of objections filed by Albert M. Greenfield, Jr., and Elizabeth M. Petrie to the schedule of distribution which has been filed in the estate of Albert M. Greenfield.
Albert M. Greenfield died on January 5, 1967, survived by a widow and five children. The decedent left a will and codicils wherein he gave his widow, among other things, a life interest and a testamentary power of appointment in one-third of his estate, and after providing for numerous gifts, he divided the residue of his estate into five separate trusts for the benefit of his children and their issue. His widow, Elizabeth M. Greenfield, now Elizabeth M. Petrie, filed a timely election to take against the will. The executors filed an account which was confirmed on May 22, 1972 by adjudication of BOLGER, J. The balance for distribution was "awarded in accordance with the statement of proposed distribution." On October 10, 1972, Judge BOLGER filed a supplemental adjudication concerning issues not relevant here and confirmed the prior adjudication in all other respects. The only exception taken was to the award of certain art objects to the Philadelphia Museum of Art. The court en banc sustained this exception. Greenfield Estate, 61 D.&C. 2d 243 (1973). However, on appeal, the Supreme Court sustained the auditing judge. Greenfield Estate, 457 Pa. 114 (1974).
Thereafter, a schedule of distribution was filed, certified by counsel to be in accordance with the adjudication. The schedule was filed without the joinder of Albert M. Greenfield, Jr., a co-executor and co-trustee. Mrs. Petrie filed timely objections to the schedule. Objections were also filed by Albert M. Greenfield, Jr. Mrs. Petrie then filed preliminary objections to the objections of Albert M. Greenfield,
[1 Phila. 96 Page 98]
Jr. The preliminary objections were subsequently withdrawn.
On October 9, 1975, the court, upon petition of the executors and trustees, appointed Mervin J. Hartman, Esquire, as guardian ad litem for minors and trustee ad litem for unborn and unascertained beneficiaries having an interest in the matter, to represent them in proceedings relating to the schedule of distribution and the objections thereto.
Hearings were held on the disputed issues. Counsel for the parties entered into a stipulation dated June 16, 1976 and a second stipulation dated September 23, 1976, which are annexed hereto.
We shall first deal with the objections of Mrs. Petrie, which are, in essence, a claim for reimbursement of the Pennsylvania inheritance taxes which were charged against her distributive share in the schedule of distribution. She admits that due to the election to take against the will, the widow's share is initally chargeable with the Pennsylvania inheritance tax. However, she contends that the Pennsylvania inheritance tax charged to her was included as part of the maximum credit for state death taxes under the applicable federal estate tax regulations*fn1 to reduce the federal estate tax for which only the non-elective share was liable.*fn2 As a result, she argues that she is entitled to have the amount of Pennsylvania inheritance tax charged against her reduced dollar for dollar by the amount of credit received by the non-elective share toward the federal estate tax. She cites § 4(b)(3) of the Estate Tax Apportionment Act of 1951; Mellon Estate, 347 Pa. 520 (1943); and Clark Estate, 8 D.&C. 2d 665, 7 Fiduc. Rep. 73 (1957),
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as authority for her position and as determinative of the issue.
We see no need for an extensive discussion of this complex problem as the parties are not really contesting the legal position advanced by Mrs. Petrie in her claim for reimbursement. The guardian ad litem has acquiesced "in the position taken by the electing widow with regard to the Pennsylvania inheritance tax credit." His reasons are set forth at length in his comprehensive report. Counsel for Albert M. Greenfield, Jr., also does not challenge the legal validity of the widow's argument. However, he does argue that Mrs. Petrie is estopped from asserting these objections. He states that when the widow filed her election to take against the will, she and her attorney made oral representations to the other executors that the estate would not suffer any disadvantage as a result of her taking against the will in order to induce them not to contest the election. He then concludes that the executors relied on this representation and did not contest the election, and, if Mrs. Petrie is permitted to assert her objections and they are sustained, there will be less money available for distribution to the residuary trusts and, thus, they are disadvantaged.
Counsel for Mr. Greenfield has emphasized in his brief the following testimony of Mrs. Petrie in support of his argument:
That I wanted him (Dean Wolfman) to make the statement to the executors, which you have referred to -- make it clear that what I was electing to do was not in any way to make them suffer financially. So, after that it became, so far as I was concerned, a matter for the lawyers to work out. (N.T. 163) (Parenthesis added.)
He would have us interpret this and similar statements of Mrs. Petrie to mean that if there were
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a transaction which resulted in a benefit to her and a detriment to the residue, she would then reimburse the residue without regard to any transactions which benefited the residue at the expense of Mrs. Petrie. We find this interpretation unreasonable and unsupported by the evidence.
Considering all of the testimony of Mrs. Petrie, which we find credible, and all the other evidence offered on this issue, we conclude that Mrs. Petrie did indicate that if there were an overall economic detriment to the residue as a result of her election, she would reimburse the residue for such detriment.
Mr. Greenfield did not present any evidence of overall economic disadvantage to the residue. In fact, he did not present any evidence of economic disadvantage except for this transaction. Nor did he present sufficient or persuasive evidence to support any theory of estoppel in this case. On the other hand, there was unrefuted evidence of substantial economic disadvantage to Mrs. Petrie: (1) she gave up a $50,000 pecuniary legacy; (2) she gave up a life estate valued at $205,000 in certain paintings; (3) she gave up a life interest valued at $63,000 in the balance of decedent's personal property located at "Sugarloaf"; and (4) there were tax benefits which accrued to the estate in the form of larger charitable deductions as a result of her giving up certain of the life estates.
As a result, we conclude that there is insufficient evidence to support any estoppel theory to prevent Mrs. Petrie from asserting her objections. We find her objections valid and sustain them.
The schedule of distribution states that $103,064.96 was charged against the distributive share of Mrs. Petrie as her proportionate share of Pennsylvania inheritance tax. However, she has waived any objection to Pennsylvania inheritance tax charges against
[1 Phila. 96 Page 101]
her share in excess of $97,000. She did claim in her objections, and the stipulation contains the fact, that if her position were sustained, she would also be entitled to a pro rata share of income and appreciation of principal on the said $97,000.
It should also be noted that in the federal estate tax return filed with the Internal Revenue Service, the amount claimed in schedule "M" for the marital deduction was not reduced by $97,000 (the amount of Pennsylvania inheritance tax charged to the widow) as required by the pertinent federal estate tax regulations. This resulted in a reduction of the federal estate tax paid by the estate of $75,000 being 77% (estate tax bracket) of $97,000.
If the electing widow's position is not sustained, the executors may well be obliged to pay the additional federal estate tax due by reason of the marital deduction being reduced by the Pennsylvania inheritance tax charged to the electing widow. The additional federal estate tax payable of $75,000 (as agreed in the stipulation) would be subject to interest for a period of at least eight years and nine months for a total tax of approximately the same amount as the inheritance tax claimed by the electing widow.
The objections of Mr. Greenfield raise the question whether the schedule of distribution is in conformity with the adjudication of Judge BOLGER. The schedule, as filed, computed the balances available for distribution to the parties by the "changing fraction" method. Mr. Greenfield agrees this method is proper for the distribution of income but he contends that the "fixed fraction" method should be used to determine the distributive shares of principal. The guardian ad litem agrees with Mr. Greenfield as to the method to be used for calculating the distributive shares of principal.
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The parties have agreed and stipulated that "if the aforesaid objections of Albert M. Greenfield, Jr., are well taken, the distributive share of principal of Elizabeth M. Petrie should be decreased on account thereof by $275,000.00 and the distributive shares of the principal of the residuary trusts for Decedent's five children should be increased by $55,000.00 each on account thereof."
The adjudication of Judge BOLGER awarded the balance for distribution "in accordance with the statement of proposed distribution." The statement of proposed distribution provided as follows:
Balance to widow and Trustees of five trusts for the children of decedent 'based on their respective interest in the principal assets held from time to time by Executors.'
'One-third (1/3) of net probate estate' to widow. Balance after payment of Federal Estate tax into equal separate trusts for each of decedent's five children.
We are thus faced with the issue, does the adjudication direct the calculation of the distributive shares of principal by any particular method?
The fixed fraction method is based on the following rationale: The widow's elective share is determined at the date of death as a statutory percentage of the net probate estate. On the date of final distribution, the widow's share is calculated by applying the same statutory percentage to the sum of the reappraised balance of principal, the advance distributions which have been made, legacies satisfied and taxes paid. Under this method, the widow would share in all gains or losses in principal in accordance with the same statutory precentage.
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Under the changing fraction method, as an estate is held over a period of time and as taxes and legacies are paid and distributions made, the relative interests of the elective share and the non-elective share at any given time are expressed as a fraction, the numerator being the dollar value of that share of the estate at that time and the denominator the dollar value of the total remaining estate at that time. Any gains or losses are reflected accordingly.
In the instant case, Judge BOLGER, in his adjudication, awarded the estate in accordance with the statement of proposed distribution as stated above.
All parties are in agreement that the language with respect to income clearly directs distribution by the changing fraction method.
Since the language distributing principal is significantly different than the language distributing income, Mr. Greenfield argues that this shows an intent to distribute principal by a method other than the changing fraction method. He argues that if the distribution of principal were intended to be made in the same manner as the distribution of income, then the executors would have used the same or similar language in requesting the award of principal in the statement of proposed distribution. Counsel for Mrs. Petrie argues that the difference in language conveys no such intention and should not be controlling.
There is no doubt that the language distributing income is different from the language distributing principal. But, what effect should be given to this difference in language? All agree that this specific question in regard to the method of calculating the distributive shares of principal was never presented to the auditing judge for decision. However, we have been asked by Mr. Greenfield to conclude that
[1 Phila. 96 Page 104]
the adjudication of Judge BOLGER compels distribution of principal by the fixed fraction method. We can not do this. The language of the adjudication directing the distribution of principal is fundamentally the statutory language which determines the percentage an electing spouse is to receive if testator is survived by more than one child. On its face, it does not mandate any specific method of calculating the distributive shares. We believe it would be incorrect to impute a meaning to these words which would be dispositive of the complex legal issue now before us when that issue was never presented to the auditing judge for determination. Accordingly, we conclude that the auditing judge did not direct the use of any specific method for calculating the distributive shares of principal.
It has also been argued that the statement of proposed distribution, which contains the language in question, was signed by Mrs. Petrie and she is bound by it. This argument assumes the executors intended the fixed fraction method be used in distributing principal, an assumption not supported by the evidence.
In our opinion, a review of the evidence fails to disclose any expression of intent by the executors as to the ultimate distribution of principal. From the testimony of the co-executors, it seems evident to this court that they did not have any particular distributive plan in mind when they executed the statement of proposed distribution. They, apparently, were unaware of the potential ramifications and did not consider the use of the fixed fraction method as opposed to the changing fraction method in proposing distribution of principal. Thus, it would be illogical to infer any intent on their part to direct distribution by any particular method. Accordingly, we must now determine the method which should be used.
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The statute governing a surviving spouse's right to take against a will sets forth the percentage share of the estate to which he or she is entitled. 20 Pa. C.S.A. § 2508. The statute does not provide the method to be used in calculating the ultimate distributive shares. Counsel has not called our attention to any appellate court decisions on this issue, nor has our independent research found any. There are three decisions by Judge TAXIS of Montgomery County: Gentle Estate, 22 Fiduc. Rep. 352 (1972); Boyer Estate, 23 Fiduc. Rep. 233 (1973); Weaver Trust, 25 Fiduc. Rep. 626 (1975); and Lewis Estate, decided by Judge GUTOWICZ of this Court, all of which uphold the changing fraction method. However, each of these decisions limited its holding to the facts of the case with which the court was dealing. In fact, in Weaver, supra, the court said at 630:
It should be stated that the 'changing fraction' method is not mandated by Gentle Estate, supra. Gentle Estate turned on the question of whether the 'changing fraction' method was inherently unfair, not whether it was mandatory. The court, in that case, found the 'changing fraction' method to be fair. In other cases, the 'fixed fraction' method might well be the more proper.
Since the legislature has not prescribed the law regarding the question before us, the court must decide as a legal issue the proper method for calculating the distributive shares of principal. This does not mean that we should decide that one method or the other is fair and equitable given the facts of the case at bar. The law with regard to the distribution of assets should be mandated so that the same principles apply to every estate. Of course, fairness must be used in making the decision but the decision should be made as a matter of law.
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To do otherwise might result in every administration of an estate being viewed with hindsight. Whenever there were gains or losses and the proportionate interests of the parties changed during the administration of the estate, one of the parties would always be in a position to say that the method used, be it fixed fraction or changing fraction, is not fair.
We must keep in mind the fact that this problem does not arise in cases where there have not been disproportionate advance distributions or payments of taxes and legacies which change the percentage interests of the parties in the whole of the remaining estate. However, the issue does arise when this has occurred and there has been a substantial increase or decrease in the value of the corpus. Also, depending whether there was a gain or loss, the position of the contesting parties would be different. For example, if there were a gain, one side would argue the changing fraction theory as proper and the other would argue the fixed fraction. If there were a loss, their roles would be reversed.
Now let us examine the merits of the two methods. When the fixed fraction method is used, the principal is distributed, and the gains or losses are charged according to the statutory percentage. Thus, the electing share would receive one-third of the principal, the benefit of one-third of any gain or be charged with one-third of any loss. In essence, the fixed fraction method treats the legacies and taxes which had been paid and the advance distributions which have been made as if they were still part of the corpus when, in fact, they no longer are in the estate. As a result, in many instances, the non-elective portion shares in gains or losses in a proportion which did not in fact exist when the gains or losses were realized.
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This can be best illustrated by a simple example. Let us assume that the net probate estate of a decedent is $300,000 and the widow's statutory elective share is one-third. Thus, upon her election she becomes entitled to $100,000. If federal taxes and legacies are paid out of the non-elective share (as they must be) in the amount of $100,000, there remains in the estate $200,000 in principal. The elective and non-elective shares then are $100,000 each. However, if this principal increases by $150,000 and becomes $350,000, under the fixed fraction method, the widow receives one-third of the increase and her distributive share is $150,000. The non-elective share would get two-thirds of the increase, and its distributive share would be $200,000. Thus, the value of the non-elective share increased by 100% and the value of the elective share increased 50% although both shares had exactly the same amount of money attributable to their respective shares in the estate. We can envision the problem had this been a $150,000 loss rather than gain.
On the other hand, the changing fraction method allocates the gains and losses realized on the principal of an estate among those who are in fact the owners of the principal at that time in the same proportions as their respective interests in the existing balance.
To illustrate this, let us use the same example: a net probate estate of $300,000; the widow's one-third elective share valued at $100,000; payment of legacies and taxes of $100,000 from the non-elective share and $200,000 remaining in the entire estate, and then an increase in the value of principal of $150,000. Under the changing fraction method, each would receive a proportionate share, i.e. $175,000. The method would also function if there were a loss of $150,000.
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Each would get $25,000, thus sharing in the loss proportionately.
The fairness and logic of the changing fraction method is further illustrated when we apply it to the distribution of income whereas it is difficult, if not impossible, to justify the fixed fraction method. This, again, is best illustrated by the same example as above. Assuming the elective share as $100,000 and the remaining non-elective shares as $100,000 and an annual income of $12,000, under the changing fraction method, the elective share would get $4,000 and the non-elective $8,000. This is not fair, equitable or logical. It is clear that income should be paid according to the percentage of ownership interest. We believe it is just as fair, equitable and logical that capital appreciation be similarly allocated. Furthermore, the chosen method of distribution must be fair, equitable and logical if there be a loss rather than a gain. As we saw from the example above, this occurs under the changing fraction method but it does not under the fixed fraction method.
Basically, the crux of the changing fraction theory is that the share of principal which earns income or causes capital gains or losses should receive the benefit of that income or capital gain and, likewise, be responsible for that capital loss. It is unfair that one should receive the attendant benefit or suffer the attendant detriment for gains or losses on property owned by another as would result if the fixed fraction method is used. Accordingly, we conclude that the changing fraction method should be used in determining the distributive shares of principal of this estate.
It is noted that the guardian ad litem has presented his argument in the alternative. He argues if the court concludes that the changing fraction method
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is the correct method for calculating distributive shares, it should be applied only prospectively. He reasons that all of the cases dealing with the changing fraction method were decided after the adjudication of Judge BOLGER and that it would not be correct to apply this method to this case. He argues that prior to these cases, it was standard practice to distribute via the fixed fraction method. However, he cites no authority for his contention, and we find it unpersuasive.
The court has also been asked by the parties to determine who shall pay the fee of the guardian ad litem. After considering all circumstances of the present litigation, the court concludes that one-half of the fee shall be charged to the estate and one-half to the trusts.
The stipulation of counsel dated June 16, 1976 states that if the court concludes that Mrs. Petrie's objection is proper and she is entitled to the $97,000, she claims then "she is further entitled to an additional sum of $7,842.67 on account of principal appreciation, and an additional share of income to 9/30/73 in the amount of $12,513.02."
Accordingly, this 26th day of May, 1977,
(1) The Objections filed by Elizabeth M. Petrie are sustained.
(2) The Objections filed by Albert M. Greenfield, Jr., are dismissed.
(3) Elizabeth M. Petrie is awarded an additional sum of $7,842.67 on account of principal appreciation, and an additional share of income to 9/30/73 in the amount of $12,513.02 in accordance with the Stipulation of Counsel dated June 16, 1976.
(4) Albert M. Greenfield, Jr., Elizabeth M. Petrie, Bruce H. Greenfield, Gustave G. Amsterdam and Elizabeth G. Zeidman, Executors of the estate of Albert M. Greenfield, are directed to file an
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amended schedule of distribution consistent with this Supplemental Adjudication and consistent with the relevant terms of the Stipulation of Counsel dated June 16, 1976.