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Home My WebLink About04-16-07 IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA ORPHANS' COURT DIVISION Estate of Ethel M. Baird, Deceased No. 21-06~0132 ATTORNEY GENERAL'S PROPOSED AUDITOR'S REPORT The Office of the Attorney General, in its role as parens patriae, submits this Proposed Auditor's Report pursuant to the direction of the Auditor, William A. Duncan, Esquire, appointed by Order of Court dated October 10, 2006, whose appointment was extended by Order of Court dated January 9, 2007, in the above matter. After a pre-hearing conference with the parties, the Auditor determined that the matter at issue was purely a question of law and that no hearing or discovery was necessary. The parties entered into a Stipulation of Facts filed on or '.., ;. ~-, :_1 about March 15, 2007, agreeing to the procedural history and facts recitedin~th~, foU~ing --. - ':' .....--~- .::i. Paragraphs 1 through 9. I. Procedural HistorW and Findine:s of Fact: -' ----1 '-'-} u' 1. Ethel M Baird (the "Decedent") died testate on December 22, 2005, a resident of Cumberland County. 2. The Deced~nt's Will dated November 18, 2004, was admitted to probate and Letters Testamentary were granted to Alice J. Hair as Executrix (the "Executrix"), by the Register of Wills for Cumberland County on February 10,2006. 3. After providing for a number of pre-residuary specific bequests of tangible personal property and pecuniary legacies totaling Four Thousand Dollars ($4,000), the Decedent's will left the residue of her estate to one charitable and three non-charitable beneficiaries, in specified percentages: 20% to Grace Evangelical Church and 80% to the non- charitable beneficiaries. J 4. Because the Grace Evangelical Church was no longer in existence, the Community Evangelical Free Church and the Trinity Evangelical Congregational Church executed "Consents to Compromise in Settlement of Cy Pres Determination of Beneficiary of Ambiguous Bequests" agreeing to equally split the 20% residuary bequest to Grace Evangelical Church. 5. Item First of Decedent's Will includes the following direction for the payment of taxes: "I direct that any and all inheritance, estate, and transfer taxes imposed upon my estate passing under this Will or otherwise shall be paid out of the principal of my residuary estate." 6. On or about August 9, 2006, the Executrix filed a First and Final Account of the Estate (the "Account") for the period from December 22,2005, through August 8, 2006. 7. The Executrix proposed to pay the inheritance tax from the distributable residue of the estate, prior to dividing the residue into shares of the specified percentages, with the following "Explanatory Note" appended to her Account: "Inheritance tax is proposed to be deducted prior to distribution of the residue according to the specified percentages, pursuant to the following "pay-tax clause" at Item Fifth of the decedent's will: 'I direct that any and all inheritance, estate and transfer taxes imposed upon my estate passing under this Will or otherwise shall be paid out of the principal of my residuary estate.' "As stated by Justice Roberts in Estate of Ereig, 439 Pa. 550, 558, 267 A.2d 841, 846 (Pa. 1970): 'In North Estate, 50 Pa.Dist. & Co. 703 (1944), the 'pay tax' clause was a good deal more explicit than ['all taxes shall be paid from my residuary estate'], stating that the estate taxes were to be paid 'out of the corpus or principal of my residuary estate,' obviously indicating that the taxes were to be paid before distribution of the residuary.'" -2- 6. The Account showed a residue of $90,345.53 after payment of Inheritance Taxes. The amount proposed to be distributed to each of the two Churches pursuant to the Account was $9,034.56 to each Church, representing a 20% share or $18,069.12. 7. The total Inheritance Tax paid as shown in the Account is $11,271.89, of which $646.28 was attributable to preresiduary bequests and properly paid before calculation of the residue. 8. The Attorney General filed Objections to the Account on or about August 21, 2006. The Attorney General objected to the Executrix's proposed apportionment of Inheritance Tax to the charitable residuary beneficiaries, as follows: "As a matter of law in the absence of specific language allocating the Inheritance Taxes to all the residual beneficiaries including the charities, the charitable percentage of bequest should be taken against the net value of the estate after adding back the Inheritance Taxes. See, In re Estate of Pyle, 391 Pa. Super. 244,570 A.2d 1074 (1990). 9. If the Attorney General's objections are sustained, the Inheritance Tax attributable to the residual beneficiaries would be added to the balance for distribution prior to calculation of the 20% charitable share of the residue, as follows: $90,345.53 + (Balance after payment of Specific Bequests) $10.625.61 (Inheritance Tax on non-charitable residual beneficiaries' shares) $100,971.14 x 20% = $20,194.22 or $10,097.11 to each Church II. Statement of Issue 10. Whether Item First of Decedent's Will contains an operative tax clause that changes the statutory presumption that residual beneficiaries are responsible for their own taxes and charitable residuary beneficiaries are exempt from tax. -3- III. Conclusions of Law 11. The tax clause in Item First of Decedent' s Will is not sufficient to shift the burden of the inheritance taxes imposed upon the non-charitable residual beneficiaries to the charitable residual beneficiaries. 12. The charitable residual beneficiaries in Decedent's Will are both religious organizations and are exempt from Pennsylvania Inheritance Tax under 72 P.S. ~9111(c)(I). 13. The Pennsylvania Probates, Estates, & Fiduciaries Code states that Inheritance Tax is to be apportioned pursuant to the Pennsylvania Inheritance and Estate Tax Act. 20 Pa. C.S. ~3703. 14. The Pennsylvania Estate and Inheritance Tax Act exempts charities from taxation of inheritance transfers unless the will states otherwise. Estate of Pyle, 391 Pa. Super. 244, 570 A.2d 1074 (1990); 72 P.S. ~9144(f). 15. Pursuant to 72 P.S. ~9144, taxes on pre-residue gifts are paid as an expense of the estate but taxes on the residue are apportioned among the residual beneficiaries, as follows: (a) In the absence of a contrary intent appearing in the will, the inheritance tax, including interest, on the transfer of property which passes by will absolutely and in fee, and which is not part of the residuary estate, shall be paid out of the residuary estate and charged in the same manner as a general administration expense of the estate. The payments shall be made by the personal representative and, if not so paid, shall be made by the transferee of the residuary estate. (f) In the absence of a contrary intent appearing in the will or other instrument of transfer and except as otherwise provided in this section, the ultimate liability for the inheritance tax, including interest, shall be upon each transferee. 72 P.S. ~9144 16. In Pyle, supra, the court explained this statutory system by stating: Thus, unless contrary intent appears, the taxes are to be paid from the residuary estate. In this case, the charities are exempt from taxation, and therefore, the only inheritance taxes remaining, after payment of -4- inheritance tax on the pre-residuary bequests, are on the residuary share bequeathed to appellant. Pyle at 253,570 A.2d at 1078-79. 17. The charitable beneficiaries have an interest in their tax free status, and should not be compelled to shoulder the inheritance tax of others, without a will providing clear intent to the alter the statutory scheme. Pyle at 250, 570 A.2d at 1077. 18. The language in Decedent's Will is similar to the language in Pyle, in which the court held that "the testator did not express a clear intent where the will merely provided for the payment of all taxes from the residuary estate." Pyle at 250, 570 A.2d at 1077 citing In re Estate of Erieg, 439 Pa. 550,267 A.2d 841 (1970). 19. Pursuant to Pyle, the language of intent must be specific; without such particular language, "a contrary intent will not be implied." Pyle at 250, 570 A.2d at 1077; See also, Estate of Fleishman, 479 Pa. 569,388, A.2d 1077 (1978); Berkev Estate, 26 Fiduc. Rep. 2d 265 (O.C. Div. Somerset 2006) and Robison Estate, 26 Fiduc. Rep. 2d 493 (O.C. Div. Phila. 2006). 20. The cases cited by the Executrix, In re Audenried's Estate, 376 Pa. 31,101 A.2d 721 (1954); In re Jones, 796 A.2d 1003 (Pa. Super. Ct. 2002), and North's Estate, 50 Pa. D. & C. 703 (O.C. Phila. 1940), had more explicit language than that that in Decedent's Will and thus are distinguishable and not controlling precedent in this matter. 21. Item First of Decedent's Will directs the tax to be paid from the "principal of [her] residuary estate." A direction to pay tax from the principal directs the source of payment, to be paid from principal rather than income, but does not address the apportionment of the payment between the residual beneficiaries. 22. There is no clearly stated contrary intent to alter the statutory tax apportionment scheme appearing in the Decedent's Will. -5- 23. Because the language in Decedent's Will is not sufficient to alter the statutory scheme, the charitable residuary beneficiaries should not bear the tax on shares of the non- charitable residuary heirs. IV. Recommendation 24. The Objection of the Office of the Attorney General should be sustained. The Account shall be revised so that the Inheritance Tax attributable to the shares of the residual beneficiaries shall be added to the balance for distribution prior to calculation of the 20% charitable share of the residue, as follows: $90,345.53 + (Balance for distribution after payment of Specific Bequests) $10,625.61 (Inheritance Tax on shares of non-charitable residual beneficiaries) $100,971.14 x 20% = $20,194.22, or $10,097.11 shall be distributed each to the Community Evangelical Free Church and the Trinity Evangelical Congregational Church. The amounts to be distributed to the non-charitable residual beneficiaries shall be revised and reduced by the Inheritance Tax attributable to their shares. Respectfully submitted, THOMAS W. CORBETT, JR. Attorney General By: G~~ o NNE BOOK COLES e uty Attorney General rney I.D. No. 82028 MARKA. PACELLA Chief Deputy Attorney General April 13, 2007 Office of Attorney General Charitable Trusts & Organizations Section 14th Floor, Strawberry Square Harrisburg, PA 17120 (717) 783-2853 -6- IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYL VANIA ORPHANS' COURT DIVISION Estate of Ethel M. Baird, Deceased No. 21-06-0132 CERTIFICATE OF SERVICE NOW, this 13th day of April, 2007, I, Joanne Book Coles, Deputy Attorney General, Charitable Trusts & Organizations Section, Office of Attorney General, do hereby certify that I served the foregoing Attorney General's Proposed Auditor's Report, upon the following by placing a true and correct copy of the same by way of first-class United States Mail, postage prepaid, addressed as follows: Thomas E. Flower Law Offices SAIDIS, FLOWER & LINDSAY 2109 Market Street Camp Hill, P A 17011 Office of Attorney General Charitable Trusts & Organizations Section 14th Floor, Strawberry Square Harrisburg, P A 17120 (717) 783-2853 COMMONWEALTH OF PENNSYLVANIA OFFICE OF ATTORNEY GENERAL TOM CORBETT ATTORNEY GENERAL April 13, 2007 Charitable Trusts and Organizations Section 14th Floor, Strawberry Square Harrisburg, P A 17120 (717) 783-2853 Fax (717) 787-1190 j coleS@1attorneygeneral.gov Glenda Farner Strasbaugh, Register of Wills Court of Common Pleas Cumberland County Courthouse One Courthouse Square Carlisle, P A 17013-3387 C\ Re: Estate of Ethel M. Baird No 21-06-0132 C,f"1, c... Dear Sir or Madam: Enclosed for filing is the Attorney General's Proposed Auditor's Report, in the above- referenced matter. Please file-stamp the two additional copies of this document and return them to me in the enclosed prepaid, self-addressed envelope. If you should have any questions or comments, please do not hesitate to contact me at (717) 783-2853. Thank you for your attention to these matters. Sincerely yours, ~C~ JBC/lss Enclosures cc: Service List