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HomeMy WebLinkAbout21-2003-474 Orphans ESTATE OF DONALD GRENIER, DECEASED : IN THE COURT OF COMMON PLEAS : OF CUMBERLAND COUNTY, : PENNSYLVANIA IN RE: : NO. 2003-00474 : ORPHANS' COURT DIVISION IN RE: FINAL DETERMINATION OF PETITION FOR DECLARATORY JUDGMENT Opinion Hoffer, P.J.: Before the court is the Petition of Patricia Rose and John Grenier, the niece and nephew of the Decedent and co-executors of his estate, seeking a Declaratory Judgment which classifies the estate assets transferred to them as pre-residuary gifts under the Will. If granted, the effect of this Declaratory Judgment would relieve the Petitioners of the burden of their share of inheritance and estate taxes. Catholic Charities and Holy Spirit Hospital (hereinafter "Charities") are charitable residuary legatees who contend that the assets given to the Petitioners are a part of the estate's residue. For the purpose of estimating the potential tax implications of the parties' respective interpretations of the Will, the parties have stipulated the debts, administrative expenses, and fees incurred by the Estate, as well as facts relevant to interpretation. STATEMENT OF FACTS Donald Grenier died testate on June 4, 2003 with an estate consisting of assets worth over $1.6 million. (Stipulation of Facts at 1, 3.) He never married and had no children.1 (Id. at 1.) Petitioners, both adults residing in California, were his closest living relatives at the time of his death. (Id. at 2.) His three-page will is comprised of four numerated items.2 (Id. at Exhibit A.) The item labeled "FIRST" directs the Executor to "pay from the residue of my estate. . . all estate, inheritance, succession, and transfer taxes. . . ." (Id.) Immediately following this paragraph, the dispositive provisions of the will state as follows: SECOND: I give and devise the residue of my estate, . . ., as follows: A. I give and bequeath the maximum amount allowable for the estate tax transfer exemption at the time of my death, not to exceed One Million Dollars, to my niece, Patricia Rose, . . ., and my nephew, John Grenier, . . ., to be shared equally. B. I give and bequeath three-fourths (75%) of the remainder of my estate to Catholic Charities. . . C. I give and bequeath one-fourth (25%) of the remainder of my estate to Holy Spirit Hospital. . . (Id.) Both Catholic Charities and Holy Spirit Hospital are charitable organizations exempt from inheritance tax. See 72 Pa.C.S.A. ~ 9111 (c)1; (Id. at 2.) There are no other beneficiaries who received property under the Will or from its residue. (Id. at Exhibit A.) There are sufficient assets in the estate to fund the $1 million legacy. (Id. at 3.) 1 Decedent was a resident of Cumberland County, Pennsylvania. 2 The third and fourth items are erroneously labeled "Fourth" and "Fifth," but there is no allegation by any party that these three pages do not encompass the will in its entirety. Furthermore, the "Fourth" and Fifth" items are not relevant to this discussion. 2 DISCUSSION In the interpretation of any will, a court must focus on the intent of the testator which is gathered from an examination of the entire will. Estate of McKenna, 489 A.2d 862, 865 (Pa. 1985). In order to ascertain the testator's intent, a court must examine the words of the will, and, if necessary, the scheme of distribution and other facts bearing on the issue. .!sL The provisions of the Pennsylvania Statutes, which control the apportionment of federal estate taxes, provide that a testator may direct how the estate taxes shall be apportioned and that such direction will take precedence over the statutory tax apportionment scheme. 20 Pa.C.S.A. ~ 3701 (2004).3 In the absence of such direction from the testator, each party interested in property of the gross estate is responsible for the federal estate taxes in proportion to his or her share. Id. One of the exceptions to this general rule exempts the beneficiaries of pre-residuary gifts from paying estate taxes. 20 Pa.C.S.A. ~ 3702(b)1. The taxes on these gifts are paid entirely from the residue prior to its distribution among residuary beneficiaries. Id. The Petitioners argue that the magnitude and specificity of their legacy, in comparison to the smaller legacy left to the Charities, demonstrates the Decedent's intent to bequeath them a pre-residuary gift, on which they are not responsible for taxes. In this context, they argue that the tax clause contained 3 Pennsylvania estate tax is apportioned in the same manner as a Federal estate tax. 20 Pa.C.S.A. ~ 3704 (2004). 3 in Item "FIRST" is sufficient to alter the statutory tax scheme. However, for the reasons stated in this opinion, the language in the Will does not demonstrate the Decedent's intention to give the Petitioners a pre-residuary gift and is insufficient to alter the statutory tax scheme. I. The Legacy to the Petitioners is a part of the Residue of the Estate. Generally, a specific bequest, or pre-residuary gift, is a "gift by will of a specific article or part of an estate." Soles Estate, 304 A.2d 97, 100 (Pa. 1973). By contrast, the residue of an estate is defined as "whatever is not specifically devised or bequeathed. . ." Brickner's Estate, 6 A.2d 905 (Pa. 1939). If there is any doubt as to the testator's intent whether a transfer is a specific bequest or part of the residue, the party arguing a specific gift has the burden of proof. .!sL In addition, the mere fact that the testator enumerated specific items in a residual gift does not make it a specific bequest. See In re Woolett's Estate, 337 A.2d 837, 840 (Pa. 1975.) The Will states that the Petitioners are to be given out of the residue the "maximum amount allowable for the estate tax transfer exemption not to exceed $1 million." (Stipulation at Ex. A.) The Petitioners argue that this language gives them a pre-residuary gift of a specific dollar amount of $1 million. They argue that this interpretation, which would free them of tax liability, is consistent with the scheme of distribution that makes them the estate's primary beneficiaries. They also contend that the words "not to 4 exceed" merely demonstrate that the Decedent believed his estate would only sustain a $1 million gift even if the tax exemption increased, and that they do not demonstrate the Decedent's intention to limit their share of the residue. Although this language gives the Petitioners a specific and substantial amount, it is simply a method of calculation to dispose of the residue, not a pre-residuary gift. In Item "Second," the Decedent specifically allocated a portion, albeit a substantial portion, of the residue to the Petitioners in an amount to be measured by the federal estate tax clause. (Stipulation at Ex. A.) This specific method of calculation does not override the fact that the legacy is found in the paragraph distributing the residue. Nor does it alter the source or character of all legacies in the will, which are to be satisfied from the residue under Item "Second." (Stipulation at Ex. A.) If anything, it demonstrates that the testator was aware of the tax consequences of his will, including the tax burden on the Petitioners. Had he desired to do so, the Decedent could have alleviated this burden by explicitly stating that their legacy was pre-residuary or by leaving their legacy out of the residue provision. However, the Decedent expressly stated in his Will that their legacy was to be satisfied from the residue. The Petitioners have not proven that the Decedent intended to give them a pre-residuary gift of $1 million. 5 II. The Decedent did not Intend to Alter the Statutory Tax Apportionment Scheme. In determining whether a testator intended to alter the statutory scheme with a tax clause, Pennsylvania courts must closely examine the entire will to determine if it adequately directs how estate tax is to be apportioned between beneficiaries. See ~ In re Estate of Pyle, 570 A.2d 1074, 1077 (Pa. Super. Ct. 1990). In order to establish this contrary intention, a testator must specifically direct how taxes should be apportioned among beneficiaries .!sL; ill re Estate of ErieQ, 267 A.2d 841, 845 (Pa. 1970). In the absence of such language, a contrary intent will not be implied from the rest of the will. See Pyle, 570 A.2d at 1077. The court in Pyle held that a testatrix did not intend to alter the statutory tax scheme because her will did not contain any specific language directing how tax should be apportioned among beneficiaries. .!sL A non-charitable beneficiary in Pyle argued that a clause which directed that "all taxes be paid from residue," when viewed in the context of its placement before the residue clauses and a directive transferring her portion of the residue "absolutely," demonstrated the testatrix's intent to have taxes paid from the residue prior to its distribution between her and two charitable beneficiaries. Id. at 1077-8. (emphasis added). However, the court found this argument to be insufficient to disrupt the statutory tax scheme. .!sL It refused to find that the testatrix intended to alter the statutory tax scheme by implication. See id. at 1078. It 6 reasoned that if the testatrix had desired to disrupt the statutory scheme, she could have used appropriate language in her will and specifically stated that all taxes were to be paid from residue prior to its distribution. .!sL The Pennsylvania Supreme Court also addressed the issue of allocation of estate taxes between two beneficiaries of the residual estate in In re Estate of ErieQ, 267 A.2d 841 (Pa. 1970). In ErieQ, the niece of the testator argued that the tax clause in the will required the estate taxes to be paid from the residue prior to distribution, thereby apportioning some of the tax burden to the other residuary beneficiary, the testator's widow. .!sL at 843. The court observed that while the testator had specifically directed that all taxes be paid from the residue, he had not provided any guidance as to the allocation of tax liability between the two residuary beneficiaries. .!sL at 845. Therefore, the language in the will was insufficient to overcome the statutory scheme. .!sL The Petitioners rely on Stackhous Estate, 12 Fid.2d. 311 (O.C. Montg. 1992) to support their argument that the tax clause alters the statutory tax scheme. In Stackhous, relatives of the testator, who were bequeathed both and pre-residuary legacies, argued that the presence of a tax clause demonstrated the testator's intent to alter the statutory scheme. .!sL at 312. The court held that a tax clause, similar to the one in the instant case, sufficiently demonstrated the testator's intent to have taxes paid prior to distribution of the residue between the relatives and charitable beneficiaries. Id. at 315. It reasoned that tax clauses were used prior to 1961 to insure the 7 integrity of pre-residuary gifts because such gifts were not relieved of the tax burden at that time. .!sL at 316. However, because pre-residuary gifts no longer bear a tax burden, the practice of including a tax clause would be meaningless unless it was being used to alter the statutory scheme. .!sL The court also reasoned that because an interpretation contrary to the statutory scheme was consistent with the scheme of distribution favoring the relatives, as evidenced by their pre-residuary gifts, it was more likely that the testator intended the alternative scheme. Stackhous, 12 Fid.2d at 315. In the instant case, the Will contains a tax clause similar to the ones in Pyle, Stackhous, and ErieQ. The Decedent merely included a tax clause that recited the statutory tax scheme found in ~3702(b)1, but did not direct how taxes should be apportioned between beneficiaries. Although the court in Stackhous found that this type of clause would be rendered meaningless unless it altered the statutory scheme, the Pennsylvania Superior Court in Pyle considered such reasoning to be flawed. When confronted with a tax clause that was simply a recitation of the law as found in ~3702(b)1, it stated that the clause was not meaningless and would still be enforced because it expressly applied the statutory tax scheme to the will. Pyle, 570 A.2d at 1077. Because there is no specific language indicating how the taxes should be apportioned between the Petitioners and the Charities, an intention to change the statutory scheme of tax apportionment cannot be implied. There is nothing in the Will to guide the court in apportioning tax liability other than the 8 tax clause simply directing that the statutory scheme be followed. In addition, although the scheme of distribution favors the Petitioners, unlike the beneficiaries in Stackhous who were both pre-residuary and residuary beneficiaries, here they are only residuary beneficiaries. The Decedent did not leave them any pre-residuary gifts that could demonstrate the Decedent's general desire to relieve the Petitioners of tax liability on all legacies. Because the tax clause contains no guidance concerning how tax should be apportioned among the residuary beneficiaries and there is no indication from the rest of will that the Petitioners are pre-residuary beneficiaries, there can be no departure from the statutory tax scheme. A will must control the distribution of an estate, and when its language is clear and explicit, its intention must be obeyed. In re Brown's Estate, 57 A. 360, 361 CPa. 1904). In the instant case, the language of the Will is clear: the Petitioners are to be given a portion of the residue and taxes are to be paid from the residue of the estate. Because the Decedent did not bequeath a pre- residuary gift to the Petitioners nor indicate how estate taxes should be apportioned between the residuary beneficiaries, a contrary intent to statutory tax apportionment may not be implied. Estate and inheritance taxes must be paid by the non-exempt residuary beneficiaries, in this case, the Petitioners. 9 ESTATE OF DONALD GRENIER, DECEASED : IN THE COURT OF COMMON PLEAS : OF CUMBERLAND COUNTY, : PENNSYLVANIA IN RE: : NO. 2003-00474 : ORPHANS' COURT DIVISION IN RE: FINAL DETERMINATION OF PETITION FOR DECLARATORY JUDGMENT ORDER OF COURT AND NOW, this _14 day of _January , 2005, upon consideration of the Petition for Declaratory Judgment, the Answers, the Stipulation of Facts, briefs of the parties and oral argument, and concluding that the Decedent did not intend to make a pre-residuary gift to Petitioners, John Grenier and Patricia Rose, it is hereby ORDERED that all gifts to the beneficiaries under Item SECOND of the Will be satisfied as residual gifts and that the tax burden be allocated solely to the gift to the non-charitable beneficiaries, John Grenier and Patricia Rose, under tax apportionment scheme as found in 20 Pa.C.S.A. ~3701 et seq. (2004). By the Court, George E. Hoffer, P.J. 10 Donald M. Lewis III Keefer, Wood, Allen & Rahal, LLP 210 Walnut Street P.O. Box 11963 Harrisburg, PA 17101-1963 (717)255-8038 Attorney for Petitioners Edmund G. Myers Johnson, Duffie, Stewart & Weidner 301 Market Street P.O. Box 109 Lemoyne, PA 17043-0109 (717) 761-4540 Attorney for Respondent, Holy Spirit Hospital Terrence J. Kerwin Kerwin & Kerwin 27 N. Front Street Harrisburg, PA 17101 (717)238-4765 Attorney for Respondent, Catholic Charities of the Diocese of Harrisburg, Inc. 11