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Court Decides How Certain Taxes Should Be Paid


On December 28, 1992, executed a will that made specific bequests to his wife, son and other family members. The will also left $16,500 to three charities and created a trust for the benefit of his wife and son. On December 17, 1997, the testator executed a trust that, at the time of his death, made pre-residuary distributions to family members and left $16,500 to the same three charities. The residuary went into a marital trust for Ruth. It is claimed that at this time the testator had assets of approximately $10,000,000.

On April 6, 2001, the testator created a second trust that included pre-residuary dispositions to his son and a marital trust for his wife. Upon her death, the greater of $15,000,000 or 25% of the trust principal would go to his son, with the remainder to two charitable lead trusts (CLTs) for the benefit of WCA Hospital, Jamestown Community College, and five public libraries. At that time, the testator was worth approximately $19,000,000.

On February 13, 2002, the testator executed a third trust that, upon his death, would leave $16,500 to the same three charities as the 1997 trust had done. The remainder went to his family, primarily a marital trust for his wife that went to the son after the wife died. At this point, net worth had declined to approximately $3,000,000. On September 1, 2006, the testator signed the final version of the trust. This one provided for certain pre-residuary dispositions to the son, other family members, and a local church. The residuary provided for a $3,000,000 charitable lead trust for the benefit of WCA Hospital and the Center. The testator had approximately $5,000,000 worth of assets then.

Estate taxes, gift taxes and penalties consume approximately $ 1.5 million of the decedent’s probate and trust assets, and the allocation of the taxes and penalties is the main issue in this case. While all parties agree that the taxes should be paid first from the residuary probate estate, as directed by the will, the $125,000 in the probate residuary, the entire amount that passes under the will, is clearly insufficient to pay those taxes.

The petitioner contends that the language of the will, the language of the trust, the intent of the testator, and EPTL 2-1.8 control how the rest of the taxes should be paid. Under this view, the pre-residuary dispositions are funded first, taxes come from the remaining assets, and the CLT is funded with whatever remains. Objectants similarly contend that EPTL 2-1.8 controls but, under their view, taxes must be apportioned. Because the charities are exempt from taxes, the CLT receives the full $3,000,000, taxes are then paid, and any remainder goes to the family. Alternatively, objectants allow that a possible reading of the tax clause in the will could result in apportioning the taxes among all beneficiaries, including the charities. If neither of these claims is persuasive, the charities argue that the trust should be reformed to provide for the testator’s “charitable intent.”

The will directs that taxes be paid from the residuary estate, “with no right of reimbursement from any recipient of any such property.” The “no right of reimbursement” language has been construed to mean the same thing as “no right of apportionment”. “No right of apportionment” means that all beneficiaries, even charities, must contribute to the tax burden.

Objectants cite several cases in support of their claim that when the will directs that taxes be paid from the residuary, and the residuary is insufficient, the other beneficiaries must share in the taxes. The court has no disagreement with that assertion. However, in those cases, there were other beneficiaries under the will who could be looked to for taxes and they were properly charged with some of the tax burden. Here, there are no other probate assets so taxes must come from the trust
Despite the fact that taxes must come from the trust, the charities ask the court to ignore the tax provisions contained in the trust and simply apply EPTL 2-1.8 (c). This would result in apportionment of the taxes among the trust beneficiaries with the charities being exempted from any of the taxes, notwithstanding the contrary directions in both the will and the trust. The court believes that would be an anomalous result and would also be contrary to testator’s intent.

Further, EPTL 2-1.8 by its own terms does not compel the result sought by objectants. Subdivision (c) only applies if contrary directions are not “otherwise provided in the will or non-testamentary instrument.” Here, both the will and the non-testamentary instrument provide directions for the payment of taxes. However, because the probate estate is insufficient, we turn to the trust provisions. Paragraph (V) (D) (2) of the trust provides in part:

All estate taxes, whether federal or estate, as well as anyadministration expenses shall be paid from the trustprincipal prior to the funding of any of the residuary dispositions. The decision of the Trustee as to any such payments shall be conclusive and binding upon all parties interested in this Trust or such Estate.

Paragraph (V) (D) (10) provides in part: All taxes shall be paid entirely out of my residuary estate as part of the expense of administration thereof, with no right of reimbursement from any recipient or beneficiary of any such property. The charities first contend that neither of these provisions applies and the court should simply apply EPTL 2-1.8. The court declines to arbitrarily write out of the trust the instructions of testator.

Alternatively, objectants contend that these two provisions are inconsistent and therefore the latter clause controls. There, the court held that when clauses in a will are “so radically repugnant”, or so irreconcilable “that they cannot possibly stand together, the one which is posterior in position shall be considered as indicating a subsequent intention, and prevail, unless the general scope of the will leads to a contrary conclusion”. This rule is used only as a last resort, “to be availed of when all efforts to reconcile the inconsistency by construction have failed”. Here, the general scope of the will and trusts leads inexorably to the conclusion that the testator intended to favor his family first. Therefore, even if the clauses were repugnant, the first is much more consistent with the general scope of the will and trust.

Further, when a specific clause in a document conflicts with a general clause, the specific clause prevails. The court believes that paragraph (V) (D) (2) is far more specific than (V) (D) (10) and the court has little difficulty construing the trust to direct payment of taxes and pre-residuary bequests before the CLT is funded. Additionally, the fact that (V) (D) (2) appears in all four trusts and (V) (D) (10) appears only in the last one supports the estate’s position that (V) (D) (10) was simply a drafting error.

Construing the trust as objectants propose would be contrary to the wishes of the testator as expressed throughout the wills and trusts he executed since 1992. In all of these, he provided for his family above all else. It is elementary that the intent of the testator must be a court’s “absolute guide” in construing a will. “This task is not furthered by rote ascription of technical meanings of terms regardless of context”. Rather, ” a sympathetic reading of the will as an entirety’ is required”. Further, in difficult cases, the Court of Appeals has “employed a presumption in favor of the testator’s relatives as against unrelated persons”.

The charities contend that construing the will and trust in the manner sought by petitioner would be senseless because the CLT would be self-defeating. However, the testator may have expected his assets to increase, as they had done before. Further, the testator previously created self-defeating CLTs in the 2001 trust. When the testator executed the 2001 trust, his net worth was about $19,000,000. That trust made pre-residuary dispositions before giving $15,000,000 to Robert. Taxes and expenses would not only have reduced the $15,000,000 to Robert but also would have left nothing to fund the CLTs.

Finally, it is likely that the testator did not fully appreciate the extent of the taxes he would owe. For example, it appears that he was unaware of the considerable gift taxes and penalties his estate would have to pay because he did not address the gift taxes when they accrued during his lifetime. The court does not believe that the testator deliberately and knowingly created a self-defeating trust.

The charities further argue that the trust should be “equitably reformed” to provide for the testator’s charitable intent. They claim that the testator cared more about minimizing taxes than benefitting his family and point to very innocuous matters to support their contention. The court disagrees. If limiting taxes was his only concern, he would simply have left everything to charity. The fact that he testified that his father wanted to lessen the impact of taxes on his estate does not equate to disfavoring his family. Moreover, he also testified that his father’s lawyer suggested the CLT.

Wills or trusts may also be reformed to provide for a supplemental needs trust for a person under a disability pursuant to EPTL 7-1.12. However, that is not the situation presented here and there is no compelling reason to reform the trust to favor the charities over the testator’s family.

The charities also raised a number of other objections with respect to the accounting, e.g., administration expenses, penalties and attorneys’ fees. However, they did not address them in their memorandum. The court has reviewed the objections and agrees with petitioner that the payment of administration expenses, estate and gift taxes, and legal fees were appropriate expenses. The court sees no reason to surcharge petitioner for any of them.

Accordingly, petitioner’s motion for summary judgment is granted and the objections are denied. The objectants’ cross-motion for summary judgment is denied. Costs are awarded to petitioner. The court adds only that it questions whether Justice would want the charity that bears his name to take the position that the Jackson Center did, i.e., the testator’s will or trust should be reformed so that his only child receives relatively little and the lion’s share goes to charities that were closely affiliated with decedent’s attorneys but not decedent himself.

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