Opinion
July 12, 1977
John F. Walsh for petitioner.
Freedman Kolins (Ellis J. Freedman of counsel), and Bronstein, Van Veen Bronstein (Eli H. Bronstein of counsel), for respondents.
This is an application by the executor to apportion, and direct payment of, estate taxes against two inter vivos trusts. Petitioner also seeks to have the trusts assessed costs for determining the estate taxes and for prosecuting this application.
Decedent had four successive wives. He established in 1958 and 1965 inter vivos trusts as security for the payment of alimony to his second and third wives, both of whom survived him. Pursuant to the terms of each trust, if he or his estate ever failed to make the required payment, the trustee was to make the payment out of the corpus of the trust. In the case of the third wife, the 1965 trust was established as a contractual obligation of their separation agreement. The gross estate for Federal tax purposes included these two inter vivos trusts. As a result the amount of taxes for which these trusts are responsible is allegedly 59.9% of the total taxes both for Federal and State.
The law is clear that this court cannot review the assessment of taxes, including the requirement that nontestamentary assets be computed in the gross estate, but is relegated to a determination of how this assessment should be apportioned (Matter of Singer, 80 Misc.2d 1006, 1009; Matter of Lipshie, 30 Misc.2d 306, 311). As to the nontestamentary assets in this instance, the inter vivos trusts, the will provided for the apportionment of Federal and State taxes and for the pro rata payment thereof from these two trusts. Although these two wives challenge that testamentary directive, the general policy in this State favors apportionment unless there is a direction in the will to the contrary. (Matter of Kindermann, 21 N.Y.2d 790; Matter of Shubert, 10 N.Y.2d 461; Matter of Schuchman, 51 Misc.2d 541; EPTL 2-1.8.) These trusts must bear their burden for payment of taxes (Matter of Arnold, 36 Misc.2d 695; cf. Matter of Galewitz, 3 A.D.2d 280, affd 5 N.Y.2d 721; but cf. Matter of Brokaw, 293 N.Y. 555 , affg on other grounds 180 Misc. 490, affd 267 App. Div. 811).
In both the Brokaw and Arnold cases cited above, the income from the trusts in question were payable to the wives as alimony. In this case the income was payable to the decedent or to his estate, and the estate, through a residuary trust, was required to make the payments of alimony. Therefore, the argument raised in the two cases above that payment of taxes would decrease the amount of alimony is not available herein, and may not ever have been available (dissenting opinion, Matter of Brokaw, supra; Matter of Arnold, supra).
As the learned Surrogate BENNETT held in Matter of Arnold (supra, at p 701), the parties to a separation agreement "must be presumed to have contracted with full knowledge of the possible impact of taxes, both State and Federal, upon the value of the trust assets." Since the estate is taxed on the basis of the value of these trusts which are security for the alimony payments, these beneficiaries are not truly creditors. If they were, the inclusion of the value of the trusts would be offset by a deduction of an equal amount, thereby not creating an additional tax. Furthermore, no constitutional impairment of the obligation of contracts is involved, because any reduction in the security by way of proration or apportionment arises out of the inclusion of the trust assets within the decedent's gross taxable estate. The parties to those contracts and to the trusts are held to have contemplated the exaction of such taxes pursuant to the statutes applicable at the date of death of the decedent. (Matter of Galewitz, supra; Matter of Arnold, supra; Matter of Ryle, 170 Misc. 450; cf. Matter of Brokaw, supra).
Accordingly, based upon the general State policy favoring apportionment and the equitable and legal considerations, the inter vivos trusts must bear their pro rata share of the taxes, both Federal and State, out of the principal of the trusts.
The application is granted to the extent of directing that the inter vivos trusts bear their pro rata share of the taxes and is denied as to the payment of petitioner's expenses.