union-planters-national-bank-as-and-trustee-under-the-will-of-james-a ( 1998 )

IN THE COURT OF APPEALS OF TENNESSEE, WESTERN SECTION
AT JACKSON
_______________________________________________________
)
UNION PLANTERS NATIONAL
BANK, as Executor and Trustee
)
)
Shelby County Probate
No. B-13047
FILED
Under the Will of JAMES A. LeROY, )
Deceased, ) January 7, 1998
)
Petitioner/Appellant. ) Cecil Crowson, Jr.
Appellate C ourt Clerk
)
VS. ) C.A. No. 02A01-9701-PB-00026
)
BETTYE CLAIRE REINHARDT )
DEDMAN, JOHN DEDMAN, BERNICE )
A. LeROY, JILL LeROY DIMICELI )
and SUE LeROY HENDERSON, )
)
Respondents/Appellees. )
)
______________________________________________________________________________
From the Probate Court of Shelby County at Memphis.
Honorable Leonard Pierotti, Judge
Marion S. Boyd, Jr., WYATT, TARRANT & COMBS, Memphis, Tennessee
Attorney for Petitioner/Appellant.
Allan J. Wade, BAKER, DONELSON, BEARMAN & CALDWELL, Memphis, Tennessee
Attorney for Respondents/Appellees.
OPINION FILED:
REMANDED
FARMER, J.
CRAWFORD, P.J., W.S.: (Concurs)
LILLARD, J.: (Concurs)
Union Planters National Bank (“Bank”), as executor for the estate of James A. LeRoy
(“Testator”), filed an action in the Probate Court of Shelby County for probate of Testator’s will on
January 5, 1989. Bank subsequently filed suit for declaratory judgment against the beneficiaries and
legatees of Testator’s property (“appellees”) alleging that the residuary estate provided for in
Testator’s will to pay all death taxes was insufficient to cover his tax liability and seeking restitution
from the appellees for their proportional share. Dedman appellees responded by contending that the
post-death appreciation of residuary estate assets and the receipt of income from those assets had
sufficiently increased the value of the residuary estate to enable it to sufficiently cover all death taxes
requested by Bank. The Special Master appointed by the trial judge confirmed the sufficiency of the
residuary estate on the date the taxes were due. The trial court entered judgment for appellees
confirming the report of the Special Master finding that there was no shortfall in the residuary estate
established by the testator in his will and thus rendering appellees not liable to Bank for
reimbursement of death taxes in any amount. We find the decision of the lower court as to the issue
of post-death income to the residuary trust to be in error and remand. Due to the complicated facts
of this case and our determination that one issue in this case requires a remand to the lower court,
we will only present the facts relevant to that issue.
Testator executed his will in 1977, eleven years prior to his death on December 16,
1988. At the time he executed his will, Testator’s immediate family consisted of two daughters,
appellees Jill Dimiceli and Sue Henderson and his wife, appellee Bernice LeRoy, to whom he
remained married until his death. The will established a marital trust for the benefit of Testator’s
widow and a residuary trust for the benefit of the widow, his daughters and other lineal descendants.
The income of the residuary trust was specifically devised to Testator’s wife and daughters.
A year after the will’s execution, Testator entered into a relationship with appellee
Bettye Dedman. They began living together in April 1981 and in June 1982, Ms. Dedman was made
beneficiary of Testator’s life insurance policy from which she received approximately $400,000 upon
his death. Testator also made other gifts to Ms. Dedman including a Germantown condominium
where they lived prior to Testator’s death. Ms. Dedman’s benefits were included in Testator’s gross
estate for state inheritance tax and federal estate tax purposes. Testator’s death tax liability totaled
approximately $562,000.
Testator’s will contained the following tax clause:
I direct that there shall be paid out of that portion of my residuary
estate which is not included in the share qualifying for the marital
deduction, without apportionment, all estate, inheritance, succession
and other taxes . . . assessed by reason of my death, imposed by the
government of the United States, or any State . . . in respect of all
property required to be included in my gross estate for estate or like
tax purposes by any such governments, whether the property passes
under this Will or otherwise, including property over which I have a
power of appointment, without contribution by any recipient of any
such property.
This clause was interpreted as demonstrating Testator’s intent to pay all death taxes from his
residuary estate, including the taxes on the life insurance payment to Ms. Dedman. Because the total
value of the residuary estate had not been determined, Bank, as executor, paid the tax liability in full
from assets in its possession on September 18, 1989. Bank contends that this payment of death taxes
has left it unable to fully fund the marital bequest. This insufficiency is the basis of Bank’s claim
against the Dedman appellees. Bank maintains that the residuary estate is properly valued as of
Testator’s date of death and asserts that, on that date, the residuary estate was inadequate to satisfy
the entire tax obligation.
Bank asserts that the Dedman appellees should bear the entire brunt of the shortfall
and should be denied the benefits of the tax clause since Testator was not even acquainted with them
at the date of execution of his will and, thus, did not intend that they benefit therefrom. Bank further
asserts that the post-death increases of income are properly included within the residuary estate for
the benefit of its beneficiaries, the testator’s “nearest and dearest,” his wife and two daughters. Bank
asserts that this is the only way that the will and its tax clause can be given effect as written.
While it is undisputed that the residuary estate was insufficient to pay the taxes as of
the date of the Testator’s death, the Dedman appellees argue that Testator’s date of death is not the
proper valuation date and that the residuary estate was sufficient to meet the tax burden due to the
appreciation of assets and the receipt of income since the Testator’s death.
The trial court determined that the assets of the residuary estate were to be valued as
of the date that the death taxes were due and payable and that the residuary estate should be increased
by the amount of the residuary estate’s net income accrued subsequent to Testator’s death, but which
remained undistributed on September 18, 1989. The court confirmed the report of the Special
Master that no shortfall in the residuary estate existed on the date that the death taxes were due and
payable.
When the trial court and the master agree on an issue of fact, such findings are
conclusive on appeal if supported by any material evidence. In re Estate of Tipps, 907 S.W.2d 400,
403 (Tenn. 1995). However, our scope of review regarding questions of law is de novo with no
presumption of correctness. Briggs v. Riversound Ltd. Partnership, 942 S.W.2d 529, 531 (Tenn.
Ct. App. 1996).
Although both sides in this appeal raised several complicated issues for review, the
central issues revolve around the valuation of the residuary estate and whether it was sufficient to
satisfy the tax burden assessed against it. Of particular importance to the resolution of this matter
is the issue of post-death income to the residuary estate. The trial court found that, on the date the
taxes were due and payable, the residuary estate had increased to the point it was sufficient to pay
the taxes. However, this increase was due to the appreciation of assets and the receipt of income
during the period after the Testator’s death, but before the taxes were due. It is in the disposition of
this increase that the trial court erred.
The Testator’s will established a residuary trust which was comprised of all the assets
in his residuary estate. The Testator directed the trustees of the residuary trust to
[R]emit such part of the net income therefrom as they shall determine
to be reasonably required for the reasonable maintenance and support
of my wife, BERNICE A. LeROY, . . . so long as she shall live. That
portion of the net income which shall not be distributed to . . . my
said wife shall be distributed equally to my daughters SUE ANN L.
HENDERSON and JILL MARIE L. DIMICELI.
This language clearly establishes the Testator’s intent to give the net income of the residuary trust
to his wife and daughters.
A gift of “net income” means that the beneficiary of the gift receives the income
“from the property, fund and the like after deducting periodic recurring taxes and other expenses
which are necessary to the preservation of the property from which the income is derived or which
are necessary to earn the income, to keep account of it, and the like.” 5 William J. Bowe & Douglas
H. Parker, Page on the Law of Wills § 39.3 (4th ed. 1962). While the term net income would seem
to refer to income after the deduction for administrative expenses associated with the residuary
estate, we do not take the term to include death taxes incurred by the Testator’s estate as a whole.
As to the issue of whether these beneficiaries are due the income from the death of
the Testator or whether this income becomes part of the residuary which may be used to satisfy the
death taxes of the estate, our court has adopted the “Massachusetts Rule”. American Nat’l Bank
of Nashville v. Embry, 181 Tenn. 392, 181 S.W.2d 356 (Tenn. 1944). This rule gives the
beneficiaries of the income the income from the entire residuary estate rather than merely the income
earned from the portion of the residuary estate which remains after the satisfaction of all debts and
expenses. Id. As the court said in Embry:
It is clear . . . that the application of the ‘Massachusetts Rule’ has
been approved by experience, as most reasonable and practical. Not
only does it relieve the executor and trustee from complex
accounting, and the consequent burden of changed decisions, which
may be made necessary, as the administration progresses, but it offers
a clear and simple rule upon which a testator may rely, if he so
desires, or from which he may depart if he so writes his will.
Id. at 360-361.
Therefore, the post-death income to the residuary estate, as distinguished from the
appreciation of assets, may not properly be utilized in the satisfaction of the death taxes. In this case,
despite the need for judicial economy, we feel we have no choice but to remand this case for
calculation of the residuary estate consistent with this opinion. Therefore, the remaining issues are
pretermitted. Costs in this cause on appeal are taxed one-half to the appellant and one-half to the
appellees.
__________________________________
FARMER, J.
______________________________
CRAWFORD, P.J., W.S. (Concurs)
______________________________
LILLARD, J. (Concurs)