State ex rel. Hilton v. Probate Court

Holt, J.

By writ of certiorari sued out by the attorney general, the judgment of the probate court of Kandiyohi county determining the amount of inheritance tax due the state from the estate of Catherine McIntyre, deceased, is brought before this court for review.

The decedent, a resident of the state of Iowa, left a will, whereby she gave one-third of all her property to her husband, Daniel McIntyre, and the remaining two-thirds thereof to a trustee in trust to pay to her niece, Kate Walsh, the income therefrom and a sufficient amount of the principal to support her comfortably, and at her death to deliver the remaining principal to her heirs. The will was duly admitted to probate in the proper court of the state of Iowa on November 5, 1914, and was duly admitted to probate in this state as a foreign will by the probate court of Kandiyohi county on August 16, 1915. An agreement executed by and between the husband, Daniel McIntyre, and the niece, Kate Walsh, on September 25, 1915, was filed in the probate court of Kandiyohi county on October 14, 1918. This agreement states that it was made to confirm a prior oral agreement between the parties; that, when the will was offered for probate in the Iowa court, Daniel McIntyre filed objections thereto; that to avoid a contest Daniel McIntyre and Kate Walsh made an oral agreement that the objection should be withdrawn and the will admitted to probate, and that the property left by the decedent should be divided equally between them; that the objections were withdrawn and the will was admitted to probate; that by reason of the facts recited in the agreement Daniel McIntyre is entitled to an undivided one-half of the property of the decedent, and the trustee is entitled to the other undivided one-half thereof for the purposes of the trust, and that both parties to the agreement desired the court to assign the property in accordance therewith in its final decree. The husband and the niece were the only parties to this agreement, but the power of the niece to bind the trust estate thereby does not seem to have been questioned by anyone at any time, and for the purposes of this case we shall assume, without further consideration, that the agreement was valid and effective.

The property within this state consisted of a tract of land in Kandiyohi county of the value of $4,800. It is stipulated that this land was sold for the sum of $4,800 on October 10, 1918, and that the expenses of administration in the sum of $197.50 were paid from the proceeds, and that the remaining sum of $4,602.50 was assigned in equal shares to Daniel McIntyre and Kate Walsh, pursuant to the above agreement, by the final decree of the probate court made on December 23, 1918.

Where property passes to a surviving spouse $10,000 in value is exempt from the inheritance tax; where it passes to a niece $1,000 in value is exempt from such tax. It is conceded that no tax is due from the husband whether he received one-third or one-half of the property, as in either event he received less than the amount of his exemption. By, virtue of the agreement, the trustee retained for the purposes of the trust only one-half of the property of the value of $2,301.25. The court deducted the exemption of $1,000 from this amount and held that the remaining sum of $1,301.25 was the only amount subject* to the transfer tax and rendered judgment accordingly. The state contends that two-thirds of the property of the value of $3,068.33 passed to the trustee by the will, of which $1,000 was exempt and $2,068.33 was subject to the tax.

The question presented is whether, where there is a purported will, the several beneficiaries therein shall pay the inheritance tax upon the amount actually received out of the estate according to a decree of distribution entered upon a good faith compromise between them, or should they each pay upon the portion designated as the share in the will?

The fundamental principle in the whole inheritance tax law is to exact a tax upon the clear amount in money value received by each beneficiary, legatee or heir from a decedent’s estate, by virtue of the provisions of a will, or the intestate law, or otherwise, for the tax reaches transfers made by a decedent in contemplation of death. The tax is upon the transfers by which a beneficiary, legatee or heir obtains a portion. It is not a tax upon the estate, but upon the privilege of receiving a portion thereof, and is to be computed on the clear value of the portion received. True, theoretically the transfer occurs upon the death of decedent, when it is accomplished either by will or the intestate law. And the aet-provides that the basis of computing the tax shall be upon the money value of the portion received as of the time of decedent’s death, or as soon thereafter as it is practicable to ascertain its then true value. The intention of the act is to compute the tax upon the value of the property which is received by an heir, or legatee, out of a decedent’s estate, and upon nothing else. While the law provides against evasions it also carefully guards the rights of the one from whom the tax is exacted by providing for a refund under certain conditions. It tolerates neither evasions nor injustice nor inequalities. The law does not in terms provide that the tax shall be computed upon the will as written. The intent no doubt is to compute upon the portion received by each legatee or beneficiary.

Where a decedent has attempted to transfer his estate by a purported will, there is frequently an uncertainty as to the persons who eventually will participate in the estate, and the amount or value of the portion to be received, and there is also a possibility that the transfer may after all be in virtue of the intestate law and not through the will. The will may turn out not properly executed, or invalid because of lack of testamentary capacity or the exertion of undue influence. Therefore, in casé of a contest between the beneficiaries named in the will, or where the instrument is attacked by one claiming under the intestate law, the practical proposition is that there is no actual transfer of any portion of the estate until the final decree of distribution is made, or until a court of competent jurisdiction construes or determines the issue between the claimants. The decree so finally entered relates back, and, of course, makes the transfer effectual as of the date of death. But so far as concerns the state’s right to charge inheritance tax against a transferee for an amount received, the decree must be deemed conclusive, unless entered collusively for the purpose of evading or diminishing the rax. The final determination of the courts speaks with authority concerning the transfer, the transferee, and the portion transferred. And the inheritance tax law no doubt intended that, where there was uncertainty or a contest, the tax should be computed according to the final adjudication between the parties. A contest may be tried out, but it may also be compromised. A final judgment or decree after a trial is no more effective or binding upon the parties than one entered pursuant to a compromise. In this ease there was a valid compromise and a decree of distribution agreed upon. In re Rogers’ Estate, 141 Minn. 93, 169 N. W. 477. No person can question the efficacy of this decree to formally transfer to each of the parties the portion of the estate which passed to each at decedent’s death, and the state should not be permitted to so do except upon a showing that it was collusively entered for the purpose of depriving the state of the proper tax. The policy of the state should be to encourage settlement of litigation. In the instant ease had the contest resulted in favor of the husband, there would have been no tax at all, because of the exemption allowed a spouse.

Another principle may be applied to the facts of the instant case. A beneficiary in a will may refuse to accept the.portion given.

In Wolfe’s Estate, 89 App. Div. 349, 85 N. Y. Supp. 949 (affirmed in 179 N. Y. 599, 72 N. E. 1152, upon the opinion below, and approved but distinguished in Matter of Cook, 187 N. Y. 253, 79 N. E. 991), it is said: “If the legatee renounce the gift and refuse to receive it, no tax can be collected with respect to him, because there has been no transfer to him. His right to renounce the privilege of accepting the donation is not denied or forbidden by the statute, and such right is recognized by the authorities, or some of them, which I have cited. On his effective renunciation the title to or ownership of the property of the gift remains in the estate, to be disposed of under the terms of the will, and the succession is taxable in accordance with the nature of the ultimate devolution. The fact that the tax is payable at the death of the testator controls the question of interest, but certainly controls no other question germane to the point now under consideration. There need be no reasonable apprehension that the state government will be seriously embarrassed by renunciations of legacies made in evasion of the law.” The Iowa court approved the principle stated in Stone’s Estate, 132 Iowa, 136, 109 N. W. 455, 10 Ann. Cas. 1033, where the syllabus¹ reads: “A contract between the beneficiaries in a will, including a collateral legatee, renouncing the provisions of the will and providing for a division of the property, was valid and enforceable, though its effect was to -deprive the state of a collateral inheritance tax, otherwise assessable on the legacy to the collateral legatee.” Logically it would seem to follow that if a beneficiary may renounce the whole legacy he may renounce a part, and the part so renounced is not subject- to the succession tax as property transferred to him by the will.

By the compromise, in the case at bar, the niece in fact renounced a part in favor of testatrix’s husband, the only other legatee and the sole heir. AYhether the final decree stipulated for is cónsidered as adjudicating a partial renouncement of the legacy by the niece, or as a construction of the will, even though erroneous, it is conclusive upon all interested in the estatq that, by the will, the estate passed in equal shares to the two legatees. In line with the view that the portion surrendered by the niece under the settlement is not subject to a tax, except as a transfer of that much by will to the husband of testatrix, may be cited People v. Rice, 40 Colo. 508, 91 Pac. 33. In Pepper’s Estate, 159 Pa. St. 508, 28 Atl. 353, and Hawley’s Estate, 214 Pa. St. 525, 63 Atl. 1021, 6 Ann. Cas. 572, it was held that money paid out of an estate in good faith compromise of a threatened will contest, is not subject to inheritance tax; that the only effect of such settlement was to reduce the estate that passed by the will and make the tax applicable to what remained for distribution. It is unnecessary to determine now, whether in such a case the state ought not to be able to secure the tax upon the part received by the party who accepted part of the estate by the settlement.

The decisions notably opposed to the view that a settlement of a will contest can change the tax from that computed under the terms of the will as written are: Baxter v. Treasurer and Receiver General, 209 Mass. 459, 95 N. E. 854; Matter of Cook, 187 N. Y. 253, 79 N. E. 991; and Estate of Graves, 242 Ill. 212, 89 N. E. 978, In Baxter v. Treasurer and Receiver General the court lays some stress on the fact that for many years there had been a statute in force providing • for compromise agreements in relation to will controversies, with the approval of the probate court, and it was thought that in view of that statute the inheritance tax was not intended to be subjected to the uncertainties that might result from such compromises, but should be computed under the will as written.

The reasoning in the Illinois and New York cases cited is that, where there is a compromise and settlement in' a will controversy, the transfer is by the contract of settlement and not by the will, that the one who acquires more than the will in terms gives, acquires that part by purchase or assignment, and therefore the succession tax must be based upon the will as written. It is to be noted that in both cases there was no stipulation for a final decree of distribution, as in the case at bar, and there was an outright sale and assignment of the claimant’s interest in the estate for a large money consideration. Where there is an outright- purchase and assignment of a beneficiary’s interest in an estate, it is but right that the tax which it was subject to in the hands of the assignor should be paid. But it would seem that a good faith compromise by which the whole estate is divided between the beneficiaries in the will in a different manner than therein stated, and upon no other consideration than the settlement of a bona fide contest, is not properly an assignment of any interest in the estate, and it should be accepted by the state as a proper basis for the computation of the inheritance tax, it not appearing that the compromise was made for the purpose of evading the tax.

The judgment should be affirmed.

1 [See 109 N. W. 455.]