Opinion
No. 75-374
Decided April 1, 1976. Rehearing denied May 6, 1976. Certiorari granted July 26, 1976.
Action by executrix of decedent's will challenging the construction of will of decedent's previously deceased husband and the management of his estate as carried out by his executor and testamentary trustee. From judgment entered, executrix appealed.
Affirmed in Part, Reversed in Part.
1. EXECUTORS AND ADMINISTRATORS — Terms of Will — Intent — Maximum Marital Deduction. Where, in action against executor of husband's estate, one paragraph of husband's will dictated the allocation of total assets but did not contain language recommended by expert in field for obtaining maximum marital deduction and another paragraph directed executor to deal with all tax matters for best interest of estate, but did not expressly or impliedly grant authority to disregard directions in dispositive provisions in will to achieve desirous tax results, there was no intent to create a trust qualifying for maximum marital deductions.
2. Expenses of Administration — Determine Applicable Provision — Consider — Totality of Provisions. Where, in action against executor, the issue was which provision of the will was intended to designate the residue of the estate from which administration expenses were to be paid, it is necessary to examine the totality of the will provisions, and, upon so doing, it is concluded that those expenses were to be deducted from probate assets passing to both the trusts created by the will, rather than merely to the second trust.
3. Allocation of Administration Expenses — Erroneous — Wife Without Knowledge — Challenge By Wife's Executrix — Not Barred — Res Judicata. Absent a finding by the trial court that when final report of husband's estate was filed, his wife knew or should have known of his executor's erroneous allocation of administration expenses, the doctrine of res judicata did not operate to bar wife's executrix's subsequent challenge of that allocation.
Appeal from the Probate Court of the City and County of Denver, Honorable Stewart A. Shafer, Judge.
Lawrence M. Wood, for plaintiff-appellant.
Grant, McHendrie, Haines Crouse, P.C., James R. Wade, for defendants-appellees The Colorado National Bank of Denver, Clark Hillmeyer, and Downey Hillmeyer.
Davis, Graham Stubbs, Walter B. Ash, for defendant-appellee The Colorado National Bank of Denver.
Henry, Cockrell, Quinn Creighton, Victor Quinn, for defendant-appellee University of Denver.
Division II.
In 1960 Edwin E. Hillmeyer executed a will prepared by his attorneys which transferred the bulk of his probate estate into two testamentary trusts for the purpose, inter alia, of qualifying for the marital deduction. See Int. Rev. Code of 1954, § 2056. The beneficiary of the first trust was his wife, Eva E. Hillmeyer; the second trust was primarily for the benefit of their son and granddaughter unless assets therefrom were required for Eva's support.
Edwin died in 1964 and Eva in 1970. Plaintiff, as executrix of Eva's estate, brought this action to recover damages from the Colorado National Bank, as executor of Edwin's estate and testamentary trustee of the trusts, alleging in the first claim that the Bank misconstrued Edwin's will and in the second claim that the Bank mismanaged Edwin's estate. The other defendants are beneficiaries of the second trust.
The Bank filed its answer denying the allegations of the complaint and asserted the affirmative defenses of res judicata and the statute of limitations. By agreement of the parties, the issues relative to construction of the will were tried to the court first, and it entered judgment approving the Bank's interpretation of the will. Having approved the Bank's interpretation of the will, the trial court made no ruling on the affirmative defenses. The judgment was made final pursuant to C.R.C.P. 54(b), and this appeal followed. We affirm in part and reverse in part.
Edwin's will, after making provisions for payment of his debts, expenses of last illness and burial, and making certain bequests of tangible personal property and cash, created the trusts in paragraph fourth as follows:
"All the rest and residue of my estate, real, personal and mixed, of wheresoever kind and whatsoever situate, herein called the remainder of my estate, I give, devise and bequeath as follows:
"A. In the event that my wife, Eva Hillmeyer, survives me, I give, devise and bequeath one-half of said remainder of my estate, less the aggregate value of property . . . passing at my death from me to my wife other than by the terms of this paragraph of my will, but only to the extent that said property is includible in my gross estate and deductible therefrom as a marital deduction for Federal estate tax purposes, to my Trustee hereinafter named, as my First Trust hereunder. In Trust Nevertheless . . . to pay the net income therefrom and to distribute the principal thereof as follows:
"(1) To pay to my wife, Eva Hillmeyer, as long as she lives, the net income from my first Trust . . . and to pay also to my wife or for her care and comfort, such portion of the principal of my First Trust as she shall request or as in the discretion of my Trustee may be necessary or proper to maintain her. . . . Upon the death of my wife, my Trustee shall distribute the remainder of my First Trust to such person or persons as my wife shall direct in her last will and testament. . . .
. . . .
"B. I direct that all estate, inheritance and succession taxes which at and after my death may be levied by and shall become payable to the United States, the State of Colorado, and any other tax agency or authority . . . shall be paid out of that part of the remainder of my estate existing after the creation of my First Trust provided for hereinbefore; and all property of my First Trust shall be free and clear of such death taxes and no such taxes shall reduce my First Trust. . . .
"C. I give, devise and bequeath the remainder of my estate, after there has been deducted therefrom the properties and amounts necessary to create my First Trust, to my Trustee hereinafter named, as my Second Trust hereunder, in Trust Nevertheless . . . and from the principal of my Second Trust to make the following payments and distributions: [to his wife, son, granddaughter, and the University of Denver]. . . ."
While paragraph fourth B contains directions for payment of death taxes, no specific provision was made for payment of expenses of probate administration in either that paragraph or the other paragraphs of the will.
Insofar as relevant to the issues on this appeal, paragraph seventh directed the executor to deal with all tax matters for the best interests of the estate. Paragraph eighth advised Eva that she had the right to reject Edwin's will and elect to take one-half of his estate, but assured her that the will provided her "more rights and protection." However, paragraph ninth recited that while Edwin and Eva had consulted together regarding their estates, there was no contract between them and each was free to alter their respective wills at any time.
Edwin's gross estate for Federal estate and Colorado inheritance tax purposes was $1,200,000, consisting of the assets probated under the will, certain jointly owned property, and insurance proceeds. The gross value of his probate estate was approximately $969,000. The Bank ultimately calculated the value of the first trust at $177,000 which was determined by: (1) Deducting from the gross value of the probate estate amounts paid for Edwin's debts, expenses of last illness and burial, expenses of administration, and the specific bequests: (2) dividing the remaining balance of the probate estate in two equal parts; and (3) subtracting from one part the aggregate value of nonprobate assets passing to Eva which qualified for the marital deduction.
Plaintiff contends that paragraph fourth is ambiguous, that Edwin's intent, when the will is considered in its entirety, was to create a trust in which Eva would receive an estate at least sufficient to qualify for the maximum marital deduction, and that the Bank was obligated to resolve the ambiguity in favor of Eva by transferring to the first trust sufficient assets to obtain the maximum deduction. Specifically, plaintiff asserts that the Bank misinterpreted paragraph fourth in three different respects by: (1) Failing to include the value of the nonprobate assets in calculating the total value of the "remainder" of Edwin's estate as described in the opening sentence of paragraph fourth; (2) failing to subtract the value of the nonprobate assets before dividing the "remainder" of Edwin's estate into the first and second trusts; and (3) deducting the expenses of administration from the "remainder" of Edwin's estate before the "remainder" was divided into the first and second trusts. Had the Bank interpreted Edwin's will as urged by plaintiff in all particulars, funds applied to the first trust would have approximated $445,000 instead of the $177,000 allocated by the Bank.
[1] We first discuss plaintiff's contention that the terms of the will considered together established an intent by Edwin to create a trust qualifying for the maximum marital deduction allowed by applicable tax laws. The parties agree that analysis of Edwin's intent must begin with the language of the will itself, Wright v. Poudre Valley National Bank, 153 Colo. 255, 385 P.2d 412, and when the will provisions are plain and unambiguous, those provisions control. Pitman v. Colorado National Bank, 113 Colo. 373, 158 P.2d 186.
In support of her argument, plaintiff points to the provisions of paragraph fourth which establish Edwin's intent to create a marital deduction trust, and then to the provisions of paragraph seventh and eighth as supporting the conclusion that the trust was to qualify for the maximum deduction. We find this argument unpersuasive.
Paragraph fourth A dictates that the total assets allocated to both trusts be divided in half and then the nonprobate assets received by Eva must be subtracted from a one-half share in order to arrive at the corpus set aside for the first trust. Significantly, it does not contain language recommended by experts in the field for obtaining the maximum marital deduction. While paragraph seventh directs the Bank to deal with all tax matters for the best interest of the estate, that paragraph does not expressly or impliedly grant the executor authority to disregard the directions in the dispositive provisions in the will, such as paragraphs fourth A, in order to achieve desirous tax results. Similarly, while paragraph eighth assures Eva that, by not electing to take one-half of the estate she would receive more "protection and rights," paragraph eighth does not guarantee Eva more property than she would receive by electing to take against the will, and it specifically advises her of the right to take one-half of the probate estate. In our view, the assurances of "more protection and rights" refer to the services of the trustee and Eva's ability to obtain income and principal from the second trust under appropriate circumstances. Contrary to plaintiff's contention here, in view of the language of paragraph ninth, we conclude that paragraph eighth did not grant Eva any contractual right to require that sufficient assets be transferred to the first trust to qualify for the maximum marital deduction.
For example, W. Bowe, Estate Planning Taxation 101, suggested, at the time this will was drafted, the following language: "I give, devise and bequeath that fractional share of my estate which will equal the estate tax marital deduction (allowable in determining the federal estate tax) less the value for federal estate tax purposes of all other items of my gross estate which qualify for said deduction and which pass or have passed to my wife under this will or otherwise. In making the computations to determine such fractional share the final determinations in the federal estate tax proceedings shall control."
Since we find no intent by Edwin to create a trust qualifying for the maximum marital deduction, we are unable to accept plaintiff's contention that the initial sentence of paragraph fourth should be considered ambiguous and thus interpreted as referring to all assets includable in Edwin's gross estate for death tax purposes. While reference is made in that sentence to all of the residue of Edwin's estate, "of whatsoever kind," the sentence concludes with "I give, devise and bequeath." The latter clause restricts the sentence to assets included in the probate estate only.
Nor do we agree with plaintiff's contention that the nonprobate assets received by Eva should have been subtracted from the total assets allocated to both trusts before division was made between the first and second trusts.
Plaintiff bases this argument on In re Estate of Flanigan, 175 Colo. 499, 488 P.2d 897, wherein the Court reconciled paragraph seventh of the testator's will, which indicated that his wife was to receive one-half of his entire estate (less claims, administration expenses and death taxes), with paragraph seventeenth, which directed that all death taxes should be paid as an expense of administration without reimbursement from the share of any beneficiary. The issue in that case was whether the testator intended to give his wife: (1) One-half of the estate, deducting from her half all claims, administration expenses, and taxes; or (2) one-half of the estate remaining after the claims, administration expenses, and taxes had been deducted therefrom. The Court noted that whenever possible, effect must be given to each provision of the will. The Court found no language in the will indicative of an intent by the testator to give his wife less than one-half of the net estate. The Court held that if the first alternative were correct, paragraph seventeenth performed no function and that only by adopting the second alternative was it possible to give meaning and effect to each of the paragraphs.
In order for the analysis of the Court in Flanigan to apply here, it must appear that a conflict exists between the provisions in Edwin's will. We find no such conflict. Moreover, contrary to the will at issue in Flanigan, here, paragraph fourth A makes no provision for deduction of death taxes from the first trust. Rather, paragraph fourth B directs that they be subtracted from assets allocated to the second trust. Finally, unlike the will in Flanigan, the testamentary trust in Edwin's will made provision for Eva to receive in excess of one-half of the net estate if funds were required from the second trust for her care, comfort, and support.
We do find merit in plaintiff's final contention that the Bank improperly charged the expenses of administration against the probate assets passing to both trusts instead of deducting those expenses only from the assets allocated to the second trust.
[2] The parties agree that the provision in the will directing payment of Edwin's debts does not encompass the administration expenses and that, therefore, these expenses must be paid out of the residue of Edwin's estate. See C.R.S. 1963, 153-14-17. The issue then is which provision of the will was intended by Edwin to designate that residue.
The introductory sentence of paragraph fourth is commonly used to designate the residuary estate. However, paragraph fourth A proceeds to define specifically which portion of the remaining assets are to be included as part of the first trust. Paragraph fourth B specifically directs that death taxes be paid from assets not designated for the first trust. Paragraph fourth C then provides that the "remainder of my estate, after there has been deducted therefrom the properties and amounts necessary to create my First Trust," is to be distributed to the named beneficiaries as thereafter provided. Hence, we conclude from the totality of these provisions that the administration expenses must be paid from the remainder established by paragraph fourth C.
While the trial court made no ruling on the Bank's affirmative defense of res judicata, the Bank contends that the judgment should be affirmed based upon this doctrine since Eva made no objection to its final report as executor for Edwin's estate and the report was approved and the estate closed by the probate court. We disagree.
[3] A prerequisite for application of the doctrine of res judicata is that the issues in this case were, or at least could have been, litigated before the probate court. See Pomeroy v. Waitkus, 183 Colo. 344, 517 P.2d 396. From the intermediate and final reports introduced as documentory evidence in this case, it is apparent that the probate court was not thereby advised of, and thus did not specifically approve, the Bank's final allocation of assets to the marital trust. The final report merely reflected total assets to be distributed to both trusts without any breakdown between them. Hence, the issues here were not there litigated.
Nor can we say on the record before us that, as a matter of law, the issues might have been litigated. As far as we can determine, the final calculations were made by the Bank after the estate was closed and in conjunction with administration of the trusts. Furthermore, during the course of the probate administration, the Bank made different calculations as to assets to be allocated to the first trust. For example, in a Federal estate tax application to the amount allocated the first trust was $222,000. In the Colorado inheritance tax application, as originally filed, the Bank reflected a distribution to the first trust of $270,000 and this figure was later adjusted upwards. The allocation of $270,000 may have been acceptable to and relied upon by Eva. While we recognize that the various calculations as to the first trust were influenced by tax considerations, absent a finding by the trial court that, when the final report was filed and approved, Eva knew or should have known that the Bank's final allocation to the first trust would be $177,000, we conclude that the doctrine of res judicata is not applicable.
That part of the judgment is reversed which determined that the Bank properly charged administration expenses of Edwin's estate against the probate assets passing to both trusts prior to division of assets between the trusts. The balance of the judgment is affirmed, and the cause is remanded for further proceedings not inconsistent with the views herein expressed.
JUDGE ENOCH and JUDGE STERNBERG concur.