Opinion
No. 340406
Decided September 7, 1967.
Taxation — Inheritance tax — Annuity — Determination of value — Actuarial tables — Final order — Remainder in trust — Support of life tenant — Section 5731.27, Revised Code — Temporary order — Redetermination on death of life tenant.
1. Once the inheritance tax has been determined on an annuity in accordance with the actuarial tables, no change can be made on the basis of the actual length of life of the annuitant.
2. Where the inheritance tax upon a succession subject to a contingency has been determined upon the assumption which results in the greatest tax, it is to be redetermined if the actual events result in a distribution entitled to a smaller tax. In such event the values, rates, and exemptions to be used are those which were in effect at the time of death of the decedent.
3. In the absence of a statutory assessment of trustee's commissions among the parties interested, a long-standing practice to charge them against the income beneficiary should be followed.
Mr. Robert Merkle, for St. Matthews Protestant Episcopal Church.
Mr. William B. Saxbe, attorney general, and Mr. Harold S. Van Schaack, for Department of Taxation.
William Steen died testate on November 22, 1943, and under his will the residue of his estate was bequeathed and devised in trust. Under the terms of the will, the trustee was directed to pay the net income of the trust to the decedent's wife, during her life, with the further provision that in the event the income was not sufficient for her proper care and support the trustee was authorized to invade the principal of the trust if, in his judgment, it was necessary.
The will provided that, after the death of decedent's wife, the trustee was to continue to administer the trust for the benefit of the decedent's son, who was to receive $30.00 per month from the income, of the trust and, in addition, the right to occupy one of the suites in an apartment building, rent free. Also, the trustee in his absolute discretion could pay from the income or the principal of the trust estate such sums as were necessary to provide for the proper care, maintenance and support of the decedent's son during his lifetime. The will further provided, upon the death of the survivor of the decedent's wife and his son, the trustee should transfer and pay over all of the property constituting the trust estate to St. Matthew's Episcopal Church of Cleveland, Ohio.
The decedent's wife predeceased him and the son survived the father, but he did not exercise the right to occupy the suite which was available to him. The inheritance tax was determined on the basis of Harry W. Steen receiving the annuity of $360.00 and the remainder taxed to St. Matthew's Church, a successor of the fourth class. The tax was assessed as follows:
Value of realty $49,212. Value of personalty 3,398. Gross estate $52,610. Debts costs of administration 18,680. Net estate $33,930. Harry W. Steen, son aged 59 yrs. Factor used — 9.24127 Annuity $360. Gross succ. $3,326. Tr. Fees 166. Net succ. $3,160. Exemption 3,500. No Tax St. Matthew's Episcopal Church Remainder value of succession $30,604.00 No exemption Total Tax $ 2,198.32
The order determining the tax was entered on May 10, 1946, and stated that the said order was temporary and that on the happening of any contingency whereby said estate or any part thereof passes so that the ultimate succession would be exempt from tax under the provisions of the inheritance tax law, or taxable at a rate less than the one imposed and paid, the successor shall be entitled to a refund of the difference between the amount so paid and the amount payable on the ultimate succession.
Harry W. Steen, the son, died on October 6, 1964, and the trustee filed his application for redetermination of tax and refund on December 11, 1964. The trustee contends that since the order determining inheritance tax on May 10, 1946, was a temporary order, that Section 5731.27, Revised Code, is applicable.
"When an annuity or life estate is terminated by the death of the annuitant or life tenant, and the tax upon such interest has not been fixed and determined prior thereto, the value of said interest shall be computed on the amount of the annuity or income actually paid or payable to the annuitant or life tenant during the period for which such annuitant or life tenant was entitled to the annuity or to the possession of the life estate."
The tax upon the annuity was fixed and determined by the court in its order of May 10, 1946; the annuity of $360.00 to the son, Harry W. Steen, who was then 59 years of age, was determined according to American Experience Table of Mortality.
This determination is deemed to be a final order of the court and not subject to change.
"Where the Probate Court fixes the value of a life estate and remainder based on the actuarial value on the date of death, it may not subsequently adjust the values based on the actual duration of the life estate and order a refund." In re Estate of Hough, 78 Ohio Law Abs. 238, 152 N.E.2d 561.
"If a life tenant dies before the value of his life estate is determined, then the life estate can be computed on what was actually paid to the life tenant and not on the theoretical basis (Section 5731.27, Revised Code). Once the inheritance tax has been determined on a life estate or on an annuity in accordance with the actuarial tables, no change can be made on the basis of the actual length of life of the life tenant or annuitant." Merrick-Rippner Probate Law, Second Edition, Text 313 (6) page 379.
"A temporary order of the Probate Court determining the amount and entering succession taxes pursuant to Section 5343, General Code, where applicable, is a final order within the meaning of Section 12223-2, General Code, and appealable under Sections 5348 and 12223-3, General Code." In re Estate of Friedman, 154 Ohio St. 1, 93 N.E.2d 273.
In the case of a contingency with respect to the remainder interest, the tax should be assessed by temporary order on the assumption that the succession of said interest may pass to the most remote successor. The highest possible tax which could result under the contingencies which are present is computed on a temporary order to protect the state in the collection of the tax even if the most remote succession takes place.
"Where a will creates an estate in fee, subject to be defeated, and also provides for contingent estates, the succession tax should be assessed by a temporary order providing for a tax to be imposed upon such succession at the highest rate which, on the happening of any such contingency, would be possible, pursuant to this section, subject to refunders as provided in Section 5343 and 5339, General Code." H'onderly v. Tax Commissioner, 112 Ohio St. 233, 147 N.E. 509.
The trustee in his discretion could pay to or use for the benefit of the beneficiary such amounts from income or principal as the trustee deemed necessary for the proper care, maintenance and support of the beneficiary. Under the facts, the remainder of the trust could not be taxed on a permanent order until the death of the life tenant. It was taxed on a temporary order to St. Matthew's Church, as the church was a fourth class heir under the statute and would yield the highest possible tax under the terms of the trust. Upon the death of the life tenant, the tax may then be recomputed on a permanent order, as it is only then that the amount of the remainder that was used for the son may be fixed. The amount of the remainder which goes to the church is also a definite amount at this time. The contingencies have fallen into their fixed place, and for the first time the taxable amount to each is determinable.
The values of the assets, rates of taxation, exemptions and law at the date of death of the decedent are used in the redetermination of the tax.
"The succession tax levied by Section 5731.02, Revised Code, accrues upon the death of the decedent." In re Estate of Werner, 107 Ohio App. 468.
In the Werner case, supra, the court was faced with a problem of determining the date on which the tax accrued. The Legislature exempted religious organizations after the death of the decedent, but prior to the time the tax was computed. The court said that the tax was on the right to receive property from the decedent and that right came into existence on the date of death of the decedent. The tax upon this right accrued at the same time and that an exemption which became effective subsequent to the date of death does not apply.
The income which accrued after the date of death is not subject to tax nor is the appreciation of the principal, as Section 5731.24, Revised Code, specifically states that the present value of the remainder interest in any estate shall equal the difference between the value of the entire estate and the particular estate created therein.
"A succession tax is not applicable to any income or increase accruing upon the corpus of an estate after the death of the owner." McDonald v. Evatt, 145 Ohio St. 457.
It is, therefore, a finding of this court that the income and the appreciation of the corpus of the trust subsequent to the death of William Steen on November 22, 1943, is not subject to inheritance tax and not a proper item in the redetermination of tax and refund. The son of the decedent, Harry W. Steen, should be taxed upon the annuity plus the amount of the principal of the trust which was paid to him by the trustee under the terms of the trust and the remainder of the principal of the trust should be taxed to the remainderman, namely, St. Matthew's Church.
The statute (Section 5731.26, Revised Code), which provides for the commissions to be paid to a trustee is silent on the subject of who is to pay these commissions, but the practice of charging such commissions to the income beneficiary is of long standing and this court is not inclined to deviate from such established practice. This court, therefore, holds that the commissions of the trustee are charged against the income beneficiary, Harry W. Steen. In the Packard case, 174 Ohio St. 349, the court said that long standing administration practices are not only persuasive, but should not be set aside unless judicial construction makes it imperative to do so.
Conclusion of Law
It is, therefore, held that the tax should be redetermined and a refund allowed as follows:
Value of realty $49,212.00 Value of personalty 3,398.00 Gross Estate $52,610.00 Debts and Costs of Administration 18,680.00 Net Estate $33,930.00 Harry W. Steen, Son, Age 59 yrs. Annuity $ 3,326.00 Tr. Fees 5% 166.00 Net Annuity $ 3,160.00 Prin. Distributed to Son $ 4,512.00 Tr. Fee 1% 45.00 Net Prin. Distributed to Son 4,467.00 Total Succession $ 7,627.00 Exemption 3,500.00 Net Taxable Succession $ 4,127.00 Tax at 1% 41.27 St. Matthew's Protestant Episcopal Church Gross Principal Distributed $26,092.00 Tr. Fee 1% 261.00 Net principal Distributed $25,831.00 $25,000. @ 7% $ 1,750.00 $ 831. @ 8% 66.48 Total tax $ 1,816.48 Tax Fixed by Court — May 10, 1946 $ 2,198.32 Interest Added 223.81 Amount paid — June 27, 1946 $ 2,422.13 Amt. of Tax Based on Redetermination $ 1,857.75 Interest Added 188.94 Total Amount — Tax Plus Interest $ 2,046.69 Amount of Refund $ 375.44 Interest on $375.44 from June 27, 1946 to October 6, 1965, which latter date is one year following the date of the removal of the contingency, namely, the death of the life tenant, Harry W. Steen. 217.13 Total Amount of Refund is $ 592.57
The finding of the referee is reversed and modification and finding made according to this opinion.
A journal entry may be presented accordingly.