In re Estate of Herz, 67 N.Y.2d 718 (1993)

A general tax exoneration clause in a will, directing that all estate, inheritance, and other death taxes be paid out of the estate as an expense of administration, includes foreign inheritance taxes unless the will explicitly limits the exoneration to domestic taxes.

Summary

The New York Court of Appeals addressed whether a general tax exoneration clause in a will required the estate to pay the German inheritance tax (Erbschaftsteuer) imposed on a beneficiary residing in Germany. The testatrix’s will directed that all estate, inheritance, and other death taxes be paid out of her estate as an administration expense. The Court held that the broad language of the exoneration clause encompassed the German inheritance tax, finding the testatrix’s intent was for the beneficiary to receive the bequest free of all inheritance taxes, regardless of where imposed. The court reversed the lower court’s decision, remitting the case for further proceedings.

Facts

Ilse Herz executed a will in 1988, bequeathing $250,000 to her grandnephew, York Winter, who resided in West Germany. The will instructed Winter to keep the funds outside of Germany and use a portion for specific purposes like furniture storage and grave upkeep. The will’s thirteenth paragraph directed that all estate, inheritance, and other death taxes be paid out of her estate as an expense of administration. Herz died in 1990, and Winter, as a German resident, was subject to German inheritance tax (Erbschaftsteuer) on his bequest.

Procedural History

Winter claimed the estate should pay the German inheritance tax. The residuary beneficiaries objected, leading Winter to seek a judicial construction of the will. The Surrogate’s Court ruled against Winter, finding the tax was due to his foreign domicile and required an explicit statement for estate payment. The Appellate Division affirmed. The New York Court of Appeals granted review as a matter of right.

Issue(s)

Whether a general tax exoneration clause in a will, directing the payment of all estate, inheritance, and other death taxes from the estate, includes a foreign inheritance tax imposed on a beneficiary due to their foreign domicile.

Holding

Yes, because the will’s language stating that “all estate, inheritance, and other death taxes, payable by reason of my death, shall be paid out of my estate as an expense of administration without apportionment or proration” clearly and unambiguously reflects the testatrix’s intent that her beneficiaries, including petitioner, are to take their specific bequests free of all inheritance taxes, no matter where or by whom those taxes were imposed.

Court’s Reasoning

The Court of Appeals emphasized that a court’s primary duty in will construction is to ascertain and give effect to the testator’s intent, construing their words according to their ordinary and natural meaning. The Court found the will’s language clear and unambiguous, stating that all estate, inheritance, and other death taxes payable by reason of the testatrix’s death were to be paid by her general estate. The court determined that the German Erbschaftsteuer, which is assessed against the inheritance of the beneficiary, fits the definition of an inheritance tax. The court also dismissed the argument that the location of the funds affected the tax liability, stating that “the Erbschaftsteuer would be imposed no matter where the funds were located.” The court rejected the argument that specific exoneration from foreign taxes was required to protect residuary beneficiaries, stating that testators can limit the exoneration clause to domestic taxes if they choose. The Court noted that while EPTL 2-1.8 generally favors equitable apportionment of taxes, it is subordinate to the testator’s express wishes. Even if the clause were ambiguous, the court reasoned that the will, read as a whole, revealed the testatrix’s intent for the tax to be paid as an administration expense, given Winter’s close relationship to the testatrix and the substantial bequest he received. The Court explicitly overruled prior Surrogate court cases that arbitrarily designated the Erbschaftsteuer as an “acquirer tax.”