In re Estate of King, 22 N.Y.2d 470 (1968)

A testator can direct that the estate tax burden generated by a power of appointment, even if unexercised, be borne by the appointive property, and this direction can extend to requiring charitable beneficiaries of the appointive property to pay their proportionate share of such taxes.

Summary

Albert King’s will addressed the estate tax implications of a power of appointment granted to him in his wife Grace’s will. Albert chose not to exercise this power, which would have distributed a trust to charities and a secondary trust for his daughter. His will stipulated that taxes on his estate, excluding the appointive property, be paid from his residuary estate, while the excess taxes generated by the appointive property should be paid from the appointive property itself. The Surrogate initially ruled that Albert couldn’t shift the tax burden to the appointive property without exercising the power. The Court of Appeals reversed, holding that Albert’s will validly directed the appointive property to bear the tax burden and that the charities must pay their proportionate share of the tax.

Facts

Grace King’s will created a marital-deduction trust for her husband, Albert, granting him a testamentary power of appointment over the trust’s principal, exercisable only via a will executed after Grace’s death.
In default of appointment, the trust principal was to be divided, with one-third going to named charities and two-thirds to a trust for their daughter, Louise.
Albert King’s will left his New York property to his daughter, explicitly stating that it was not an exercise of his power of appointment.
However, Albert’s will acknowledged that the appointive property would be included in his estate for tax purposes and specified that the excess taxes resulting from the inclusion of the appointive property should be paid from the principal of that property.
Albert died without exercising the power of appointment; the appointive fund was valued at approximately $2,500,000, while Albert’s gross estate was approximately $88,000.

Procedural History

After Albert’s death, disputes arose regarding the allocation of estate taxes between Albert’s estate and the appointive property.
The Surrogate’s Court concluded that Albert could not shift the tax burden to the appointive property without exercising his power of appointment and ordered ratable apportionment of the tax between Albert’s residuary estate and the appointive fund.
The Appellate Division affirmed the Surrogate’s decision.
The New York Court of Appeals reversed, holding that Albert’s will effectively directed the appointive property to bear the entire burden of taxation generated by the power of appointment and that the charities must pay their proportionate share of the taxes.

Issue(s)

Whether a testator can direct that the estate tax burden generated by a power of appointment, even if unexercised, be borne by the appointive property.
Whether such a direction can require charitable beneficiaries of the appointive property to pay their proportionate share of such taxes.

Holding

Yes, because Section 2207 of the Internal Revenue Code allows the testator to “direct otherwise” regarding the apportionment of taxes generated by a power of appointment.
Yes, because the testator’s direction in his will indicated that the entire excess of taxes attributable to the appointive fund would be paid from the principal of the property, without distinguishing between the shares distributable to the charities and the daughter’s trust.

Court’s Reasoning

The Court recognized that apportionment of taxes is generally a matter of state law, but that federal law governs the apportionment of taxes attributable to property subject to a power of appointment under Section 2207 of the Internal Revenue Code.
Section 2207 allows a testator to direct otherwise regarding the apportionment of taxes generated by the power of appointment. The court interpreted the language “unless the decedent directs otherwise in his will” broadly, concluding that it allows the testator to charge the appointive property with more than its prorata share of taxes.
The Court rejected the Surrogate’s interpretation that the testator had to exercise the power of appointment to shift the tax burden, noting that the considerations prompting Congress to enact Section 2207 are present whether or not the power is exercised. The court emphasized that if a donee could not shift the taxes generated by the power of appointment to the appointive property, his own estate would be diminished, often to the detriment of the natural objects of his bounty, by taxes on property which was not his and which did not pass under his will.
The Court distinguished Matter of Shubert, emphasizing that Shubert involved a statutory policy favoring exoneration of charitable bequests from taxes, whereas Section 2207 allows a testator to direct a contrary outcome.
The Court found that Albert King’s will clearly directed that the charities bear their prorata share of the taxes, as he treated the principal of the appointive property as a single fund without distinguishing between the shares distributable to the charities and the share distributable to his daughter’s trust. The Court noted Internal Revenue Code § 2055(c), recognizing that a charity may have to contribute to a tax, in which event the amount contributed is not allowable as a charitable deduction.