National Bank in Bartlesville v. Faulkner

Citations: 641 P.2d 1110; 1982 OK 27; 1982 Okla. LEXIS 191Docket: No. 54878

Court: Supreme Court of Oklahoma; February 22, 1982; Oklahoma; State Supreme Court

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The document addresses the legal issues surrounding an inter vivos trust and the probate of an estate involving that trust. Leland Davidson created the trust before his death in 1978, designating himself as trustee and the Bank as the successor trustee. The trust included Trust A, over which Leland's wife, Miriam, had a general power of appointment, which she never exercised before her death in 1979.

Following Miriam's death, Donna Faulkner, as Executrix of her estate, demanded that the estate tax be paid from the collateral beneficiaries of Trust A, since its corpus was included in Miriam’s estate for tax purposes. The Bank sought direction from the district court regarding its obligations, as the Executrix had already paid the taxes and sought reimbursement before distributing the trust's assets. The trial court determined that both federal and state estate taxes should be apportioned, requiring Trust A to contribute, while exempting charitable beneficiaries from this contribution.

The Bank contended that the trial court overstepped its authority by requiring the trust to cover the tax liability instead of the beneficiaries. The Bank referenced 25 U.S.C. 2207, which allows executors to recover estate taxes from property recipients only after the tax has been paid. It argued that it should not have to identify which beneficiaries owe contributions before the total tax is assessed and paid. The Executrix acknowledged that the beneficiaries should ultimately bear the tax burden but cited 22 U.S.C. 6324, which holds transferees personally liable for estate taxes related to property received.

Both parties ultimately agreed that the beneficiaries, not the trust, should be responsible for the apportioned estate tax, and the Executrix should determine and collect each beneficiary's share. The Bank's role was limited to terminating the trust and distributing the assets without liability for determining or paying the apportioned tax.

Federal statutes allow remedies for beneficiaries who do not contribute to federal estate tax liabilities. The issue of apportionment is considered a state matter. Bank seeks clarification on Oklahoma's estate tax apportionment, which has been historically ambiguous since the distinction between "estate" and "inheritance" taxes was established, with the former being a tax on the transfer of assets. The Uniform Estate Tax Apportionment Act was adopted in 1965 and repealed in 1969, followed by the enactment of 68 O.S.Supp. 1974.825 (the Act), which the trial court used for apportioning estate taxes. Executrix argues that the Act is clear, while Bank challenges its constitutionality, claiming that apportionment sections are not included in the Act's title as required by state law.

The court finds that the 1974 amendment's subject matter is sufficiently covered by the title of the original 1965 Act, thus upholding its constitutionality. Consequently, the court does not address Bank's argument regarding the payment of estate taxes from the estate's residue, as the 1974 Act has supplemented that law. Bank also contends that charitable beneficiaries should contribute to the estate tax, citing federal law and a 10th Circuit case. However, Appellee references legal authority indicating that charitable beneficiaries are not liable for estate taxes when the full value of their gifts is deductible. Both state and federal authorities allowed these deductions in the estate tax returns.

Charities argue they should not bear any tax liability due to their tax-exempt status and the lack of statutory direction in Oklahoma law. The court concludes, following principles from neighboring Missouri, that the burden of federal estate tax falls on the property generating the tax, exempting tax-exempt property. Thus, the court determines that charities are not liable for any estate taxes.

The trial court's order on the apportionment of estate taxes involved calculating the taxes attributed to both the trust ($62,210.85) and the estate ($144,584.18) without considering deductions, treating them as separate entities. The total tax liability ($223,461.36) led to a remaining balance of $16,666.33 after subtraction. The court determined that the trust estate represented approximately 37% of the gross estate ($264,461.36 out of $716,164.38) and the remaining estate accounted for about 63%. These proportions were applied to the excess estate tax, resulting in the trust owing $68,363.28 and the estate $155,098.08. Both parties opposed this calculation and suggested alternative methods.

A proposed equitable approach involves calculating each beneficiary's share of the taxable estate and then determining their tax obligation based on that proportion. For instance, if beneficiary Donald G. Davidson is to receive $88,374.68, which is roughly 14% of the taxable estate ($628,053.23), his corresponding federal estate tax would be $21,008.05 based on an estimated total federal tax of $150,057.56. This method will also be applied for the Oklahoma state estate tax.

The court’s ruling, which is partially affirmed and partially reversed, clarifies that it does not determine specific tax amounts or rates, as that falls under the Tax Commission's jurisdiction, but instead focuses on how the tax should be apportioned among beneficiaries. The executrix argued for federal law supremacy in tax apportionment, but the court noted that the bank did not pursue this argument in detail, thus accepting it as admitted. The apportionment rule for collateral interest holders is to allocate taxes based on the value of each person's interest relative to the total interests received. Legislative amendments to estate tax laws and applicable cases were also referenced to support the court's decisions.