IN RE: the ESTATE of Ellen M. HILL

Reset A A Font size: Print

District Court of Appeal, Second District, Division 2, California.

IN RE: the ESTATE of Ellen M. HILL, Deceased. C. Walter HALL, Successor Trustee and Clarellen Adams Weir, Appellants and Respondents, v. Ann Marie MERCER, Executrix of the Will of John G. Hill, Deceased, Respondent and Cross-Appellant.*

Civ. 23460.

Decided: October 26, 1959

Henry O. Wackerbarth, Los Angeles, for appellants C. Walter Hall and Clarellen Adams Weir. Snow & Snow, Hugh John Snow, Beverly Hills, for cross-appellant Ann Marie Mercer.

This is an appeal from an order resettling two Fourteenth Accounts, Amendments, and Objections thereto, taken by C. Walter Hall, a successor trustee, and Clarellen Adams Weir, a beneficiary, of a testamentary trust created by the will of Ellen M. Hill, deceased. A cross-appeal has also been taken by Ann Marie Mercer1 as executrix of the will of John G. Hill, deceased, an income beneficiary of the above trust.

This matter was before this court on a prior appeal by Jessie Elder Hill, since deceased, as executrix of the estate of John G. Hill, who challenged a former order settling said two Fourteenth Accounts and Amendments and Objections. In re Estate of Hill, 149 Cal.App.2d 779, 309 P.2d 39. John G. Hill was the husband of Ellen M. Hill and the executor of her will; he was also the trustee and principal income beneficiary of a trust created by her will.2 The trial court's order in the former appeal that John G. Hill and certain charities had waived their right to claim income earned during the probate administration was reversed. In re Estate of Hill, supra.

Ellen M. Hill died on November 16, 1939, and John G. Hill, her husband, was appointed executor. On August 27, 1941, said estate was distributed to said John G. Hill, as trustee of the trust created by his wife's will. Hill, as trustee, filed thirteen annual accounts, the thirteenth being filed for the year 1953.

Hill died on November 19, 1954, and C. Walter Hall became trustee. On February 11, 1955, the executrix of the estate of John G. Hill filed a Fourteenth Account Current and Report in this matter, in which account the executrix asked the probate court to determine the income received during the probate administration of the above estate and to allocate 90 per cent of said income to the estate of John G. Hill and the balance to designated charities. The successor trustee filed objections to the Fourteenth Account, contending that John G. Hill (his estate) was not entitled to said probate income. Amendments were filed by Hill's executrix and, on April 13, 1953, C. Walter Hall, as successor trustee, filed a Fourteenth Account Current, to which objections were filed by the above named executrix.

After the formal appeal was decided, the probate court held a rehearing on said two Fourteenth Accounts, Amendments, and Objections, and allowed 90 per cent of said probate income to the estate of John G. Hill, deceased, and 10 per cent to the charities. Furthermore, the court allowed interest on the above at the rate of 7 per cent to September 12, 1941, and at the rate of 4 per cent from September 13, 1941,3 until paid.

The assets of the probate estate included a store building in Long Beach, income property on Slauson Avenue in Los Angeles, the decedent's residence, and a vacant lot in Pacific Palisades.

During the probate administration, viz., from November 16, 1939, to August 27, 1941 (when the executor relinquished the assets of the estate to the trustee), the executor (John G. Hill) received rentals from the Long Beach and Slauson properties in the gross amount of $39,442.90. The trial court determined that the operating expenses chargeable against this income were $15,244.18. Thus there was a net probate income of $24,198.72. The appellants contend, however, that the sum of $4,976.56 that accrued as taxes on certain real property during probate should also be charged against the probate income. The court, however, charged these taxes against the corpus of the estate.

The tax items (totaling $4,976.56), the allocation of which are here in dispute, are as follows:

(a) $742.15 paid by the executor as the second installment of the Long Beach City taxes on the Long Beach property for the fiscal year 1939–1940.

(b) $3,200 paid by the executor as the second installment of County Taxes on the Long Beach property for the fiscal year 1939–1940.

(c) $357.23 paid by the executor as the second installment of taxes on the residence and Pacific Palisades lot for the fiscal year 1939–1940.

(d) $57.23 paid as taxes on the Pacific Palisades lot and $319.70 taxes on the residence as the first installment of taxes for the fiscal year 1940–1941.

(e) $300.25 paid as the second installment of taxes on the residence for the fiscal year 1940–1941.

The reasons assigned by the probate court for its refusal to allow the above items to be charged against the income derived during the probate of this estate are as follows:

(1) As to items (a), (b) and (c), said taxes were liens on the respective properties at the date of Ellen M. Hill's death, and as to item (c), for the further reason that said property was not income producing property.

(2) As to items (d) and (e), said properties were not income producing properties.

In addition to contending that the court erred in allocating the above tax items against corpus instead of probate income, C. Walter Hall and Clarellen Adams Weir, hereinafter referred to as appellants, also contend that the court below erred in holding that the estate of John G. Hill and the charities were entitled to interest on the probate income prior to the death of Hill. Ann Marie Mercer, hereinafter referred to as respondent, as executrix of the will of John G. Hill, contends error was committed in only allowing 4 per cent, rather then 7 per cent, interest on the probate income from the date of John G. Hill's death until paid.

We shall first consider whether the taxes here in question should be charged against principal or probate income. In this connection it is important to bear in mind that Ellen M. Hill died on November 16, 1939. At the time of her death real property taxes for the current year had been assessed and had been made a lien upon the property. The first half of the taxes had been paid. The principal item here involved is the second installment of taxes for the current year in the amount of $3,942.15, which had been levied on income producing properties. We are of the opinion that the court properly charged these taxes against principal.

Generally, regularly recurring taxes assessed against any portion of the corpus are payable out of income. Rest., Trusts, § 233(e); Civil Code, § 730.15. However, taxes assessed prior to death should normally be paid from corpus. 4 Bogert on Trusts, § 804, (1948 ed.); 2 Scott on Trusts, p. 1327, § 237. See also In re Estate of Jacks, 80 Cal.App.2d 562, 571–572, 182 P.2d 605. The taxes here under consideration were a fixed and final obligation at the date of death. It is not uncommon, for example, for a decedent to leave installment obligations of one kind or another. The fact that certain installments have not become due at the time of death does not change the inter vivos character of the debt. It is still a debt that was incurred during the decedent's lifetime and should therefore be paid out of assets then owned by him. Taxes that have been assessed prior to death are debts which may be paid on an installment basis and should be treated like any other installment obligation. Of course, the fact that the taxes were paid after decedent's death does not change their character.

The inter vivos character of real property taxes is recognized in our inheritance tax laws. Inheritance tax deductions are permitted for the amount of tax liens at the time of death in the same manner as deductions are allowed for claims against the estate of the decedent. Revenue and Taxation Code, § 13987.

Appellants' reliance on In re Estate of Jacks is misplaced. In that case the taxes had not been assessed on the date of death. Citing Bogert on Trusts, the court observed that ‘It is a general rule that taxes due, or at least assessed, prior to death, should normally be paid from principal, * * * while taxes assessed thereafter are payable from income.’ 80 Cal.App.2d at page 571, 182 P.2d at page 610. (Emphasis added.) Since the tax had not been assessed at the date of death and was for a fiscal year that started after the death of the testatrix, the court, in the Jacks case, held it was an ordinary, normal expense and the trustee could properly charge it against income. 80 Cal.App.2d at page 572, 182 P.2d at page 610. It is obvious that the Jacks case does not assist appellants since in the case at bar the assessment was made prior to death and for the current tax year.

We come now to the taxes paid on a vacant lot in the amount of $114.46 that was sold during probate administration. This property did not produce any income before it was sold and the property itself never reached the hands of the trustee. Neither the trustee nor any of the income beneficiaries received any benefit whatever from this property. Therefore, there is no reason why the taxes paid on this property should be charged against them. We find support for this conclusion in Restatement, Trusts, § 223(m): ‘Taxes * * * on unproductive land are payable out of principal, even though the trust estate includes other property from which an income is derived, unless it is otherwise provided by the trust.’ This rule is fair in the instant case because the principal received all of the proceeds of the sale. The expenses should be charged against this benefit. It is clear that the court properly charged this tax item against corpus.

The final item is the tax of $919.95 paid on the home which was occupied by the husband of decedent during probate administration. This property is in exactly the same category as the vacant lot in that no income was ever realized from it. The Restatement rule, noted above, regarding unproductive property should therefore be applied. When this property was sold it does not appear that any part of the sale price was allocated to income beneficiaries. As the principal of the trust received all the proceeds of the sale of this non-income producing property, the principal of the trust should be charged with the taxes in question. There is possibly some confusion in this aspect of the case since John G. Hill, who was the husband of the decedent was also the executor, the trustee named in the will and the primary income beneficiary. There were also three charities named as income beneficiaries under the trust. The propriety of the allocation of these taxes can best considered from the viewpoint of the charities. As income beneficiaries they did not receive any benefit whatever from this property, either by way of income or from its sale. There is, therefore, no logical reason why they should be charged with the taxes on it. It is thus apparent that the court properly charged these taxes against corpus rather than against income.

Appellants argue that the trustee was given discretion and since he actually paid these taxes out of probate income, thereby exercising his discretion, the trial court should have charged these taxes against income. In support of their position they quote from the decree of distribution which incorporates the trust provision in the will that authorizes the trustee, inter alia, to pay all taxes, etc., ‘From the gross income received or derived from the trust estate or from the principal thereof * * *’ (Emphasis added.) Appellants misconceive the application of this provision. By its express terms this provision relates to the discretion of the trustee after the property has passed through probate and out of the hands of the executor into the possession of the trustee. It has no application whatever to the executor. In fact, appellants concede that ‘The will of Ellen M. Hill made no provision with reference to the payment of the probate income or the deduction of real property taxes therefrom.’ Confusion has apparently crept into appellants' argument here because John G. Hill was executor and then trustee. But his duties were different in each capacity. He could not transpose authority given in one capacity so as to enlarge that conferred in the other.

Since the trial court properly charged the taxes in question against corpus, and no question has been raised as to the propriety of the charges of any other items, it follows that the court correctly determined that $24,198.72 was the amount of net probate income which the income beneficiaries are entitled to receive.

We come now to the question of interest.

Absent a contrary provision in a will which creates a testamentary trust, the income beneficiary's right to income commences from the date of testator's death and not the date of distribution. In re Estate of Platt, 21 Cal.2d 343, 346–348, 131 P.2d 825; In re Estate of de Laveaga, 50 Cal.2d 480, 485, 326 P.2d 129. In the instant case, the probate court found the net probate income to be $24,198.72, and decreed that the trust income beneficiaries are entitled to interest at 4 per cent on said amount. This sum was not distributed by the trustee as it should have been but was instead treated as corpus. Normally, the law provides for compensation when money is detained. However, respondent readily concedes that John G. Hill's estate is entitled to no interest on the net probate income from and after its distribution to the trustee until the death of John G. Hill, for the reason that the latter, as income beneficiary, received the full benefit of this money by his receipt of income earned by its retention in the trust corpus. See In re Estate of de Laveaga, supra. However, since Hill's interest in the trust terminated as of his death, he (his estate) thereafter received no benefit from the retention by the successor trustee of his share of the probate income and his estate should, therefore, receive interest on such amount from the time of his death. We agree that interest is due the John G. Hill estate on 90 percent of the net probate income as of his death until paid. However, the respondent argues that the trial court erroneously applied the 4 per cent interest rate provided for in Probate Code, § 162.

The California Constitution, Article XX, section 22, provides generally for a 7 per cent rate of interest. Section 162, Probate Code, states:

‘General pecuniary legacies, if not paid prior to the first anniversary of the testator's death, bear interest thereafter at the rate of 4 percent per annum. Annuities commence at the testator's death and are due at the end of the annual, monthly or other specified period. Whenever an annuitant, legatee of a legacy for maintenance or beneficiary of a trust may be entitled to periodic payments or trust income commencing at the testator's death, he shall be entitled to interest at 4 percent per annum on the amount of any unpaid accumulations of such payments or income held by the executor or administrator on each anniversary of the decedent's death, computed from the date of such anniversary.’ (Emphasis added.)

The probate income for which interest is now claimed was withheld by C. Walter Hall, successor trustee, from Hill's estate, long after the termination of probate. Hall is not an executor or administrator, and section 162 expressly refers to money wethheld by an executor or administrator, and makes no reference to trustees. There is nothing in the language of section 162 which indicates an intent on the part of the legislature to limit the rate of interest to 4 per cent when dealing with a trustee or successor trustee who, after receiving the probate income, improperly withholds it from those legally entitled to it. On the contrary, it is reasonably clear from the section itself, found in the division (I) of the Probate Code dealing with Wills, that it only has reference to the interval between death and distribution to the trustee. Thereafter, if the trustee or successor trustee wrongfully withholds probate income, no reason appears why the legal rate of interest should not apply. See In re Estate of Prior, 111 Cal.App.2d 464, 470–471, 244 P.2d 697. After the assets of the probate estate were distributed to the trustee, the law of trusts and not of wills became paramount. In Re Estate of Loring, 29 Cal.2d 423, at page 434, 175 P.2d 524, at page 530, the court stated: ‘Although testamentary trusts are, for purposes of convenience, placed under the supervision of the probate courts (Prob.Code, § 1120), the substantive law governing such trusts after the final decree of distribution is the law of trusts and not the law of wills. This law, as respects this case, is no different from that applicable to an inter vivos trust.’ It is unquestionably true that section 162 does not apply to inter vivos trusts (Jacks v. Monterey County Trust & Savings Bank, 20 Cal.2d 494, 499–500, 127 P.2d 532) and no reason appears why the instant trust, after the decree of distribution, should be treated any differently than an inter vivos trust insofar as the trustee's liability for interest upon his failure to pay over money due the estate of a deceased beneficiary is concerned. Rest., Trusts, § 207(1).

The de Laveaga case, supra, indicates that section 162 applies to testamentary trusts after distribution to the trustee. It should be noted, however, that the actual was recoverable. No issue was made as to whether section 162 did or did not control issue before the court in this regard was the right to a credit against interest for income produced by the withheld probate income, and not the rate at which interest the interest rate. The point simply was not presented to the court. The trial court in de Laveaga employed section 162 and the Supreme Court merely, absent argument on the question, followed the finding of the trial court that 4 per cent was the proper rate. Therefore, we do not believe the de Laveaga case actually decided the question presently before this court and, consequently, our present holding that section 162 is inapplicable is in no manner out of harmony with the prior decision by our Supreme Court.

Comment seems appropriate for the guidance of the trial court in its redetermination of the amount of interest due the income beneficiaries. Hall, the successor trustee, wrongfully failed to pay over to the income beneficiaries the net probate income of $24,198.72. These beneficiaries suffered a detriment from this wrongful omission and are entitled to recover damages therefor from Hall personally. In re Estate of de Laveaga, supra, 50 Cal.2d at page 488, 326 P.2d at page 133; In re Estate of Prior, supra, 111 Cal.App.2d at page 472, 244 P.2d at page 702. As we have previously pointed out, interest should be allowed at the rate of 7 per cent per annum from November 19, 1954 (the date of Hill's death), until paid. This is the compensation allowed by law for the detention of money (Civ.Code, § 1915) and since there is here no suggestion of oppression, malice or fraud (see Civ.Code, § 3294), additional damages would not be proper. The income beneficiaries will be fully compensated for the detention of the money here involved by payment of 7 per cent interest upon $24,198.72 less the amounts, if any, paid such beneficiaries from the earnings upon such sum, or by retention of such earnings if they should exceed the interest. In re Estate of de Laveaga, supra, 50 Cal.2d at page 489, 326 P.2d at page 134. The income beneficiaries are entitled to retain whatever payments, if any, they have received in the form of ‘earnings' from the principal sum whether or not such payments prove in excess of the legal rate of interest, but they ‘may not have double recovery (two compensations) for one detention of one sum.’ In re Estate of de Laveaga, supra, 50 Cal.2d at page 489, 326 P.2d at page 134.

The portion of the order appealed from which allocates taxes and adjudicates that the net probate income is $24,198.72 is affirmed. The portion of the order that determines the rate of interest to be paid on the net probate income and the date from which interest starts to run is reversed with directions to redetermine the interest on said net probate income and the net amount, if any, payable to the income beneficiaries in accordance with the views herein expressed.

FOOTNOTES

1.  Jessie Elder Hill, who was the original executrix of the will of John G. Hill, died pending the determination of this matter. She has been succeeded by Ann Marie Mercer as such executrix.

2.  The Ellen M. Hill will provided for a trust to continue until the year 1960 or until the deaths of all the income beneficiaries other than the charities. The income during the trust was to be paid (1) 10 per cent to the University of Southern California, Methodist Hospital of Los Angeles and the Methodist Episcopal Church, and (2) the remainder (90%) to John G. Hill during his lifetime, and thereafter to Gladys Hill Adams (daughter of Ellen M. Hill) and Clarellen Adams Weir. Upon the termination of the trust, the trust assets should go (a) 1/8 to the University of Southern California, Methodist Episcopal Church, Methodist Hospital in Los Angeles, California, or Omaha, Nebraska, and (b) 7/8 to Gladys Hill Adams, Clarellen Adams Weir and her issue.

3.  This is the date on which Probate Code, § 162, as amended, became effective. It provided, inter alia, that ‘General pecuniary legacies, if not paid prior to the first anniversay of the testator's death, bear interest thereafter at the rate of 4 percent per annum.’

FOX, Presiding Justice.

ASHBURN, J., concurs. HERNDON, J., being disqualified, does not participate herein.