* Motion for rehearing denied, with $25 costs, on October 15, 1947. John Cudahy, a resident of Milwaukee county, died testate September 6, 1943, and his will was admitted to probate in the county court of Milwaukee county. By trust agreement dated *Page 117 June 7, 1918, the testator and eight other members of the family of Patrick Cudahy transferred to the respondent, First Wisconsin Trust Company, as trustee, 10,491 shares of stock in the Patrick Cudahy Family Company, of which the testator transferred 999 shares. The trustee was required to receive all dividends declared or paid on account of the stock. Out of these dividends the trustee was required to pay administration expenses "including any and all taxes which said trustee may be required to pay by any present or future law." After the payment of expenses of administration each subscriber was to receive the net dividends in respect of the shares of stock transferred by him. Upon the death of any subscriber the trustee was required to pay to such living appointee or appointees as the deceased subscriber by his last will and testament admitted to probate might designate and appoint, the net dividends in respect of the shares of stock transferred by such subscriber or such portion as the appointment might direct. No appointment was to be effective for a longer period than the natural life of the appointee. In the event of the termination of the term of any appointment the trustee was to pay the net dividends to the issue of such subscriber living at the time of distribution proportionately by right of representation.
Two of the settlors of the trust predeceased the testator. In a controversy involving liability for payment of inheritance taxes arising out of their death the circuit court for Milwaukee county on December 29, 1939, adjudged that the provisions of the trust agreement relating to payment of taxes by the trustee required it to pay inheritance taxes which had been imposed at their death upon the transfer of stock under the trust agreement. There was also an adjudication that inheritance taxes which might thereafter be imposed at the death of other settlors on the transfer of stock under the trust agreement should be paid by the trustee provided that in any case "the tax be one which the trustee is obligated by law to pay." The judgment of the circuit court was preceded by a determination of *Page 118 inheritance-tax liability in the estate of Anna M. Cudahy on June 26, 1939, in which the county court concluded that any portion of the inheritance tax upon the transfer under the trust agreement paid by the executor out of the decedent's residuary estate should be deemed an advance for which the executor or residuary legatees would be entitled to reimbursement out of the trust estate.
In art. I of his will the testator provided:
"I direct that my just debts, funeral expenses and all inheritance, estate and succession taxes be paid by my executors."
There were specific devises and bequests followed by the customary residuary clause. In addition the will contained a provision appointing the testator's wife to receive the net income of the trust during her life. No appointment was made to take effect upon her death for the recited reason that under the terms of the trust the testator's issue were to take at that time.
On July 3, 1946, the executors petitioned for a hearing on inheritance-tax determination and for an adjudication that the respondent trustee was liable for the inheritance tax on the deceased's beneficial interest in the trust and for other relief. In answer to the petition the trustee requested the court, among other things, to adjudge that all federal estate taxes, including such as might arise by reason of the inclusion of the assets of the trust, be paid from the estate. On December 20, 1946, the court entered judgment that the estate was liable for all Wisconsin inheritance and federal estate taxes which might be levied against it or any beneficiary thereof. On February 13, 1947, it entered an order determining inheritance taxes. The executors appeal from the judgment and the order. The first question is whether the direction for payment of debts, funeral expenses, and inheritance, estate and succession taxes by the executors was intended to require payment of the Wisconsin inheritance tax imposed upon specific devises and bequests, out of the residue of the estate. The effect of such direction would be to free the specific legatees and devisees from payment of the taxes imposed upon their legacies and devises and to diminish the residuary estate by the amount of these taxes. There is no specific direction to pay out of the residue as in the case of Estate of Levalley (1926), 191 Wis. 356,210 N.W. 941, but we are of the view that the testator so intended. The instruction as to payment of debts, funeral expenses, and taxes is followed by specific bequests and devises — exercise of the power of appointment — and art. VII, which disposes of "all the rest, residue and remainder of my estate." Direction for payment of the tax, accompanied as it is by the, direction to pay debts and funeral expenses which in any case are payable before computation of the residue, followed by disposition of the residue, indicates that the testator intended to dispose of the residue subject to diminution by these items. Other courts have so held. Starr v. Watrous (1933),116 Conn. 448, 165 A. 459; Righter v. Fidelity Union Trust Co. (1932) 110 N.J. Eq. 169, 159 A. 393. See also cases collected at 51 A.L.R. 484, 115 A.L.R. 920, 116 A.L.R. 862, and 141 A.L.R. 852.
We come now to a very difficult problem. Did the testator intend that the executors should pay the Wisconsin inheritance tax attributable to the transfer of his interest in the trust estate and to absolve the trustee of such payment?
Ascertainment of the testator's intent must be approached with due regard for the decisions of the county and circuit courts concerning the liability of the trustee for payment of inheritance taxes. Such liability had been adjudicated in the case of two predeceased settlors and with reference to such taxes as might thereafter accrue upon the death of other settlors. *Page 120 The testator was of course aware of this when he prepared his will.
Sec. 72.01(5), Stats., provides that both the exercise and the nonexercise of a power of appointment by a donee shall result in a taxable transfer in the same manner as though those taking by reason of the exercise or default had taken by devise or bequest under a will of the donee. The subsection is devoted solely to the matter of a taxable transfer. It does not purport to say that such property actually passes under a will. Obviously it could not do so where there is no will.
Did the instruction of the testator to the executors to pay inheritance taxes require that the executors pay taxes upon property passing not by the will but by the trust agreement in which provision for payment of such taxes existed? It is true that the direction was not expressly limited to property passing by the will, but we are persuaded that it was impliedly so limited. In addressing himself in the will to payment of inheritance taxes, the testator intended that the specific devises and bequests should not be burdened with payment of such taxes attributable to them. There could be no other purpose in the provision. However, provision already existed in the trust agreement for the payment by the trustee of such taxes accruing upon the transfer of his interest in the trust. There would be no occasion for directing payment by the executors in order to absolve the recipients of that interest from the burden of the tax.
We see no reason why the direction to the executors should be construed to include the payment of inheritance taxes upon property not passing under the will. The will disposed of property and made provision for payment of taxes thereon. The trust disposed of property and made provision for payment of taxes thereon. There would have been no occasion for a direction to the executors to pay the tax on the transfer of the testator's interest in the trust unless it had been intended to benefit the trust at the expense of his residuary estate. *Page 121 There is no intent otherwise manifest in the will to provide for the beneficiaries of the trust estate. And such an intent should not be spelled out of the direction to pay taxes where it will result in diminishing the estate of those for whom the testator clearly intended to provide.
It is argued that the language directing the executors to pay "all" inheritance, estate and succession taxes is unambiguous and includes all taxes, whether accruing under the will or otherwise. The direction to pay is clear enough, but the taxes included are not. The language "all inheritance taxes" could mean all taxes arising by reason of the testator's death or it could mean all taxes arising out of legacies and devises under the will. In view of what we have said we construe it to mean the latter. There is a collection of cases in 51 A.L.R. 484; 115 A.L.R. 920; 116 A.L.R. 862; and 141 A.L.R. 852, to which reference has been made, dealing with problems similar to this one. While determination of the question depends in any case upon the peculiar language of the direction for payment of the taxes and upon other attendant facts and circumstances, it may be said that in construing such directions the decisions generally are inclined to limit them to property passing by w, ill and to exclude property passing from the testator under the terms of an inter vivos trust.
The respondent contends that the adjudication of the county court that the trustee should pay out of trust income inheritance taxes accruing upon the death of settlors has no application. It is argued that the trustee was adjudged liable only for such inheritance taxes upon the death of settlors as it was by law obligated to pay. It is then said that where the testator directs the executors to pay all inheritance taxes the trustee is not obligated by law to pay them. The provision in the judgment was intended to conform the liability of the trustee to the provision of the trust agreement that it should pay out of income all taxes which it was required by law to pay. Taxes required or obliged to be paid by law refer to impositions made by law. *Page 122 Assuming the testator's estate had been insolvent, it could' hardly be said that an obligation fixed by law on the trustee could have been avoided by a specific direction to the executors to pay inheritance taxes. The county court clearly intended to fix the trustee's liability to pay out of income the taxes imposed upon it by statute.
It has not been determined whether there will be a federal estate tax upon the transfer of the testator's interest in the trust estate. We express no view upon that matter. Estate ofBritt (1946), 249 Wis. 602, 26 N.W.2d 34.
By the Court. — Judgment and order reversed, and cause remanded with directions for further proceedings in conformance with the opinion.