Title: Estate of James F. Sheppard v. Jessica Schleis

State: wisconsin

Issuer: Wisconsin Supreme Court

Document:

2010 WI 32 
 
SUPREME COURT OF WISCONSIN 
 
 
 
 
 
CASE NO.: 
2009AP1021 
COMPLETE TITLE: 
 
 
Estate of James F. Sheppard, by its Co-Personal  
Representative, Michael E. McMorrow, 
          Plaintiff-Appellant, 
     v. 
Jessica Schleis, James Schleis, Mary Jo Schleis 
and XYZ Financial Institutions, 
          Defendants-Respondents. 
 
 
 
 
ON BYPASS FROM THE COURT OF APPEALS 
 
 
OPINION FILED: 
May 4, 2010   
SUBMITTED ON BRIEFS: 
        
ORAL ARGUMENT: 
February 11, 2010   
 
 
SOURCE OF APPEAL: 
 
 
COURT: 
Circuit   
 
COUNTY: 
Washington   
 
JUDGE: 
Patrick J. Faragher   
 
 
 
JUSTICES: 
 
 
CONCURRED: 
        
 
DISSENTED: 
        
 
NOT PARTICIPATING:         
 
 
 
ATTORNEYS: 
 
For the plaintiff-appellant there were briefs (in the court 
of appeals) by Michael E. McMorrow and the Law Offices of 
Michael E. McMorrow, Mequon; J. Lewis Perlson, Amy S. Kiiskila, 
and Michael Best & Friedrich, LLP, Milwaukee; and Jonathan V. 
Goodman and Goodman Law Offices, Milwaukee, and oral argument by 
J. Lewis Perlson and Michael E. McMorrow. 
 
For the defendants-respondents there was a brief (in the 
court of appeals) by Elaine A. Shanebrook and Shanebrook & 
Falkowski Law Office, West Bend, James G. Pouros and the O’Meara 
Law Firm LLP, West Bend, and oral argument by Elaine A. 
Shanebrook. 
 
 
 
 
2010 WI 32
NOTICE 
This opinion is subject to further 
editing and modification.  The final 
version will appear in the bound 
volume of the official reports.   
 
No.  2009AP1021  
(L.C. No. 
2008CV1122) 
STATE OF WISCONSIN  
 
 
   : 
IN SUPREME COURT 
 
 
Estate of James F. Sheppard, by its Co-Personal 
Representative, Michael E. McMorrow, 
 
          Plaintiff-Appellant, 
 
     v. 
 
Jessica Schleis, James Schleis, Mary Jo Schleis 
and XYZ Financial Institutions, 
 
          Defendants-Respondents. 
 
 
 
FILED 
 
MAY 4, 2010 
 
David R. Schanker 
Clerk of Supreme Court 
 
 
 
 
 
APPEAL from an order and  judgment of the Circuit Court for 
Washington County, Patrick J. Faragher, Judge.  Affirmed. 
 
¶1 
SHIRLEY S. ABRAHAMSON, C.J.   This is an appeal of an 
order and judgment from the Circuit Court of Washington County, 
Patrick J. Faragher, Judge.  This court granted the Estate's 
petition to bypass the court of appeals pursuant to Wis. Stat. 
§§ 808.05 and 809.60 (2007-08).1   
                                                 
1 All subsequent references to the Wisconsin Statutes are to 
the 2007-08 version unless otherwise indicated. 
No. 
2009AP1021   
 
2 
 
¶2 
Jessica Schleis was named as the recipient of two 
accounts, one a "Payable on Death" (P.O.D.) account, the other a 
"Transfer on Death" (T.O.D.) account, totaling over $3 million 
in the name of James F. Sheppard, the decedent.  For ease of 
discussion, we will refer to both accounts as P.O.D. accounts.2   
¶3 
This action was brought by the Estate of James F. 
Sheppard, deceased, against the defendants, Jessica Schleis (the 
named recipient of the two accounts); her parents, James Schleis 
and Mary Jo Schleis (who signed an agreement with the Estate 
stating that "required estate taxes" would be paid out of the 
accounts); 
and 
XYZ 
Financial 
Institutions 
(named 
under 
Wisconsin's Fictitious Name Statute, Wis. Stat. § 807.12, as the 
institutions that currently have on deposit the funds from the 
two P.O.D. accounts).  The Estate seeks reimbursement from these 
defendants of the federal and state estate taxes generated by 
the P.O.D. accounts.   
¶4 
The circuit court granted summary judgment to the 
defendants, holding that "the obligation to pay estate and 
inheritance 
taxes 
rests 
on 
the 
estate 
and 
the 
personal 
representative, not the defendants."  As to the Wisconsin estate 
tax, the circuit court concluded that Firstar Trust Company v. 
First National Bank of Kenosha, 197 Wis. 2d 484, 541 N.W.2d 467 
(1995), "deals with the issue completely" and that the Estate's 
claim that the defendants were obligated to pay a portion of the 
                                                 
2 The two types of accounts are, for purposes of the instant 
case, substantially similar.  See Wis. Stat. §§ 705.03(2), 
705.26. 
No. 
2009AP1021   
 
3 
 
Wisconsin estate tax generated by the P.O.D. accounts is not 
maintainable under state law.  The circuit court also rejected 
the Estate's claim for apportionment of estate taxes because no 
Wisconsin apportionment statute exists and the court declined to 
create a common-law equitable apportionment rule.  As to the 
Estate Tax Withholding Agreement signed by Mary Jo Schleis and 
James Schleis and the Estate for the "required estate taxes" to 
be paid from the P.O.D. accounts, the circuit court concluded 
that "the so called agreement does not provide a cognizable 
remedy," because "there is no federal or state withholding 
procedure" for P.O.D. accounts. 
¶5 
On appeal from the judgment and order of the circuit 
court, this court must address four issues:  (1) When a decedent 
dies leaving no will, must a recipient of a P.O.D. account 
reimburse the Estate for a portion of the federal estate taxes 
attributable to a P.O.D. account?  (2) When a decedent dies 
leaving no will, must a recipient of a P.O.D. account reimburse 
the Estate for a portion of the Wisconsin estate taxes 
attributable to a P.O.D. account?  (3) When a decedent dies 
leaving no will and no Wisconsin statute directs apportionment 
of estate taxes, does the court apply a common-law limited 
equitable apportionment rule requiring a recipient of a P.O.D. 
account to reimburse the Estate for a portion of the federal and 
state estate taxes attributable to a P.O.D. account?  (4) Does 
an agreement signed by parents of a minor recipient of a P.O.D. 
account impose liability on the parents or the minor to 
No. 
2009AP1021   
 
4 
 
reimburse the Estate for a portion of the federal and state 
estate taxes attributable to a P.O.D. account?   
¶6 
We conclude that payment of the federal estate tax is 
to be made by the Estate under 26 U.S.C. § 2002 (2006),3 which 
provides that an estate pays the estate tax on nonprobate 
property.  The P.O.D. accounts at issue do not fall within 26 
U.S.C. §§ 2207B and 2036 or any other exception to the general 
rule that an estate pays the federal estate tax generated by 
nonprobate assets.4  We further conclude that the Estate must pay 
the Wisconsin estate taxes generated by the P.O.D. accounts.  In 
Wisconsin the court has applied the burden-on-the-residue rule 
for state estate taxes unless the testator directs otherwise.  
The 
court 
declines 
to 
establish 
a 
common-law 
equitable 
apportionment rule.  Furthermore, the agreement signed by Mary 
Jo and James Schleis, parents of Jessica Schleis, to retain 50% 
of all sums payable on the P.O.D. accounts "for the purpose of 
paying required estate taxes" is not enforceable against the 
Schleises.  Accordingly, we affirm the order and judgment in 
favor of the defendants.   
                                                 
3 All subsequent references to the United States Code are to 
the 2006 official version unless otherwise indicated. 
4 Probate assets are those transferred by testate or 
intestate succession; nonprobate assets are those transferred 
outside of probate, such as life insurance proceeds or jointly 
held property.  For a summary of and illustrations of probate 
and nonprobate assets, see Katherine W. Lambert, Death in 
Wisconsin: 
A 
Legal 
Practitioner's 
Guide 
to 
Postmortem 
Administration, §11.1 (9th ed. 2008). 
No. 
2009AP1021   
 
5 
 
I 
¶7 
For the purposes of this appeal, the facts are not in 
dispute.5  James F. Sheppard, the decedent, established two 
payable on death (P.O.D.) accounts prior to his death.  Sheppard 
designated his goddaughter, Jessica Schleis, as the recipient of 
these two P.O.D. accounts on his death.  James Sheppard died 
without a will on July 2, 2007, with a total estate valued at 
approximately $12 million.  The P.O.D. accounts designating 
Jessica Schleis as the recipient were worth approximately $3.8 
million at the time of Sheppard's death.6    
¶8 
Jessica Schleis was a minor, 17 years old, when James 
Sheppard died.  Jessica's mother, Mary Jo Schleis, communicated 
with the attorney for the Estate on July 19, 2007.  The Estate's 
attorney, who also represents the Estate before this court, 
advised Mary Jo Schleis that federal and Wisconsin estate tax 
                                                 
5 The circuit court observed that this matter "is not fact-
intensive.  Although there are likely differences of opinion as 
to facts, none of them would seem to be material to any issue of 
law before the Court.  There is no genuine issue as to any 
material fact."   
The circuit court also adopted the Estate's "statement of 
the true controversy: 'The ultimate question in this case is the 
extent to which the Schleis family collectively will be required 
to pay their proportionate share of both federal and state 
estate taxes on two payable on death accounts . . . .'" 
6 The accounts at issue include a "brokerage account" held 
at M&I Brokerage Services, Inc., which had $1,115,720.44 on 
deposit at the time of Sheppard's death, and a "Premier Platinum 
Checking Account" held at Chase Bank, which had $2,666,854.59 on 
deposit. 
No. 
2009AP1021   
 
6 
 
obligations would attach to the recipient of the P.O.D. 
accounts.   
¶9 
At the suggestion of the Estate's attorney and with 
the advice of their own attorney, Jessica's parents signed, with 
Jessica's knowledge, an "Estate Tax Withholding Agreement," 
dated September 3, 2007.7  The agreement provided that 50% of all 
sums would remain on deposit in the accounts for the purpose of 
paying "required estate taxes."  The Estate then supplied the 
Schleis family with information the Estate had regarding the 
P.O.D. accounts and with two death certificates, and refrained 
from taking any action to impede Jessica Schleis's ability to 
withdraw from the accounts.  
¶10 Because Jessica Schleis was a minor, her parents 
petitioned the circuit court on September 13, 2007, to be 
appointed her guardians.   
¶11 As part of the guardianship proceeding, the circuit 
court appointed a guardian ad litem for Jessica Schleis.  The 
guardian ad litem advised the Estate's attorney that she had 
advised the Schleis family that Jessica Schleis was not 
responsible for payment of federal or state estate taxes because 
the P.O.D. accounts were not part of the residuum of the probate 
estate and that as guardians of Jessica's estate the Schleises 
could remove all funds from the P.O.D. accounts.   
                                                 
7 The Schleises' signatures on the agreement are dated 
August 31, 2007. 
No. 
2009AP1021   
 
7 
 
¶12 On October 30, 2007, Mary Jo Schleis and James Schleis 
were appointed guardians for Jessica.  The Schleises withdrew 
the entire balance from the P.O.D. accounts on November 12, 
2007. 
 
While 
guardianship 
proceedings 
were 
ongoing, 
the 
Schleises retained a second attorney who on November 26, 2007, 
advised the Estate's attorney that she believed the Estate Tax 
Withholding Agreement was not binding on her clients, Mary Jo 
and James Schleis.   
¶13 On January 17, 2008, the Estate's counsel advised 
counsel for the Schleises that the Estate maintained the 
position that Mary Jo Schleis, James Schleis, and Jessica 
Schleis were responsible to pay their share of all federal and 
Wisconsin estate taxes and that their obligation was joint and 
several.  The Estate brought this suit seeking reimbursement of 
estate taxes from Mary Jo Schleis, James Schleis, and Jessica 
Schleis.   
¶14 Jessica Schleis reached the age of majority on 
February 18, 2008.  
II 
¶15 In reviewing a circuit court's decision granting 
summary judgment, this court applies the same methodology as the 
circuit court.8  Under Wis. Stat. § 802.08(2), summary judgment 
must be entered "if the pleadings, depositions, answers to 
interrogatories, and admissions on file, together with the 
                                                 
8 Pawlowski v. Am. Family Mut. Ins. Co., 2009 WI 105, ¶15, 
322 Wis. 2d 21, 777 N.W.2d 67. 
No. 
2009AP1021   
 
8 
 
affidavits, if any, show that there is no genuine issue as to 
any material fact and that the moving party is entitled to a 
judgment as a matter of law." 
III 
¶16 The first issue is whether the Internal Revenue Code 
provides the Estate a right to recover a portion of federal 
estate taxes from the recipient of a P.O.D. account.  We begin 
with a brief review of the applicable Internal Revenue Code 
provisions.   
¶17 First, 26 U.S.C. § 2002 states that the executor of a 
decedent's estate shall pay federal estate taxes imposed by 26 
U.S.C. §§ 2001 et seq., whether the taxes are attributable to 
probate or nonprobate property.  Section 2002 simply states, 
"The tax imposed by this chapter shall be paid by the executor."  
Section 20.2002-1 of the Regulations elaborates to explain that 
an executor's or administrator's duty to pay federal estate tax 
applies to the "entire tax, regardless of the fact that the 
gross estate consists in part of property which does not come 
within possession of the executor or administrator. . . . "  26 
C.F.R. § 20.2002-1 (2009).  Thus the probate estate (the portion 
of the estate within the executor's possession) pays all of the 
federal estate taxes even if a portion of the total tax is 
generated by property that has passed to a recipient through a 
nonprobate transfer (such as a P.O.D. account) and did not come 
under the executor's control or possession.   
¶18 Four federal statutory provisions, 26 U.S.C. §§ 2206–
2207B, set forth exceptions to the general rule of 26 U.S.C. 
No. 
2009AP1021   
 
9 
 
§ 2002 that the probate estate pays the federal estate tax.  
These four exceptions permit the estate to seek reimbursement 
for a portion of the federal estate taxes paid from a recipient 
of a nonprobate asset.  The four exceptions are as follows:   
Section 2206 
 
Life Insurance Beneficiaries. 
 
Section 2207 
Liability of recipient of property over 
which decedent had power of 
appointment. 
 
Section 2207A 
Right of recovery in the case of 
certain marital deduction property. 
 
Section 2207B 
Right of recovery where decedent 
retained interest.  
¶19 The Estate argues that the last exception, 26 U.S.C. 
§ 2207B, applies in the present case.  Section 2207B states that 
if the value of property is included in the gross estate on 
which estate tax has been paid, by reason of 26 U.S.C § 2036, 
then the decedent's estate has a right of recovery from the 
person receiving the property equal to the same ratio that the 
value of the property bears to the taxable estate.  Section 
2207B(a) provides as follows: 
Right of recovery where decedent retained interest.   
(a) Estate tax. 
(1) In general.  If any part of the gross estate on 
which tax has been paid consists of the value of 
property included in the gross estate by reason of [26 
U.S.C. § 2036] (relating to transfers with retained 
life estate), the decedent's estate shall be entitled 
to recover from the person receiving the property the 
amount which bears the same ratio to the total tax 
under this chapter [26 U.S.C. §§ 2001 et seq.] which 
has been paid as— 
No. 
2009AP1021   
 
10 
 
(A) the value of such property, bears to  
(B) the taxable estate. 
(2) Decedent may otherwise direct.  Paragraph (1) 
shall not apply with respect to any property to the 
extent that the decedent in his will (or a revocable 
trust) specifically indicates an intent to waive any 
right of recovery under this subchapter with respect 
to such property. 
¶20 To determine whether the Estate has a right of 
recovery under § 2207B, we must therefore examine whether the 
value of the P.O.D. accounts at issue was included in James 
Sheppard's gross estate pursuant to 26 U.S.C. § 2036.  Only if 
the P.O.D. accounts were included in the gross estate pursuant 
to § 2036 does § 2207B apply, giving the Estate a right to seek 
reimbursement from Jessica Schleis for a portion of the estate 
taxes.  
¶21 Section 
2036 
governs 
transfers 
made 
during 
a 
decedent's lifetime in which a decedent retained the right to 
income from the property or the right to determine who shall 
receive the property or income from the property.  Section 
2036(a) provides as follows:  
Transfers with retained life estate 
(a) General Rule.  The value of the gross estate shall 
include the value of all property to the extent of any 
interest therein of which the decedent has at any time 
made a transfer (except in the case of a bona fide 
sale for an adequate and full consideration in money 
or money's worth), by trust or otherwise, under which 
he has retained for his life or for any period not 
ascertainable without reference to his death or for 
any period which does not in fact end before his 
death——  
No. 
2009AP1021   
 
11 
 
(1) the possession or enjoyment of, or the 
right to the income from, the property, or  
(2) 
the 
right, 
either 
alone 
or 
in 
conjunction with any person, to designate the 
persons who shall possess or enjoy the property 
or the income therefrom.  
¶22 Section 2036 applies where a decedent makes "a 
transfer" by trust or otherwise during his life retaining for 
his life, or any period not ascertainable without reference to 
his death, the income or the right to designate the persons who 
shall possess or enjoy the property or the income.  Section 2036 
operates to impose a portion of the federal estate tax on 
property that a decedent transferred during his or her life but 
in which the decedent retained an economic benefit until his 
death.  See Helvering v. Bullard, 303 U.S. 297, 300 (1938); 
Hassett v. Welch, 303 U.S. 303, 310-12 (1938). 
¶23 To determine whether the P.O.D. accounts at issue are 
included in the gross estate under 26 U.S.C. § 2036, we must 
determine whether the decedent made "a transfer" during his life 
by creating the P.O.D. accounts.   
¶24 Under Wisconsin law governing P.O.D. accounts, the 
creation of a P.O.D. account does not amount to a transfer of 
property by the decedent to the recipient during the decedent's 
life.  When a depositor opens a P.O.D. account, he or she names 
a recipient who is to receive the property in the account at the 
No. 
2009AP1021   
 
12 
 
time of the depositor's death.9  The depositor is not required to 
notify the recipient when the account is opened or when the 
recipient is named.  Wis. Stat. § 705.26.  Prior to the 
depositor's death, the depositor maintains control over the 
principal and income of the accounts and can change the P.O.D. 
recipient at any time.  The depositor can remove all the assets 
from a P.O.D. account and close the account at any time before 
his or her death, without notifying the P.O.D. recipient.  The 
recipient has a right to the account only if the account exists 
at the death of the depositor and the recipient survives the 
depositor.   
¶25 Section 2036 applies to a transfer with a retained 
life estate.  A property interest must be transferred during the 
owner's lifetime in order for a life estate to be retained.  The 
P.O.D. account does not constitute such a transfer.  During his 
or her lifetime the depositor is the owner of the P.O.D. account 
and controls the income, the principal, and the right to decide 
who gets the property at the depositor's death.  With a P.O.D. 
account the depositor remains the owner during his or her life, 
transfers nothing during his or her life, and retains total 
                                                 
9 The 
legislature 
has 
authorized 
Wisconsin 
financial 
institutions to offer P.O.D. accounts to their customers.  See 
Wis. 
Stat. 
§§ 705.01(8)-(9), 
705.03(2). 
 
Wisconsin 
Stat. 
§ 705.03(2) specifies that "[a] P.O.D. account belongs to the 
original payee during the original payee's lifetime and not to 
the P.O.D. beneficiary or beneficiaries."  With respect to 
T.O.D. accounts, Wis. Stat. § 705.26 provides that "[t]he 
designation 
of 
a 
TOD 
beneficiary 
on 
a 
registration 
in 
beneficiary form does not affect ownership until the owner's 
death."   
No. 
2009AP1021   
 
13 
 
interest in the property during his or her life.  The depositor 
continues to control the principal and the income and could 
close the account or change the recipient at any time without 
even notifying the recipient of a change or the existence of the 
account.  The depositor did not transfer any ownership rights or 
any rights to income during his life.  
¶26 The recipient of a P.O.D. account does not possess a 
remainder interest.  The recipient has only the potential 
expectancy of receiving the proceeds if the depositor makes no 
change in the nature of the account or in naming the recipient 
of the account and the named recipient survives the depositor.  
There is no transfer to the recipient involved in the creation 
of a P.O.D. account during the decedent's lifetime as required 
by 26 U.S.C § 2036.  
¶27 The Estate argues for a broad definition of "a 
transfer" under 26 U.S.C. § 2036 to include the creation of a 
P.O.D. account.10  The Estate argues that the ownership right the 
decedent relinquished was the right to include the P.O.D. 
accounts in his probate estate.  This argument would create an 
overly broad definition of a transfer.  The Estate's definition 
                                                 
10 The Estate suggests that Doerr v. United States, 819 F.2d 
162, 164 (7th Cir. 1987), provides a definition of "transfer" 
that would encompass creating and naming the recipients of 
P.O.D. accounts.  Doerr, a gift tax case, held that "when a 
person bestows an economic benefit upon another individual by 
gratuitously 
releasing 
a 
valuable 
right 
as 
against 
that 
individual, the release of that right constitutes a 'transfer of 
property by gift.'"  Doerr, 819 F.2d at 164.  Here, it cannot be 
said that when the decedent created the P.O.D. accounts he 
released any valuable right. 
No. 
2009AP1021   
 
14 
 
would appear to require that virtually all nonprobate assets be 
included under 26 U.S.C. § 2036. 
¶28 Arguing that such a transfer does take place, the 
Estate relies on an Indiana court of appeals case, Burke v. 
Cleland, 702 N.E.2d 1078 (Ind. Ct. App. 1998).  The Cleland case 
is not helpful to our analysis.  Cleland turns on the language 
of the instruments used by a testator to transfer property to 
beneficiaries.  The Indiana court did not analyze 26 U.S.C. 
§ 2036.  It simply stated that an inter vivos trust was included 
in the gross estate under § 2036.   
¶29 In Cleland, the testator's will and an inter vivos 
trust each contained a clause directing the payment of federal 
estate taxes, and the two clauses were conflicting.  The 
beneficiaries under the inter vivos trust (executed after the 
will) and the will were different.  Conflict arose about who 
should pay the federal estate taxes generated by the property in 
the inter vivos trust.  
¶30 The Indiana court of appeals held that the last 
instrument in time, the inter vivos trust, would control when 
there was an unambiguous tax provision in both a will and an 
inter vivos trust.  The inter vivos trust instrument provided 
that upon request of the testator's personal representative, the 
trustee would pay all federal and state death taxes.  The 
Indiana court held that this pay-all-taxes clause rebutted 
Indiana's presumption of apportionment.  Accordingly, the inter 
vivos trust was responsible for the federal estate tax.   
No. 
2009AP1021   
 
15 
 
¶31 The analysis in Cleland, where a specific provision by 
the testator provided for payment of taxes by the trust, does 
not apply to the present intestate case.  The general rule that 
the residual estate pays the estate tax is not displaced by any 
instructions of the decedent. 
¶32 The Estate relies on other cases holding that the 
decedent had made a transfer for purposes of 26 U.S.C. § 2036.  
For 
example, 
the 
Estate refers to Estate of Morton v. 
Commissioner of Internal Revenue, 12 TC 380 (1949), in which the 
election of a settlement option by a surviving spouse under the 
terms of a life insurance contract was determined to be a 
transfer during her lifetime that brought the proceeds within 
her gross estate at the time of her death.  The spouse was 
entitled to the proceeds of the policy but elected to leave the 
proceeds with the insurer, receiving income with a right to 
invade the remainder, and naming a recipient who would receive 
the money on her death.  The issue was whether the proceeds were 
included in the gross estate of the spouse even though she had 
not elected to receive the lump sum during her lifetime.  The 
court considered that the spouse had made a transfer of the 
assets.   
¶33 Another example provided by the Estate is when a 
decedent set up a bank account in his name as a trustee for 
specified recipients, sometimes called a savings account trust 
(or "Totten Trust").  Estate of Sulovich v. Comm'r of Internal 
Revenue, 587 F.2d 845 (6th Cir. 1978).  The decedent gave the 
passbook to the parent of the recipients and authorized the 
No. 
2009AP1021   
 
16 
 
withdrawal of funds.  Under banking rules, the decedent retained 
full income and remainder rights to the account.  The issue was 
whether the funds should be included in the decedent's gross 
estate, not the applicability of § 2207B for apportionment of 
estate taxes.  The court held that the decedent had not 
completed a gift of the assets, but that the decedent had made a 
transfer of the assets under either 26 U.S.C. § 2036 or § 2038, 
and that the assets were therefore included in the gross 
estate.11   
¶34 These fact patterns are different from the P.O.D. 
accounts where the accounts remained titled in the decedent's 
sole and individual name.  The cases relied upon by the Estate  
are inapposite. 
¶35 We conclude that creation of the P.O.D. accounts did 
not fall within the meaning of a transfer under 26 U.S.C. 
§ 2036, and therefore the estate does not have a right to 
recover under 26 U.S.C. § 2207B.  Because §§ 2207B and 2036 do 
not apply, the general rule of 26 U.S.C. § 2002 applies: the 
residual estate pays the federal estate taxes on the P.O.D. 
accounts.  The P.O.D. accounts are therefore not required to pay 
any portion of the federal estate taxes.  
                                                 
11 See also Estate of Bowgren v. Comm'r of Internal Revenue, 
105 F.3d 1156, 1160 (7th Cir. 1997) (decedent created an 
Illinois land trust retaining interests during life; property 
included in gross estate under either 26 U.S.C. § 2036 or 
§ 2038). 
No. 
2009AP1021   
 
17 
 
IV 
¶36 Next, we turn to whether a recipient of a P.O.D. 
account must reimburse an Estate for a portion of the Wisconsin 
estate taxes attributable to the P.O.D. account when a decedent 
dies with no will.  The answer is No.   
¶37 We agree with the circuit court that Firstar Trust Co. 
v. First National Bank of Kenosha, 197 Wis. 2d 484, 541 
N.W.2d 467 (1995), controls.  Under Firstar Trust, the residue 
of the estate pays the Wisconsin estate taxes attributable to 
nonprobate property in the absence of clear directions from the 
testator providing otherwise.  
¶38 The Estate does not separately brief the issue of 
liability for the Wisconsin estate tax.  We conclude that under 
Firstar Trust, the Estate's claim against the Schleises for a 
portion of the state estate tax cannot be maintained under 
Wisconsin law. 
V 
¶39 The third issue is whether a common-law rule of 
limited equitable apportionment exists, requiring a recipient of 
P.O.D. accounts to reimburse an estate for a portion of the 
federal and state estate taxes attributable to the P.O.D. 
accounts when a decedent dies leaving no will.   
¶40 Generally, if a decedent does not specify who pays 
federal or state estate taxes or does not do so effectively, 
state law will determine how to apportion the payment of federal 
No. 
2009AP1021   
 
18 
 
and state estate taxes among the various beneficiaries.12  
Several states have enacted statutes that determine which 
beneficiaries will pay federal and state estate taxes.  Many 
states' statutes require recipients of nonprobate assets to pay 
their pro rata share of the federal and state estate taxes.  
State courts have also created equitable apportionment remedies 
that accomplish the same result as an apportionment statute.   
¶41 Wisconsin does not have an apportionment statute that 
directs the apportionment of federal or state estate taxes among 
various beneficiaries when a will or trust does not provide 
direction. 
¶42 In response to the Estate's request that the circuit 
court adopt an apportionment rule, the circuit court declared 
that "[t]here is no basis either statutorily or in the case law 
which would give the Court the confidence to create a remedy.  
More importantly, that is the province of the Supreme Court, not 
this Circuit Court especially under these facts.  The [Estate] 
is asking the Court to stand the system on its head.  It is the 
probate estate that pays the estate and inheritance taxes. To 
suggest that this obligation should be distributed to P.O.D. and 
similar accounts would have a serious negative impact on the 
administration of probate, generally; there would be tax 
obligations flowing outside of the classic probate process."   
                                                 
12 Riggs v. Del Drago, 317 U.S. 95, 97-99 (1942) (the 
Internal Revenue Code allocates the federal estate tax burden in 
certain circumstances; state law generally controls the thrust 
of the federal estate tax liability).   
No. 
2009AP1021   
 
19 
 
¶43 We examine three Wisconsin cases that discuss an 
equitable apportionment rule:  Will of Uihlein, 264 Wis. 362, 59 
N.W.2d 641 
(1953); 
Estate 
of 
Joas, 
16 
Wis. 2d 489, 
114 
N.W.2d 831 (1962); and Firstar Trust Co. v. First National Bank 
of Kenosha, 197 Wis. 2d 484, 541 N.W.2d 467 (1995).  None of the 
cases adopts or applies an equitable apportionment of estate 
taxes. 
¶44 In Uihlein, the widow of the decedent chose to take 
her statutory one-third share of the estate rather than to take 
her share under the will.  The widow claimed her statutory one-
third share was to be calculated before federal estate taxes 
were paid.  The effect of the widow's claim was to shift the 
burden of the federal estate tax to the remainder of the estate, 
making her share of the estate larger.  
¶45 The Uihlein court likened the federal estate tax to 
debts and expenses of administration that are to be paid by the 
residue before calculating the widow's share.  The court 
rejected equitable apportionment of the federal estate tax as 
"unwarranted judicial legislation."  Uihlein, 264 Wis. at 376. 
The court stated that "[t]his court in Will of Kootz [228 
Wis. 306, 280 N.W. 672 (1938)] rejected the theory that our 
court 
should 
invoke 
its 
equity 
powers 
to 
achieve 
an 
apportionment of federal estate taxes which would prevent 
inequities . . . . We deem that it would be unwarranted judicial 
legislation for this court to attempt to apportion the impact of 
the federal estate tax . . . . The legislature has the power to 
enact an apportionment of federal estate tax statute providing 
No. 
2009AP1021   
 
20 
 
for a different method of bearing the impact of federal estate 
taxes if it should determine the same desirable."  Uihlein, 264 
Wis. at 374, 376.   
¶46 In Joas, this court considered who should pay the 
federal estate and Wisconsin inheritance tax relating to joint 
property.  The will declared that the estate would pay all taxes 
for property that passed under the will.  Because the joint 
property was nonprobate property, that is, the property did not 
pass to the recipients under the will, the court held that the 
will's provision allocating taxes did not apply to the joint 
property.  The court applied Wisconsin law, placing the burden 
of paying the federal estate tax attributable to the joint 
property on the residuum of the probate estate.  The court 
declined to create an equitable apportionment rule.13       
¶47 Finally, in Firstar Trust, the court addressed the 
issue of whether the residue of the estate or a trust bore the 
burden of the portion of the Wisconsin estate tax generated by 
the trust property.  The court held that the burden of the state 
estate tax was to be borne by the decedent's probate estate and 
that the estate was not entitled to reimbursement from the trust 
for Wisconsin estate taxes paid.  The court reviewed and 
reaffirmed prior Wisconsin case law, refusing to recognize 
                                                 
13 The Wisconsin inheritance tax was at that time a tax on 
the right to receive the property unless the decedent made some 
other provision in the will.  Because the will's tax clause did 
not cover nonprobate property, the inheritance tax was payable 
by the surviving joint tenant who received the property.  Joas, 
16 Wis. 2d at 492. 
No. 
2009AP1021   
 
21 
 
equitable apportionment of Wisconsin estate taxes, stating:  
"Although some states have altered the burden-on-the-residue 
rule by statutory or judicially-created apportionment rules, 
Wisconsin is among the states that have not done so."  Firstar 
Trust, 197 Wis. 2d at 510.  As noted there, "This court has 
consistently rejected the notion of judicially legislated estate 
tax apportionment rules."  Firstar Trust, 197 Wis. 2d at 509 
n.15.   
¶48 The Estate argues that Will of Cudahy, 251 Wis. 116, 
28 N.W.2d 340 (1947), controls to make apportionment of the 
estate tax burden applicable to nonprobate property.  The Estate 
misinterprets Cudahy.  
¶49 The issue in Cudahy was the interpretation of the 
decedent's will and inter vivos trust.  Cudahy involved property 
passing under an inter vivos trust, the terms of which directed 
the trustee to pay all taxes on the trust property.  At the same 
time, the decedent's will directed the executors to pay "just 
debts, 
funeral 
expenses 
and 
all 
inheritance, 
estate 
and 
succession taxes."  The question was which entity, the trust or 
the estate, should pay Wisconsin inheritance taxes generated by 
the transfer of the decedent's interest in the trust.  The court 
concluded that the will did not manifest the decedent's 
intention to provide for the payment of the taxes attributable 
to the beneficiaries of the trust estate, nonprobate property.  
The court ruled that the trust should pay the inheritance taxes; 
the trust disposed of the property and the trust instrument made 
No. 
2009AP1021   
 
22 
 
provision for payment of taxes thereon.  Cudahy, 251 Wis. at 
120-21.   
¶50 The Cudahy court did not hold that nonprobate assets 
should pay a share of inheritance taxes attributable to those 
assets.  Cudahy was an interpretation of the decedent's 
intentions expressed in written documents, not an adoption of 
Wisconsin tax apportionment law.  Cudahy is not instructive for 
the present case.  
¶51 The Estate asks this court to recognize a common-law 
equitable apportionment doctrine to prevent injustice to heirs 
of James Sheppard and to prevent Jessica Schleis from getting a 
windfall.  The Estate views the rule of limited equitable 
apportionment as promoting fairness and equality. 
¶52 Wisconsin does not have an apportionment statute.  
Wisconsin 
case 
law 
declines 
to 
recognize 
an 
equitable 
apportionment rule.  The precedent is clear:  In the absence of 
a statute or a decedent's written directions, in Wisconsin the 
burden of the federal and state estate taxes attributable to 
probate and nonprobate assets falls on the residue of the 
estate.  The rationale for the "residuary rule" has generally 
been that the decedent intended property transferred outside 
probate to be free of the usual burdens imposed on the probate 
estate.14   
                                                 
14 In Estate of Mason, 947 P.2d 886, 889 (Ariz. Ct. App. 
1997). 
No. 
2009AP1021   
 
23 
 
¶53 The burden of the federal and Wisconsin estate taxes 
in the instant case falls on the residue of the estate where the 
law has placed it.  If apportionment is to be the policy of the 
state, then the state legislature should adopt it.   
VI 
¶54 The final issue relates to the Estate Tax Withholding 
Agreement signed by Mary Jo Schleis, James Schleis, and the 
Estate.  The Schleises agreed that 50% of the balance of the 
P.O.D. accounts would remain on deposit "for the purpose of 
paying required estate taxes" (emphasis added).  The Agreement 
further provides that "[i]n the event excess sums have been 
withheld, these monies will be distributed within 30 days 
following the filing of estate tax returns."  The Agreement does 
not state that Jessica Schleis is required to pay a certain 
amount or portion of estate taxes.  The entire text of the 
agreement reads as follows: 
The parties agree that 50% or one-half of all payable 
on death accounts owned by James F. Sheppard at the 
time of his death will remain on deposit with the bank 
for the purpose of paying required estate taxes. 
In the event excess sums have been withheld, these 
monies will be distributed within 30 days following 
the filing of estate tax returns. 
¶55 The Estate asks the court to hold that this Agreement 
obligates Jessica Schleis and her parents to pay a portion of 
the estate tax, even without determining as a prerequisite that 
Jessica owed any estate tax. 
¶56 The circuit court concluded that there is no contract 
binding Jessica Schleis "and further the so called agreement 
No. 
2009AP1021   
 
24 
 
does not provide a cognizable remedy.  There is no federal or 
state withholding procedure for such accounts." 
¶57 The Agreement refers to "required taxes."  The 
Schleises have no "required taxes."  Because the P.O.D. accounts 
are not required to pay any estate taxes under federal or 
Wisconsin estate tax law, the Agreement creates no obligation to 
pay required taxes.  This two-sentence document cannot be 
interpreted to create an independent obligation on the part of 
the Schleises to pay a share of estate taxes that neither they 
nor their daughter owed.  
¶58 Furthermore, Jessica did not sign the agreement and is 
not a party to it.  The document does not suggest that Mary Jo 
Schleis and James Schleis are signing in any capacity other than 
personally for themselves.  No guardian had been appointed for 
Jessica, who was a minor when the Agreement was signed.  Jessica 
is not liable for the taxes, and a guardian would not be 
authorized to make a gift of the taxes to the Estate without 
express court approval.  Wis. Stat. § 54.20(2)(a).   
¶59 The Estate argues the Agreement is binding because 
Jessica did not disavow it.  No agreement was made on Jessica's 
behalf, so there was nothing for her to disavow.  Furthermore, 
Jessica's guardian ad litem did advise the Estate of the intent 
to disavow any purported agreement.  By letter dated October 10, 
2007, Jessica's guardian ad litem advised the Estate that under 
Wisconsin law, "the estate taxes would be paid out of the 
residue of Mr. Sheppard's estate," and that "Mr. & Mrs. Schleis 
cannot enter a contract regarding their daughter's money."  
No. 
2009AP1021   
 
25 
 
Jessica's position has been consistent: she is entitled to all 
the proceeds of the P.O.D. accounts and has no obligation to pay 
the estate taxes.  
¶60 The Estate claims the result is unjust and unfair and 
imposes an undue burden on James Sheppard's heirs who take 
through the probate estate.  Federal and state law have 
determined where the tax liabilities fall.  There is no 
equitable basis to impose a constructive trust as a matter of 
law.  James Sheppard could have directed a different result but 
he did not.   
¶61 In sum, for the reasons we set forth, we conclude that 
payment of the federal estate tax is the burden of the Estate 
under 26 U.S.C. § 2002, which provides that an estate pays the 
estate tax on nonprobate property.  The P.O.D. accounts at issue 
do not fall under 26 U.S.C. §§ 2207B and 2036 or any other 
exception to the general rule that an estate pays the federal 
estate tax generated by nonprobate assets.  We further conclude 
that the Estate must pay the Wisconsin estate taxes generated by 
the P.O.D. accounts.  In Wisconsin, the court has applied the 
burden-on-the-residue rule for state estate taxes unless a 
testator directs otherwise.  The court declines to establish a 
common-law equitable apportionment rule.  Furthermore, the 
agreement signed by Mary Jo and James Schleis, parents of 
Jessica Schleis, to retain 50% of all sums payable on the P.O.D. 
accounts "for the purpose of paying required estate taxes" is 
not enforceable against the Schleises.   
No. 
2009AP1021   
 
26 
 
¶62 Accordingly, we affirm the circuit court's order and 
judgment in favor of the defendants.   
By the Court.—The order and judgment of the circuit court 
are affirmed.    
 
No. 
2009AP1021   
 
 
 
1