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Hale v. Leeds

Decided: November 17, 1958.


On appeal from Superior Court, Chancery Division.

For affirmance -- Chief Justice Weintraub, and Justices Heher, Wachenfeld, Burling, Jacobs, Francis and Proctor. For reversal -- None. The opinion of the court was delivered by Burling, J.


This is an action commenced pursuant to N.J.S. 3 A:25-37 and R.R. 4:85, for reimbursement of federal estate taxes paid by the plaintiff. The Superior Court, Chancery Division, entered final judgment in favor of defendants, executors of the estate of Robert L. Leeds. Plaintiff appealed to the Superior Court, Appellate Division. While the cause was pending in that court we certified it on our own motion.

Plaintiff is the former wife of decedent. On November 16, 1938 the plaintiff and decedent entered into a formal separation agreement executed in the State of New York. In consideration of the surrender of plaintiff's marital property rights she was to receive a life interest in life insurance policies of her husband totalling $140,000 in face amounts, and a right to invade corpus up to $25,000. Thereafter,

on February 25, 1939 plaintiff obtained a final decree of divorce in Florida. The decree did not incorporate or refer to the 1938 separation agreement.

By a formal agreement dated June 4, 1941, the parties modified the 1938 agreement in certain respects. Under the terms of the modified agreement plaintiff was to receive instead of a life interest in $140,000, the entire proceeds outright of three life insurance policies totalling $74,600, if she survived decedent. In the event that she did not survive him the proceeds were to be paid to their children. In addition to the proceeds of the policies the decedent agreed that: "his Estate will be charged with the obligation to pay the sum of Fifteen Thousand Dollars ($15,000) outright to the party of the second part (free from Estate and Inheritance taxes)." Decedent promised to pay the premiums on the life insurance policies and further that: "he will not without the written consent of the party of the second part, change the beneficiary clauses of the said Policies, or any of them, borrow against the said Policies, or surrender the said Policies, or exercise any options in respect of the same or any of them."

Decedent drew his last will and testament on September 15, 1954. He died October 25, 1955, a resident of New Jersey. His will was admitted to probate by the Surrogate of Monmouth County on November 7, 1955. By article Thirteenth of the will he directed the executors to pay to the plaintiff $15,000 "free of estate and inheritance taxes" in fulfillment of his obligations under the 1941 agreement. Article Twenty-fifth of the will relating to payment of estate and inheritance taxes provided:

"I direct that there shall be paid out of my residuary estate all estate, inheritance, legacy, succession and transfer taxes, Federal and State, which may be payable by or assessed against my estate or any part thereof or any bequest or devise hereunder, including not only property passing under this will but also property not passing under this will, such as, but not limited to, policies of insurance on my life, excepting, however, policies of insurance on my life payable to my former wife, Elisabeth B. Hale, which shall bear their share of such taxes as provided by law."

Plaintiff has been paid the $15,000 bequest free and clear of all taxes. But a dispute arose with respect to the proceeds of the insurance policies. The defendants have maintained that plaintiff must pay a proportionate share of the federal estate taxes attributable to the inclusion of the proceeds of the insurance policies in the taxable estate under federal law. Plaintiff disputes liability for a pro rata share of the federal taxes, contending that no apportionment may be had and that the proceeds of the policies are not includable in the decedent's federal taxable estate.

There is some factual disagreement concerning whether or not plaintiff originally acquiesced in defendants' contention that she was responsible for the amount of the federal estate taxes apportionable to the $74,600 in life insurance proceeds due her. This dispute need not be resolved. Suffice it to say that her ultimate responsibility for estate taxes is governed by the applicable law at the time of decedent's death and that plaintiff has not waived any rights which she may have in this regard, since her present position was crystallized and made known to defendants prior to the time that the defendants filed their federal estate tax return.

Plaintiff and defendants executed an escrow agreement dated June 15, 1956, whereby plaintiff deposited $20,000 from the proceeds of the policies in an escrow account. The defendants, pending final determination of the amount of taxes apportionable to the policies, were permitted to make withdrawals of the amount deemed necessary to pay federal and state taxes. $5,953.12 was withdrawn from the account by defendants to pay that portion of the federal estate tax represented by the $74,600 in insurance proceeds, which proceeds they voluntarily included in the federal estate tax return as part of the taxable estate. $10,000 of the remainder was subsequently returned to plaintiff. The judgment below directed that any balance not required for federal taxes be returned to plaintiff pursuant to the terms of the escrow agreement. A judgment for reimbursement of the amount paid was denied.

A preliminary question is raised concerning whether plaintiff and decedent agreed, irrespective of any apportionment statute, that plaintiff was to pay any tax liability arising out of the transfer of the insurance proceeds to her. We do not find the agreements unequivocal in this regard. Since we are of the view that the applicable apportionment statutes demand the same result as that which would be reached if the parties intended to impose tax liability on the plaintiff, we prefer to dispose of the controversy on that broader ground.

Assuming for the present the includability of the policies in the taxable estate (of which more hereafter), the issue is whether a pro rata share of the tax assessment on the proceeds of life insurance policies payable to a divorced spouse pursuant to a separation agreement must be borne by the spouse. There are two statutes, one state and one federal (which for present purposes may be deemed co-terminus in their effect) applicable to such a situation.

(a) The New Jersey statute. N.J.S. 3 A:25-31 provides in pertinent part:

"Whenever a fiduciary has paid or may be required to pay an estate tax under any law of the state of New Jersey or of the United States upon or with respect to any property required to be included in the gross tax estate of a decedent under the provisions of any such law, hereinafter called 'the tax,' the amount of the tax, except in a case where a testator otherwise directs in his will, and except to the extent where by any instrument other than a will, hereinafter called a 'nontestamentary instrument,' a direction is given for apportionment within the fund of taxes assessed upon the specific fund dealt with in such nontestamentary instrument, shall be apportioned among the fiduciary and each of the transferees interested in ...

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