On appeal from the Superior Court, Appellate Division.
Handler, Wilentz, Pollock, O'Hern, Garibaldi, Stein, Clifford
The opinion of the court was delivered by
In this case the decedent executed a will creating two trust funds, one for his wife and the other for his children and grandchildren. Prior to his death, decedent failed to modify his will in order to take advantage of changes in the federal tax laws. As a result, the estate is subject to substantial federal estate taxes applicable to the trust established for the children and grandchildren. The issue posed in this appeal is whether the provisions of decedent's will creating the trust for children and grandchildren may be modified solely in order to exempt the trust from the imposition of federal estate taxes.
The decedent, George V. Branigan, died on July 4, 1988. He was survived by his wife; three sons, Robert James, William T., and Alan E.; and nineteen grandchildren. Six of those grandchildren are the children of George V. Branigan, Jr., the decedent's fourth son, who predeceased his father. His will named plaintiffs Robert James Branigan and Alan E. Branigan, two of the decedent's surviving sons, as co-executors under the will, with a power to designate a corporate fiduciary to serve with them as a co-executor and co-trustee. Plaintiff First Fidelity Bank M.A., New Jersey was later named as corporate fiduciary, and letters testamentary were granted to the three as executors on August 30, 1988.
The will essentially transfers to decedent's wife, Emma J. Branigan, all real property belonging to him at the time of his death. The will also provides for the creation of two trust funds for the Disposition of decedent's personal assets. The first trust provides his wife with a portion of the estate equivalent to the maximum marital deduction available under federal tax law. The other trust, comprising the remainder of the estate, provides that in the event of the death of decedent's wife, the trustees will divide the principal among decedent's children, and on their deaths, decedent's grandchildren.
Although decedent's estate was exempt from certain federal estate taxes under the tax scheme existing at the time of the execution of the will, decedent failed to alter his will in order to obtain the benefits attributable to subsequent changes in federal tax laws with respect to federal estate taxes on the trust fund established for his children and grandchildren. Following the death of the testator, the procedure for the reduction of federal estate tax liability underwent further modifications. The executors of decedent's will therefore sought to reform decedent's will in order to take advantage of the changes in the federal estate tax laws subsequent to the execution of the will and subsequent to the death of the testator. All of the beneficiaries, including the grandchildren, who are of legal age, consented to the request by the executors to modify the terms of the testator's will.
The trial court denied that relief, holding that the "court does not have the power to reform a will." The court concluded that it may engage in will construction only when patent or latent ambiguities exist in a will. The Appellate Division affirmed in an unreported opinion. A Dissenting Judge suggested, however, that principles of will construction would permit a partial reformation of the trusts. Plaintiffs appealed as of right. R. 2:2-1(a). This Court granted the New Jersey Bar Association Section on Real Property, Probate and Trust Law leave to appear as amicus curiae.
Decedent's will is a carefully-crafted document prepared and executed under the direction and guidance of skilled lawyers expert in matters of testamentary Dispositions and estates, including tax considerations and consequences. The issue is whether that will can be reformed or modified in order to effectuate tax savings under existing tax law. A determination of that issue requires a full appreciation of the exact terms of the will itself and an understanding of the federal tax laws both at the time the will was executed and following the death of the testator.
On April 16, 1982, decedent executed a will establishing two trusts, respectively designated "Fund A" and "Fund B." Fund A is a marital deduction trust designed to minimize estate taxes by establishing a Qualified Terminable Interest Property ("QTIP") trust. That form of trust takes advantage of the unlimited marital deduction that existed at the time of the execution of the will for property passing to a surviving spouse. The income is payable to or for the benefit of decedent's wife, with a further power in the corporate trustee at its own discretion to pay so much of the principal of Fund A as it may deem necessary to provide for her maintenance and support. In the event of his wife's death, the remaining principal in Fund A is added to and becomes a part of Fund B to follow the Disposition therein.
Fund B consists of all the "rest, residue and remainder" of decedent's estate. The Trustees are directed to pay or apply the net income to or for the benefit of decedent's wife and his surviving sons, in such amounts and proportions as the corporate trustee shall determine, the remaining unpaid balance to be added to the principal. The corporate trustee is also given the power to use so much of the principal in its sole discretion for the benefit of the class members, consisting of decedent's wife and surviving sons.
On the death of decedent's wife, the trustees are directed to divide the principal of Fund B into equal shares for each living son and one such equal share for the then living issue collectively of any deceased son. The share set aside for the issue of a deceased son (the decedent's grandchildren) is paid over to such issue in equal shares per stirpes, unless such issue is under the age of thirty, in which case the share is to be held and disposed of pursuant to a separate paragraph. Each living son is entitled to the net income of the trust fund set up for his benefit, and the corporate trustee is authorized to pay so much of the principal as it deems advisable for his education, maintenance or support.
Each living son is also granted the right to exercise a limited power of appointment in his own last will and testament of the remaining principal in the trust fund to a class of persons consisting of his issue. If the power is not exercised, the trustees are required on the death of that son to divide the principal into as many equal shares as there are then children of such son, the decedent's grandchildren. The income from the amount so held is to be paid or applied for the benefit of the minor grandchildren until they attain majority, with the net unpaid income applied to the principal of each grandchild's trust fund. When the grandchild attains his or her majority, the entire net income is to be paid to the grandchild, and at age thirty the grandchild may withdraw the entire principal together with any accumulated income. Under the will, all estate taxes are paid out of Fund B, with the exception of certain federal estate taxes.
Tax consequences were very much in the forefront of consideration by decedent and those who assisted in the preparation and drafting of the will. When decedent executed his will in 1982, transfers to grandchildren were not subject to an additional federal estate tax, known as Generation Skipping Transfer ("GST") taxes. GST taxes apply when the IRS taxes transfers that skip a second generation of transferees and pass taxable property to a third generation. However, the tax laws then in effect considered the child to be a transferor rather than a "skipped" generation and his or her appropriate tax rates were applied to property otherwise subject to GST taxes.
The Tax Reform Act of 1986 ("TRA") retroactively repealed the existing GST tax, however, and replaced it with a drastically revised GST tax, which, inter alia, imposed taxes on "direct skips." A direct skip is defined under the Internal Revenue Code as any transfer to a person two or more generations below the transferor; that is to say, trusts established for grandchildren are subject to GST taxes. I.R.C. § 2612(b); I.R.C. § 2613(a)(1). The TRA makes all such direct skips taxable at a flat rate, whether the transfer is outright or in trust, except for direct skips to a grandchild of a predeceased parent. I.R.C. § 2612(c)(2). Consequently, Fund B under decedent's will is subject to GST taxes under the current tax regime.
The TRA also included new provisions for GST tax exemptions. First, it provided a $1,000,000 GST tax exemption for transferors of QTIP trusts. I.R.C. § 2631. The TRA provided that for GST tax purposes, any QTIP included in the surviving spouse's estate would be treated as having passed from that surviving spouse, i.e., the surviving spouse would be the transferor of the taxable property for purposes of the $1,000,000 exemption. That exemption was in addition to the ...