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Estate of Lustgarten v. Director

May 5, 1995

ESTATE OF BAIER LUSTGARTEN, PLAINTIFF-RESPONDENT,
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-APPELLANT



On appeal from Tax Court of New Jersey.

Approved for Publication May 5, 1995.

Before Judges Pressler, Landau and Conley. The opinion of the court was delivered by Pressler, P.j.a.d.

The opinion of the court was delivered by: Pressler

PRESSLER, P.J.A.D.

The decedent Baier Lustgarten died at the age of 82 in 1990. A resident of New York State, he left an estate in excess of thirty-one million dollars, one of whose assets, located in New Jersey and valued at about six million dollars, is a nursery business and the extensive lands on which it is operated (New Jersey property). Concluding that under the term of the decedent's will the New Jersey property had been bequeathed and devised as a general legacy, defendant Director of the Division of Taxation assessed a transfer inheritance tax pursuant to the so-called ratio tax provision of N.J.S.A. 54:34-3. The Estate challenged the assessment by complaint filed in the Tax Court, urging that the legacy was specific and therefore exempt under the ratio tax law. On cross motions for summary judgment, Judge Dougherty agreed and entered judgment setting aside the assessment. The Director appeals, and we affirm.

The relevant facts are not in dispute. The decedent left surviving him his second wife, Elizabeth Lustgarten, then 76; two children of his own, David and Suzanne; and Elizabeth's four sons, Kenneth, Howard and Gary Lustgarten and J. Paul Hoffman. His will made provision for his son by separate trust and bequeathed a substantial cash legacy to his daughter. A number of additional cash bequests were made to other relatives, employees and charities. The four stepsons were provided for by way of the Disposition of the residuary estate, which constituted the bulk of the estate. It is that Disposition that gives rise to the issue here raised.

In order to take full advantage of the federal estate tax marital exemption in the event Elizabeth survived the decedent, the entire and undifferentiated residuary estate was devised by way of a trust designed eligible for election by the executors as a qualified terminable interest in property pursuant to 26 U.S.C.A. § 2056(b) (QTIP trust). Accordingly, Elizabeth was designated as the sole life tenant of the trust. The named trustees, Kenneth Lustgarten and decedent's accountant Martin Starr, were required to pay to Elizabeth "all the net income of the trust in quarterly or more frequent installments as long as she shall live" and were accorded the power, to be exercised in their discretion, to invade the principal of the trust "to liberally provide for my wife's care, support and maintenance during her lifetime, after taking into account her other capital resources...." which were ample. The Disposition of the residuary estate in the event Elizabeth failed to survive decedent and the Disposition of the remainder following her death if she did survive him were identical. That Disposition, made by Paragraph (D) of Article Fifteenth of the will is as follows:

(D) Upon the death of my wife after my death, I direct my Trustees to pay over or distribute the property of the trust as then constituted, or if my wife does not survive me, my Trustees upon my death shall divide and distribute all of the trust property as follows:

(1) to my wife's son, KENNETH LUSTGARTEN, all then existing real and personal property located in the State of New Jersey including, but not limited to, the nursery and real property located at Cream Ridge consisting of approximately seven hundred sixty (760) acres, together with the fixtures, vehicles, equipment, inventory, houses, stock and accounts receivable of the business, subject to any then existing outstanding bills and liabilities relating to such property.

(2) If KENNETH LUSTGARTEN shall predecease me, then my Trustees shall pay over and distribute the above described trust principal to his children who shall survive me, in equal shares per stirpes.

(3) To my daughter, SUZANNE, the sum of TWO HUNDRED FIFTY THOUSAND ($250,000) dollars, or if she shall have predeceased me, to her children who shall survive me, in equal shares, per stirpes.

(4) The balance of the principal of the trust, after distribution as described in the above subparagraphs "(1)", "(2)" and "(3)" shall be divided among my wife's sons, J. PAUL HOFFMAN, HOWARD CARL LUSTGARTEN and GARY THOMAS LUSTGARTEN, or to the survivor of them, in equal shares, per capita.

The sole question raised by this appeal is whether the gift over to Kenneth Lustgarten of the New Jersey property was a legacy eligible for application of the ratio tax.

N.J.S.A. 54:34-3 imposes a transfer inheritance tax on the New Jersey property of a non-resident decedent. The technique for calculation of the tax is first to assume that the decedent had died a resident of this State and to calculate the New Jersey tax on the entire estate pursuant to N.J.S.A. 54:34-1, et seq., taking into account the relationship of the beneficiary to the decedent for the purpose of determining, pursuant to N.J.S.A. 54:34-2, the taxability of the transfer and, if taxable, the rate. The tax so calculated is the hypothetical or base tax. Next, the total value of that portion of the estate located in New Jersey, irrespective of the identity of the beneficiary or beneficiaries thereof, is divided by the value of the entire estate. The percentage so produced is then multiplied by the hypothetical tax to produce the ratio tax. *fn1 See generally Lansing, Raymond P., Est. of v. Taxation Div. Dir., 6 L. Ed. 2d 137 (Tax Ct. 1983); Herschberg v. Director, Division of Taxation, 2 L. Ed. 2d 121 (Tax Ct. 1981). See also Beck, New Jersey Inheritance and Estate Taxes, ยง 7-3 at 125-133 (1993). However, in determining the value of the New Jersey property for ...


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