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Matter of Will of Adair

June 27, 1997

IN THE MATTER OF THE MARITAL DEDUCTION TRUST UNDER WILL OF HERBERT J. ADAIR, DECEASED. J. SUSAN EMILIO, AS PERSONAL REPRESENTATIVE OF THE ESTATE OF DELIA DAVID ADAIR, DECEASED, PLAINTIFF-APPELLANT,
v.
PNC BANK, N.A., AS TRUSTEE OF THE MARITAL DEDUCTION TRUST UNDER WILL OF HERBERT J. ADAIR, DECEASED, DEFENDANT-RESPONDENT.



On certification to the Superior Court, Appellate Division.

The opinion of the Court was delivered by Garibaldi, J. Chief Justice Poritz and Justices Handler, Pollock, O'hern Stein and Coleman join in Justice Garibaldi's opinion.

The opinion of the court was delivered by: Garibaldi

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

IMO THE MARITAL DEDUCTION TRUST UNDER WILL OF

HERBERT J. ADAIR, DECEASED (A-138-96)

Argued April 29, 1997 -- Decided June 27, 1997

GARIBALDI, J., writing for a unanimous Court.

The primary issue presented on appeal is whether the estate of Delia Adair, the surviving spouse of Herbert J. Adair and the income beneficiary of a "qualified terminable interest property" (QTIP) trust established under his will, may recover from the remainderman of that trust Florida estate taxes attributable to the inclusion of the QTIP trust in her estate.

Herbert J. Adair, a New Jersey resident, died on December 10, 1985. He was survived by his second wife, Delia, and three adult children from his first marriage. At the time of his death, Herbert's estate was worth approximately $15,000,000.

By will, Herbert created a marital trust of approximately $6,000,000 for the benefit of Delia. Herbert's executors elected to qualify that trust as a QTIP trust, which deferred the tax on the trust until Delia's death. Under the trust, Delia was to receive the income for life. She did not own or have any right to the principal of the trust and could not expend the principal for herself or direct its Disposition at her death. PNC Bank was named Trustee of the QTIP trust.

According to Herbert's will, the QTIP trust terminated on Delia's death and Herbert's children received the remaining principal. The will directed the trustees to pay any federal taxes due on the trust from its principal before distributing the balance to the children. The will did not mention the payment of state death taxes.

During the marriage, Delia had executed several wills wherein she bequeathed her estate to Herbert's children. However, after her relationship with the children soured, Delia altered her will by naming her relatives as primary beneficiaries. After her move to Palm Beach, Delia prepared a new will in January 1989 and then another in February 1990. The February will clearly disinherited the Adair children. The primary beneficiaries under the will were Delia's sister Eleanor, niece J. Susan Emilio, and nephew Edward H. Korn. The will also contained a clause directing the QTIP trust to pay its own taxes. However, on April 19, 1990, Delia prepared a final will and standby trust that contained no reference to the QTIP trust. Those documents were in effect at her death.

When Delia Adair died on January 5, 1993, she was a resident of Palm Beach County, Florida. Delia's niece, J. Susan Emilio, was appointed personal representative of the estate. At the time of Delia's death, the QTIP trust was valued at $7,841,097 and became included in her gross estate for federal estate tax purposes. Under Florida law, estate tax attributable to a QTIP trust is to be equitably apportioned among the recipients of that trust, unless payment of the tax is "otherwise directed" by the governing instrument of the testator. The total federal estate taxes attributable to the trust were $4,390,560; $3,296,282 attributable to the federal estate tax and $1,094,278 owed to Florida as part of the federal state death tax credit. PNC paid the federal estate tax out of the QTIP trust but refused to pay the federal state death tax credit. To avoid penalties and interest, Mrs. Emilio paid the tax out of Delia's estate.

PNC filed a declaratory judgment action to determine whether the accrued Florida estate taxes attributable to the QTIP trust should be paid out of the trust. Mrs. Emilio filed a separate complaint, seeking reimbursement from the QTIP trust for the death taxes already paid to Florida out of the standby trust. Both parties moved for summary judgment. The trial court granted PNC's motion, finding that the standby trust clearly indicated responsibility for taxes on non-probate property such as the QTIP trust.

On appeal, the Appellate Division affirmed, finding that the language of the will represented a clear and unambiguous direction that the standby trust would assume the burden of paying the Florida death taxes due on the QTIP trust.

The Supreme Court granted certification.

HELD:

Delia Adair, in her will and standby trust, did not otherwise direct against statutory tax apportionment; therefore, the beneficiaries of the QTIP trust are not exonerated from contributing their share of the Florida state death taxes attributable to the QTIP trust.

1. The Internal Revenue Code provides that the estate of a surviving spouse has the right to recover from the recipients of the QTIP principal the amount by which the total federal estate tax exceeds the tax that would have been payable if the QTIP trust had not been included in the gross estate. Such recovery does not apply, however, if the decedent otherwise directs by will. (pp. 7-9)

2. State law controls the apportionment of state estate tax liability. Under Florida law, there is a presumption in favor of apportionment that can only be overcome if the surviving spouse otherwise directs by an appropriate governing instrument. A direction against apportionment may be explicit or implicit from the terms of that instrument, but the direction must be clear and unequivocal. The court must also find that the testator considered and made a deliberate and informed decision about the tax burden. (pp. 9-12)

3. Neither Delia's will nor her standby trust explicitly or implicitly "otherwise directed" against apportionment. Neither the will nor the standby trust directs the actual payment of any death taxes. The "boilerplate" provisions of those two instruments do not evince a clear and unequivocal intention by Delia to otherwise direct against apportionment. Nor was there an implicit direction to pay such taxes from the residuary estate. (pp. 12-16)

4. The lack of express or implied direction against apportionment precludes a finding that Delia made a deliberate and informed decision about the burden of taxation. It would defy logic and common sense to conclude that Delia intended to exonerate her stepchildren from paying their share of the tax in light of the acrimonious relationship that existed prior to Delia's death. (pp. 12-19)

Judgment of the Appellate Division is REVERSED.

CHIEF JUSTICE PORITZ and JUSTICES HANDLER, POLLOCK, O'HERN STEIN and COLEMAN join in JUSTICE GARIBALDI'S opinion.

The opinion of the Court was delivered by

GARIBALDI, J.

In this appeal, the primary issue is whether the estate of Delia D. Adair, the surviving spouse of Herbert J. Adair and the income beneficiary of a QTIP trust established under his will, may recover from the remaindermen of that trust Florida estate ...


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