August 24, 2011
IN THE MATTER OF THE ESTATE OF SIDNEY STARK, DECEASED.
On appeal from the Superior Court of New Jersey, Chancery Division, Mercer County, Docket No. 94-00763.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted June 8, 2011
Before Judges R. B. Coleman and Lihotz.
In this probate matter we are asked to examine the interplay between the estate tax provisions in the Internal Revenue Code (IRC) and state provisions governing testamentary intent. The estate of Sylvia Stark, represented by her executor Thelia Taytelbaum (plaintiff), sought reimbursement from Albert Stark and Joan Foster (defendants) of federal and state estate taxes the estate paid upon the death of decedent Sylvia Stark, who had an interest in a qualified terminable interest property (QTIP) trust pursuant to terms of the testamentary trust of her husband, defendants' father, Sidney Stark.*fn1 Upon Sylvia's death, defendants received the remainder of assets in the QTIP trust as its residuary beneficiaries; however, Sylvia's estate was required to pay estate taxes on the transfer of these assets to defendants at her death.
Defendants opposed plaintiff's request for reimbursement of the taxes attributable to the QTIP assets, relying on a clause in Sidney's will. The provision stated that if Sylvia died within three years after Sidney's death, the QTIP trust would be responsible for any estate taxes resulting from the inclusion of the trust in her estate. Sylvia died seven years after Sidney. Therefore, defendants argue the implication of the terms of Sidney's will is that Sylvia accepted the obligation to pay the taxes.
The parties stipulated the facts. On the parties' cross-motions for summary judgment, Judge Maria Sypek entered judgment for plaintiff and ordered defendants to reimburse plaintiff for all of the federal and a portion of the New Jersey estate taxes attributable to the QTIP trust's assets. On appeal, defendants argue the court erred in interpreting the tax payment clause in Sidney's will, asserting the QTIP trust assets would be used to pay estate taxes only if she died within three years of Sidney's death. Following our review, we concur with the legal decision of Judge Sypek and affirm.
We provide an overview of the facts stipulated by the parties. Sylvia and Sidney had each been previously married and had children; Sylvia had only one child, Taytelbaum, and Sidney had two children, defendants. In contemplation of their impending marriage, Sylvia and Sidney executed a prenuptial agreement in which Sidney agreed to provide for Sylvia in the event of his death. Specifically, she would be permitted to reside in a New Jersey condominium, the expenses for which would be paid by his estate. Sylvia and Sidney agreed to waive their respective interests in the event of the other's death, including any elective share.
Sylvia executed a will on August 11, 1983. Her will reiterated the agreement she and Sidney reached in their prenuptial agreement, stating:
I purposely make no provisions herein for my husband, SIDNEY STARK, since he and I entered into an Ante-Nuptial Agreement dated June 8, 1983, at which time it was understood between us that no part of my separate property, owned by me prior to our marriage, or acquired thereafter with the proceeds of the sale thereof, or by inheritance, would be claimed by him during my lifetime or upon my death.
Sylvia's entire estate was left to Taytelbaum.
Sidney executed a will in 1984. The document complied with the prenuptial agreement and also included a testamentary trust for Sylvia. On August 12, 1992, Sidney revoked this will and executed the will document that was probated by defendants as co-executors, upon Sidney's death. Under the terms of this new will, Sylvia's interests varied from those of its predecessor.
In compliance with the parties' prenuptial agreement, Sylvia was given the right to occupy the New Jersey condominium for life, use its contents and an automobile. Defendants were responsible to directly pay all costs of maintaining the condominium and title passed to them, as part of Sidney's residuary estate, at Sylvia's death.
Sidney also chose to utilize a QTIP trust, funded with $400,000 plus a Florida condominium he owned, which was worth $107,000. New Jersey National Bank, which later became Corestates Bank, was designated as trustee. The trust terms required that all net trust income must be distributed to Sylvia in quarterly installments up to the date of her death. Further, the trustee was to pay for the maintenance expenses of the Florida condominium and was given sole discretion to distribute principal sums to Sylvia for her health, maintenance and support. At Sylvia's death, the residue of the QTIP trust was distributed to defendants.
The provision of Sidney's will creating the QTIP trust also contained tax clauses that defendants believe control the disposition of the questions presented. Article One, Section F stated:
5. Unless SYLVIA directs otherwise by Will, if SYLVIA dies within three (3) years after the date of my death, the Trustee shall first pay from the principal of this Trust, directly or to the legal representative of SYLVIA's estate as the Trustee considers advisable, the amount by which the estate and inheritance taxes (including related interest or penalties) assessed by reason of SYLVIA's death shall be increased as a result of the inclusion of this Trust in SYLVIA's estate for such tax purposes.
7. If the effect of any provision of this Trust, or any power granted to the Trustee would be to prevent the allowance of said marital deduction with respect to the assets which comprise this Trust, then I direct that such offending provision or power shall not apply to the assets which comprise this Trust and that as far as this Trust and its administration is concerned, this Trust shall be read and take effect as if such offending provision or power did not exist.
8. The Trustee is authorized to agree with the Internal Revenue Service to allocate assets in such a manner to insure the attainment of the marital deduction for the full amount as prescribed above.
Article Eight of the will discussed the executor's powers and duties. Section B entitled "Qualified Terminable Interest Election" stated, in pertinent part:
I am aware that if SYLVIA survives me, the Executor is granted the election to treat certain interests in Assets as qualified terminable interest property for Marital Deduction purposes. . . . This Section B shall be binding upon, and conclusive against, SYLVIA's executors or administrators, and all persons interested in or claiming an interest in my estate or in SYLVIA's estate.
1. Intent. The Executor shall consider exercising the election to reduce my Estate and Inheritance Taxes, and to defer their payment, to the greatest extent practicable. I recognize that exercising the election will increase the value of the Assets subsequently includable in SYLVIA's Gross Estate for Federal estate tax purposes. I believe that the investment yield and appreciation on the Assets which would otherwise be paid in Estate and Inheritance Taxes on my estate, and the reduced need for liquid Assets, should at least offset any resulting increase in SYLVIA's Estate and Inheritance Taxes.
Sidney passed away on May 2, 1994. The transfers to Sylvia, including her life estate in the New Jersey condominium and the assets placed in the QTIP trust, qualified for the marital deduction pursuant to 26 U.S.C.A. § 2056(a) so that $630,815 of Sidney's assets were not subject to federal or state estate or inheritance tax. During the ensuing seven years, the QTIP trust distributed $225,958.01 in principal and income to or for Sylvia's benefit.
Sylvia died on May 5, 2001. Defendants admitted that Sylvia's estate would have no liability for federal or state estate tax if the QTIP assets were not included in her gross estate. However, her gross estate, as reported for federal tax purposes, was comprised of $493,244 in stocks and bonds; the life interest in the New Jersey condominium, valued at $91,350; and the QTIP trust, worth $628,178. Defendants paid $13,971 of the tax liability attributed to the New Jersey condominium. The balance of the federal and estate tax liability of $155,455, which included taxes attributed to the QTIP trust, was deducted from plaintiff before any distribution to Taytelbaum. The $628,178 remainder of the QTIP trust assets were distributed to defendants.
We pause to review the taxation provisions surrounding QTIP trusts to
aid understanding of the matter in controversy. A QTIP trust allows
property to pass from a decedent-spouse to designated residuary
beneficiaries without triggering federal estate taxes so long as
decedent's surviving spouse has a qualifying income interest for life.
26 U.S.C.A. §§ 2056 (a) and (b)(7)(B). See also In re Will of Adair,
149 N.J. 591, 597-98 (1997). If a QTIP election is made by the
at the time estate taxes are paid, a marital deduction*fn2
is permitted for the entire value of the QTIP trust corpus,
even though distributions to the surviving spouse may be limited to
income and only so much of the principal as determined by the
ascertainable standard for the surviving spouses health, maintenance
and support. 26 U.S.C.A. § 2056(b)(7)(B)(i). See also Estate of
C.I.R., 86 F.3d 1045, 1049 (11th Cir. 1996) (stating "the .
. . QTIP trust provisions . . . liberalize[d] the marital deduction to
cover trust instruments that provide ongoing income support for the
surviving spouse while retaining the corpus for the children or other
beneficiaries"). In this way, the value of the QTIP corpus is deducted
from the decedent's gross estate, and no estate taxes are due upon the
death of the decedent.*fn3 26 U.S.C.A. § 2044. "Thus,
a decedent can  provide for a surviving spouse while
controlling the ultimate disposition of the property after the
surviving spouse's death." Adair, supra, 149 N.J. at 597.
As we noted, the value of QTIP property is deducted from the decedent-settlor's gross estate, and no taxes are paid on it at the time of the decedent-settlor's death. 26 U.S.C.A. § 2056(a). The tax attributable to the QTIP trust property is deferred until the death of the QTIP beneficiary-spouse, at which point the QTIP property is included within the surviving spouse's gross estate. 26 U.S.C.A. § 2044. See Adair, supra, 149 N.J. at 598.
Federal estate taxes apply to the assets transferred upon the death of the QTIP beneficiary-spouse. Ibid. A decedent's estate has the obligation to satisfy the federal estate tax imposed, including federal estate tax attributable to the QTIP assets. 26 U.S.C.A. § 2002; Treas. Reg. § 20.2002-1.
"[I]f the surviving spouse's gross estate includes any QTIP property, the executor or administrator may recover the amount of estate tax attributable to the inclusion of that property from a 'person receiving the property.'" Lee, supra, 389 N.J. Super. at 36 (quoting 26 U.S.C.A. § 2207A(a)(1)). There is no direct liability of the QTIP trust to pay the tax, but the QTIP spouse's estate may seek recovery from the QTIP trust assets for the amount of the estate tax paid which exceeds the amount of tax "which would have been payable if the value of [the QTIP] property had not been included in the gross estate." 26 U.S.C.A. § 2207A(a)(1)(B). The right to recover the taxes paid can be waived if the QTIP beneficiary spouse "specifically indicates an intent to waive any right of recovery under this subchapter . . . with respect to such property." 26 U.S.C.A. § 2207A(a)(2).*fn4
In this matter, the parties' stipulated to a set of facts, identified the relevant documents for review and framed the legal issues for the court's determination. Defendants moved for summary judgment, arguing plaintiff was not entitled to reimbursement of federal and state estate taxes under § 2207A because the tax payment clauses reflected Sidney's intent to limit the trust's obligation under § 2207A to three years following his death. Additionally, defendants contended the probable testamentary intent of the will's terms was that Sylvia's acceptance of the QTIP provisions required her to agree to pay the taxes associated with the gift if she survived him by more than three years. Plaintiff cross-moved for summary judgment asserting § 2207A preempted any contrary state law, making Sidney's testamentary intent irrelevant. Plaintiff noted Sylvia took no affirmative action to waive her rights under § 2207A. Finally, plaintiff maintained the tax provision in Sidney's will was at best ambiguous and reasonably could not be construed as a conditioned gift.
There is no question that Sylvia's will contained no express language evincing her specific intent to waive plaintiff's right to recover the estate taxes attributable to the QTIP property. 26 U.S.C.A. § 2207A(a)(2). The legal issue to be considered is whether the language in Sidney's will explicitly conditioned Sylvia's acceptance of the QTIP bequest upon her agreement to satisfy the estate tax obligation resulting from the inclusion of the QTIP assets in her estate. The trial court found that it did and defendants appealed.
In conformity with well-established principles, we review the motion court's conclusions de novo because this is an appeal from the grant of summary judgment. Estate of Hanges v. Metro. Prop. & Cas. Ins. Co., 202 N.J. 369, 382 (2010). No deference is given to the legal conclusions reached, which are subject to plenary appellate review. City of Atl. City v. Trupos, 201 N.J. 447, 463 (2010).
In our review of summary judgment, we use the same standard as the trial court. Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.) (citing Antheunisse v. Tiffany & Co., 229 N.J. Super. 399, 402 (App. Div. 1988), certif. denied, 115 N.J. 59 (1989)), certif. denied, 154 N.J. 608 (1998). The "essence of the inquiry" is "'whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.'" Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 536 (1995) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S. Ct. 2505, 2512, 91 L. Ed. 2d 202, 214 (1986)). Accordingly, after viewing the facts in the light most favorable to the non-moving party, Hodges v. Sasil, 189 N.J. 210, 215 (2007), summary judgment must be granted if "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(c); Brill, supra, 142 N.J. at 528-29.
Generally, questions of state of mind or intent are not appropriate for disposition through summary judgment. Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 181 N.J. 245, 271 (2004). However, where they are no questions of material fact, summary judgment will not be barred. Brill, supra, 142 N.J. at 529.
Defendants first argue the court erroneously determined there was no evidence of Sylvia's understanding, knowledge and acceptance of the tax payment clause in Sidney's will. This determination resulted in the court concluding:
Even viewing the facts in a light most favorable to the Defendants . . . the
[c]court finds that there is no evidence that Sylvia understood and accepted the condition sought to be imposed by the Tax Payment Clause . . . . Her estate is therefore entitled to exercise the right of recovery under §2207A.
Defendants maintain this was not an issue to be reviewed on the cross-motions for summary judgment as the parties had foregone discovery in lieu of agreeing to seek determination of the legal issue regarding the interpretation of Sidney's will. Defendants suggest that if determination turned on a factual issue, summary judgment should have been denied.
The record does not contain any mention of such an understanding regarding the suggested parameters of the summary judgment motions. The two case management orders do not state discovery is stayed in lieu of the pursuit of summary judgment. Further, plaintiff has not participated in this appeal giving us no means to test defendants' proposition.
We agree with Judge Sypek that the record contains no evidence of Sylvia's knowledge and understanding of the tax payment clauses in Sidney's estate. Moreover, there is no evidence of her affirmative acceptance of the QTIP benefits in exchange of the burdens of taxation were she to survive Sidney for more than three years. In light of this void, we will confine our review to the legal issue requiring statutory interpretation and decedent's intent.
On this issue, defendants maintain the court erred by failing to find Sidney's will expressly intended to eliminate plaintiff's federal statutory right to seek estate tax reimbursement at Sylvia's death. Defendants argue Sidney's will purposely allowed the three-year window for the exercise of any reimbursement, thereafter the QTIP provisions gave Sylvia more than she was entitled to receive under the prenuptial agreement, making it proper to make the bequests subject to payment of the accompanying taxes. Defendants recite the court's opinion stating when "the value of the gift is greater than the amount of the charge, there is a presumption that the beneficiary has accepted the gift subject to the charge, Olsen v. Wright, 119 N.J. Eq. 103, (Ch. 1935)[,]" and conclude Sylvia "is presumed to have accepted the conditions imposed by" the tax clause of Sidney's will.
With respect to federal estate taxation of QTIP trusts, federal law controls that subject. Lee, supra, 389 N.J. Super. at 37. As we noted, Congress extended the marital deduction to bequests made under the terms of a QTIP trust, so long as the decedent's estate specifically elects QTIP treatment when the estate tax return is filed. 26 U.S.C.A. § 2056(b)(7).
Here, defendants, as Sidney's co-executors, made the QTIP election to obtain the benefit of the marital deduction, deferring estate tax for the value of property transferred to the QTIP trust. Clearly the objective of the election was tax avoidance; Sidney's estate sought to secure the largest marital deduction possible at the time of his death thus sheltering a larger portion of Sidney's estate.
The IRC recognizes the right to reimbursement of the taxes when they become due. 26 U.S.C.A. § 2207A. This can be waived only if the QTIP trust beneficiary -- here Sylvia --"specifically indicates an intent to waive any right of recovery under this subchapter . . . with respect to such property." 26 U.S.C.A. § 2207A(a)(2). Because the presumption created by 26 U.S.C.A. § 2207A is that the residuary beneficiaries of the QTIP trust, not the estate, will pay the tax, the majority view is that there must be a "clear and unequivocal," or "clear and unambiguous," intent expressed in a testamentary document to exonerate the QTIP residuary beneficiaries from reimbursing the excess estate taxes created by the inclusion of their interest in the QTIP trust. Adair, supra, 149 N.J. at 600; In re Estate of Klarner, 113 P.3d 150, 156 (Colo. 2005); In re Estate of Gordon, 510 N.Y.S.2d 815, 818 (N.Y. Sur. Ct. 1986) (noting presumption that most testators do not intend to apply a general tax exoneration clause to QTIP property).
Defendants rely on Eisenbach v. Schneider, 166 P.3d 858 (Wash. Ct. App. 2007), to support their position that Sylvia implicitly waived the right of reimbursement when she accepted the QTIP bequest. In Eisenbach, the issue examined was whether the parties' trust agreement, which provided for pro rata allocation between two trusts set up by the husband and wife, could override the allocation of the estate taxes stated in § 2207A. Id. at 860. The parties' agreement provided the trustee would pay "a ratable share of [estate] taxes determined by the proportion which the taxable portion of the trust estate bears to the net taxable estate[.]" Id. at 862. The court found that this language "plainly and unambiguously" expressed the settlors' intent that estate taxes should be paid ratably. Ibid. Despite what the court described as this "clear and unambiguous" directive, the co-executor allocated the estate taxes pursuant to § 2207A, which the appellate court held violated the settlors' intent. Id. at 863-64. The court held stating the estate taxes were to be apportioned pro rata constituted the type of specific language intended by Congress. Id. at 866.
Defendants suggest the probable intent of the tax clause in Sidney's will is that the QTIP trust would pay the estate tax "only if" Sylvia died within three years of Sidney's death; otherwise, her estate would bear that burden waiving any right of reimbursement under § 2207A. Defendants maintain the clause, as interpreted, reflects Sylvia's clear intent. We disagree.
Here, according to defendants' argument presented to the trial court, Sidney's will purposely employed a vague statement on the reimbursement issue. They argue, nevertheless, the provision is clear on the issue of who will pay the taxes, maintaining the clause requiring the trust to bear the tax burden if Sylvia dies within three years of Sidney's death implies a different result after the three year period. See In re Estate of Payne, 186 N.J. 324, 335 (2006) (holding that in interpreting a will, the aim is to ascertain the probable intent of the testator).
When asked by Judge Sypek for the rationale behind the clause and why it did not directly express Sylvia's obligation to pay all taxes from her estate and waive the right of reimbursement after three years, defendants' counsel explained the ambiguity was purposeful to assure the trust qualified for the marital deduction. Conceding Sylvia's acceptance of the tax obligation was not directly set forth, counsel justified the description of Sidney's intent as a means to "take advantage of what the IRS allowed, which is to take money and get a deduction for it in the first estate that had a tax in the second estate." An additional tax benefit allowed the deferral of the estate tax, "in this case by seven years." Counsel advised that if the language used in the tax clause directed "that Sylvia -- in order to accept the trust -- must, in her will leave back to my children whatever the amount is that the [§] 2207A reimbursement would be" then "there would be no question that the trust would have to pay the [estate] tax[.]" However, that would trigger a reduction in the marital deduction and increase the estate tax at Sidney's death.
In her opinion, Judge Sypek accepted this explanation stating:
The less than explicit language used in [Sidney's] [w]ill in connection with the purported limitation of Sylvia's estate's § 2207A right of reimbursement can be explained by the desire to avoid drawing the attention of the Internal Revenue Service (IRS) to the limitation. This was acknowledged by counsel for [d]efendants. If the IRS focused on this limitation, it most likely would have taken a position either denying a marital deduction for the [QTIP] Trust or reducing the amount of any marital deduction allowed.
Perhaps it is to be expected that the
[d]efendants would seek the greatest possible marital deduction, but the fact that the IRS allowed a marital deduction for the full value of the [QTIP] Trust strongly suggests that it did not perceive the language of the Tax Payment Clause as reducing the value of the devise to Sylvia by limiting the right of recovery of her estate pursuant to § 2207A.
Contrary to defendants' suggestion, we do not determine the tax provision in Sidney's will presented a choice to Sylvia such that her acceptance of the benefits under the QTIP trust signaled agreement that plaintiff would carry the burden to pay the full estate tax upon Sylvia's death. We find no support for the suggestion that Sylvia is presumed to have consented to such a condition. See Olsen, supra, 119 N.J. Eq. at 106-07 (stating there is a rebuttable presumption that if a legatee or devisee does not reject a gift or devise he or she is deemed to accept it). Sidney was an attorney and familiar with will-drafting and the tax provisions at issue here. He opted to create an ambiguity to assure a marital deduction. The estate elected and was approved to receive a marital deduction, shielding the entirety of the assets comprising the QTIP trust, despite the fact that the gifts were not given to Sylvia outright. The desired tax benefits were achieved. Nothing in the language confirms the assertion of waiver, belying the necessity for "the direction against apportionment" whether explicit or implicit, that it "must be clear and unequivocal." Adair, supra, 149 N.J. at 601. After reading Sidney's will, we do not agree it is unmistakably clear that he considered the issue and made a deliberate decision about the burden of taxation, which was accepted by Sylvia.
Even acknowledging Sidney may have intended to shift the estate tax burden to Sylvia's estate were she was still receiving the benefits of the QTIP trust three years after his death, the statute confers the right to waive reimbursement upon Sylvia alone. We believe defendants' focus on Sidney's probable intent is misplaced. We conclude a simpler basis for rejecting the contention that Sylvia waived plaintiff's right to seek reimbursement is found in the statutory language addressing the requirements of such a waiver. Sidney could not employ a vague device in his will that qualifies as Sylvia's unmistakable directive of waiver in the face of the statute's intent to the contrary.
The statute "specifically indicates an intent to waive any right of recovery" requirement of § 2207A(a)(2) mandates that Sylvia must include the waiver in her will. The statute's directive does not require a review of Sidney's probable intent. This fact is highlighted by the authorities cited by defendant, which involve an interpretation of will provisions of a surviving spouse, here Sylvia.
We find nothing in Sylvia's will to support any clear and unambiguous directive to waive the right to seek reimbursement as required by 26 U.S.C.A. § 2207A(a)(2). Absent a specific direction to do so, we conclude Sylvia did not waive plaintiff's right to seek reimbursement of the tax imposed by 26 U.S.C.A. § 2044.
Defendants also challenge as error the court's order for defendant to proportionally reimburse plaintiff for the New Jersey estate tax attributed to the QTIP trust assets. The court directed defendants to pay the estate the portion of the New Jersey estate tax paid by the estate "which bears the same ratio to the total tax as the ratio of the [QTIP] Trust corpus bears to the total property entering into the net estate for tax before the specific exemption pursuant to N.J.S.A. 3B:24-4a." Defendants claim the tax payment clause in Sidney's will renders the New Jersey statute inapplicable. Based on our above conclusion, we reject this argument.
State law controls the apportionment of state estate tax liability. Adair, supra, 149 N.J. at 598. See also Riggs v. Del Drago, 317 U.S. 95, 63 S. Ct. 109, 87 L. Ed. 106 (1942); In re Estate of Penney, 504 F.2d 37, 40 (6th Cir. 1974). New Jersey's estate tax apportionment statute is found at N.J.S.A. 3B:24-1 to -8. Specifically, N.J.S.A. 3B:24-2 provides that whenever an estate is required to pay federal or state estate tax "the amount of the tax, except in a case where a testator otherwise directs in his will[,] . . . shall be apportioned among the [estate] and each of the transferees[.]" In the absence of directions to the contrary, the estate tax must be apportioned pro rata among the beneficiaries. N.J.S.A. 3B:24-4(a). See also Lee, 389 N.J. Super. at 37.
Accordingly, we conclude Judge Sypek properly applied the statute to apportion the New Jersey estate tax resulting from the inclusion of the QTIP trust in Sylvia's estate.