77th SEMI-ANNUAL TAX & ESTATE PLANNING FORUM...Requests for such permission should be sent to NJICLE, a Division of the New Jersey State Bar Association, New Jersey Law Center, One

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2017 Seminar Material

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New Jersey Institute for Continuing Legal Education

A Division of the State Bar Association NJICLE.com

77th

SEMI-ANNUAL

TAX & ESTATE

PLANNING FORUM

S0127a.17

c

77th

SEMI-ANNUAL

TAX & ESTATE

PLANNING FORUM

Co-Moderators John J. Miesowitz, Esq. Ventura, Miesowitz, Keough & Warner, P.C. (Summit) John L. Pritchard, Esq. Law Offices of John L. Pritchard (Union)

Speakers Robert I. Aufseeser, Esq. Ansell, Grimm & Aaron, P.C. (Ocean) Elaine M. Cohen, Esq. Witman Stadtmauer, P.A. (Florham Park) Andrew J. DeMaio, Esq. Neff Aguilar, LLC (Red Bank) Mark R. Friedman, Esq. FriedmanLaw (Bridgewater) Richard H. Greenberg, Esq. Greenberg & Schulman (Woodbridge)

In cooperation with the New Jersey State Bar Association Real Property,

Trust & Estate Law Section, the NJ Sharing Network, LEAP,

RotenbergMeril and PKF O’Connor Davies, LLP S0127a.17

Martin D. Hauptman, Esq. Mandelbaum Salsburg (West Orange) Bruce E. Mantell, Esq. Mantell, Prince & Reynolds, P.C. (Murray Hill) Lori M. McNeely, Esq. McNeely McGuigan & Esmi, LLC (Moorestown) Jack F. Meola, Esq. EisnerAmper, LLP (Bridgewater) Christine H. O’Donnell, Esq. Law Office of Christine H. O’Donnell (Jackson)

© 2017 New Jersey State Bar Association. All rights reserved. Any copying of material

herein, in whole or in part, and by any means without written permission is prohibited.

Requests for such permission should be sent to NJICLE, a Division of the New Jersey

State Bar Association, New Jersey Law Center, One Constitution Square, New

Brunswick, New Jersey 08901-1520.

Table of Contents Page Firearms as Estate Asset: Issues of Planning, Administration, And Potential Liability of the Fiduciary PowerPoint Presentation Elaine M. Cohen, Esq. 1 “Transfers of Firearms to a Beneficiary: Federal and State Laws May Apply” Elaine M. Cohen Tara S. Sinha 9 2C:58-3 Purchase of Firearms 13 Application for Firearms Purchaser Identification Card and/or Handgun Purchase Permit 19 Consent for Mental Health Records Search 20 When Are the Statements of the Decedent Admissible into Evidence in Estate Litigation? PowerPoint Presentation Robert I. Aufseeser, J.D., LL.M. 21 Attachments IMO the Estate of Payne 39 IMO the Estate of Zahn 49 Amendments to Rule 4:86 Christine H. O’Donnell, Esq, 55 Attachments Certification of Assets 63 Certification of Physician or Psychologist 65 Adult Guardianship Case Information Statement 67 Order Fixing Guardianship Hearing Date and Appointing Attorney for Alleged Incapacitated Person 69 Judgment of Incapacity and Appointment of Guardian(s) of the Person and Estate 71 Negotiating Charitable Gifts and Bequests: Naming Rights, Standing for Enforcement and More John L. Pritchard, Esq. 77 Enforceability of Pledges to Charities 77 Naming Rights 77 Reversions 78 Investment by Organization 78 Review of Organization’s “Standard Contract” 78 Awards Named for the Donor 79

Standing to Enforce 79 Techniques in Drafting and Planning 80 Attachment Sample Donation Agreement to Scholarship Fund 81 “Changes to the New Jersey Tax Laws Warrant Immediate Attention!” Glenn A. Henkel, Esq. 93 “New Jersey Estate Tax Repeal: What You Need to Know!” Glenn A. Henkel, Esq. 97 “New Jersey Estate Tax Has Been Repealed! What’s Next?” Martin M. Shenkman Richard Greenberg Glenn Henkel 101 Attachment Bank of America, N.A. v. Commissioner of Revenue 117 Seven Years of Portability: What Have We Learned, What Are We Still Learning, and Where Are We Going? Bruce E. Mantell, Esq., LL.M., CPA 129 Portability After Seven Years: A New Jersey Practitioner’s Practical Perspective and Musings 129 Exhibits A – Letter Confirming Rejection of Portability Election 133 B – Tax Closing Document 134 C – In the Matter of Estate of Vose 135 D – Allocation of Deceased Spouse’s Unused Exclusion Amount 151 E – Form 709 153 F – Form 706 155 The Shift From Tax Avoidance to Asset Protection in Estate Planning John J. Miesowitz, Esq. 157 Estate Planning Techniques That Provide Asset Protection 159 Domestic Asset Protection Trusts 163 Tips for Insuring Maximum Trust Protection 164 Beware the NJ Trust Buster Statute Regarding Special Needs Trusts Mark R. Friedman, Esq. 167 Part 1: What is a Special Needs Trust? 167 Part 2: NJ’s Trust Buster Statute and How It Affects SNT’s 169 Attachment Kirsch v. DMAHS, et al. 173

New Jersey Inheritance Tax Martin D. Hauptman, Esq. 181 Over View 181 New Jersey Inheritance Tax 181 Compromise Tax 188 Procedure for Computing the Compromise Tax 189 Other Tax Considerations 192 Attachments Estate of Van Riper v. Director, Division of Taxation 195 Van Riper Order 219 26 U.S. Code § 2702 229 Gray v. Director, Division of Taxation 233 Making It Stick: Choosing the Right Parties to Trust Litigation and Nonjudicial Settlements Andrew J. DeMaio, Esq. 245 Attachments Chapter 276 247 4:26-3 Virtual Representation of Future Interest 275 Social Security, (Old Age, Survivors and Disability Insurance (OASDI)) and Estate Planning Jack F. Meola, CPA, J.D., LL.M. 277 Defensive Estate Planning to Avoid Litigation and Claims Against the Attorney Lori M. McNeely, Esq. 289 The Attorney-Client Relationship 291 Whom Do You Represent? 291 Areas in Which to Proceed With Caution 292 What Duty (if Any) is Owed the Beneficiary of an Estate? 292 By the Executor? 292 By the Attorney Representing the Estate/Executor? 292 Scrivener Acting as Executor 293 Food for Thought 294 Practice Tips 295 Attachments Letter re: Dual Representation 297 Opinion 683 299 Opinion 487 301 RPC 1.7 304 Estate Planning Questionnaire (Married/Domestic Partners) 305 About the Panelists… 315

1

Firearms as Estate Asset: Issues of Planning,

Administration, and Potential Liability of the Fiduciary

Elaine M. Cohen, Esq.

1

Introduction

• The purpose of the presentation is to provide information about estate planning when firearms are property of the estate; and

• To clarify fiduciary duties.

2

Disqualifiers• To any person under the age of 18 years for a firearms purchaser

identification card and to any person under the age of 21 years for a permit to purchase a handgun;

• To any person who has been convicted of any crime, or a disorderly persons offense involving an act of domestic violence as defined in section 3 of P.L.1991, c.261 (C.2C:25-19), whether or not armed with or possessing a weapon at the time of the offense;

• To any person who is subject to a restraining order issued pursuant to the "Prevention of Domestic Violence Act of 1991," P.L.1991, c.261 (C.2C:25-17 et seq.) prohibiting the person from possessing any firearm;

• To any drug dependent person as defined in section 2 of P.L.1970, c.226 (C.24:21-2),

3

Disqualifiers (cont.)

• To any person who is confined for a mental disorder to a hospital, mental institution or sanitarium, or to any person who is presently an habitual drunkard;

• To any person who suffers from a physical defect or disease which would make it unsafe for him to handle firearms, or

• To any alcoholic unless any of the foregoing persons produces a certificate of a medical doctor or psychiatrist licensed in New Jersey, or other satisfactory proof, that he is no longer suffering from that particular disability in a manner that would interfere with or handicap him in the handling of firearms;

4

Disqualifiers (cont.)

• To any person who knowingly falsifies any information on the application form for a handgun purchase permit or firearms purchaser identification card;

• To any person where the issuance would not be in the interest of the public health, safety or welfare;

5

Disqualifiers (cont.)• To any person who as a juvenile was adjudicated delinquent for an

offense which, if committed by an adult, would constitute a crime and the offense involved the unlawful use or possession of a weapon, explosive or destructive device or is enumerated in subsection d. of section 2 of P.L.1997, c.117 (C.2C:43-7.2);

• To any person whose firearm is seized pursuant to the "Prevention of Domestic Violence Act of 1991," P.L.1991, c.261 (C.2C:25-17 et seq.) and whose firearm has not been returned; or

• To any person named on the consolidated Terrorist Watch list maintained by the Terrorist Screening Center administered by the Federal Bureau of Investigation.

6

Real Life

• What happened with my father and his firearms after he passed? Savage Mark II Bolt Action .22 rifle

7

Transfer of Firearms

• Planning stages. • Ask the difficult questions. • Recommend an alternative in case of

disclaimer or disqualification.• Fiduciaries (a) appointment first;

(b) safety; (c) does beneficiary qualify; (d) appraisal if need to sell; (e) transfer paperwork, if applicable.

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Page 1 of 4

Reprinted with permission from the Dec. 19, 2016, issue of the New Jersey Law Journal.

Further duplication without permission is prohibited. All rights reserved.

© 2016 ALM Media Properties, LLC.

Transfer of Firearms to a Beneficiary: Federal and State Laws May Apply

Testators and fiduciaries beware

By Elaine M. Cohen and Tara S. Sinha

There are federal and state

regulations that govern the purchase,

ownership and transfer of firearms. The

focus of this article is to notify parties who

make a will and fiduciaries, as well as their

legal counsel, about the requirements

regarding the transfer of firearms upon the

death of a resident of New Jersey. This

article will also discuss a new federal rule

that clarified a fiduciary’s duties with

respect to firearms.

Federal Regulation

The National Firearms Act (NFA)

(1934) as amended by Title II of the Gun

Control Act of 1968 governs the

manufacturing, importing, sale and taxation

on the transfer of firearms. The federal law

was recently amended to clarify the

obligations of a fiduciary.

Federal laws govern the transfer and

taxation of “NFA firearms,” which are

defined as follows:

A shotgun having a barrel(s) less

than 18 inches long;

A weapon made from a shotgun if

such weapon as modified has an

overall length of less than 26 inches

or a barrel or barrels less than 18

inches long;

A rifle having a barrel or barrels less

than 16 inches long;

A weapon made from a rifle if such

weapon as modified has an overall

length of less than 26 inches or

barrel(s) less than 16 inches long;

Any other weapon as defined in 18

U.S.C. §5845(e);

A machine gun;

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Page 2 of 4

A muffler or a silencer for any

firearm whether or not such firearm

is included within this definition; or

A destructive device.

An executor, administrator or

personal representative needs to determine

whether the firearm owned by the decedent

qualifies as a “NFA firearm.” The vast

majority of us are not familiar with firearms,

and the determination of whether a firearm

qualifies as an “NFA firearm” can determine

whether federal or state laws govern the

transfer of the firearm. Thus, we recommend

that a fiduciary or legal counsel seek the

assistance of a federal licensed firearms

dealer if he/she is unable to determine what

type of firearms the decedent possessed,

since the law treats a revolver differently

than a semi-automatic or automatic firearm.

In the interim, the fiduciary is responsible to

maintain custody and control of any firearm

until proper transfer to a beneficiary or other

transferee. It should be noted, it is the

fiduciary’s personal responsibility to

maintain custody and control of the firearm;

the firearm may not be transferred to another

individual, such as a firearms dealer or

license-holder, for safekeeping or sale.

The Bureau of Alcohol, Tobacco,

Firearms and Explosives (ATF) maintains a

National Firearms Registration and Transfer

Record. A fiduciary can contact a local ATF

NFA branch to determine the registration

status of a particular firearm held by a

decedent. Unregistered firearms are

considered contraband and are subject to

forfeiture. An unregistered firearm cannot be

registered by the estate; accordingly, the

fiduciary must contact an ATF office to

arrange for the abandonment of the firearm.

Before the administration of the estate is

completed and the probate proceeding is

closed, the fiduciary should arrange for the

transfer of registered firearms owned by the

decedent to either a qualified beneficiary or

a third party.

On July 13, new federal regulations

were adopted (27 CFR §479.90a), governing

the transfer of a firearm held in an estate.

The new regulations made significant

changes to the prior law. Specifically, the

regulations provided that a fiduciary’s

possession of a firearm registered to a

decedent during the pendency of probate is

not considered a transfer. However, the

fiduciary must, prior to the close of probate,

submit an application to the ATF to transfer

the firearm. The process varies if the firearm

is being transferred to a beneficiary of the

estate or a non-beneficiary.

If the property is being transferred to

a beneficiary, the fiduciary must complete

and file ATF Form 5, Application for Tax

Exempt Transfer and Registration of

Firearm. The heir’s fingerprints must

accompany the application. If the ATF

determines that any federal, state or local

law prohibits the heir from receiving or

possessing the firearm, the ATF will not

approve the application.

If the firearm is being transferred to

a non-beneficiary (i.e., unrelated purchaser),

the fiduciary must file ATF Form 4,

Application for Tax Paid Transfer and

Registration of Firearm. Form 4 must be

accompanied by the transferee’s fingerprints

and photographs. In addition, the application

must be certified by an appropriate law

enforcement official having jurisdiction

where the transferee resides. Acceptable

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Page 3 of 4

certifying officials include chiefs of police,

county sheriffs, heads of state police, district

attorneys, state attorneys general, or judges

of state courts having authority to conduct

jury trials in felony cases.

Regardless of whether the firearm is

being transferred to an estate beneficiary or

a non-beneficiary, the fiduciary must also

provide the following information and

documents to the ATF:

Documentation of the fiduciary’s

appointment as personal

representative;

A copy of the deceased owner’s

death certificate;

A copy of the decedent’s Last Will

and Testament (if any);

Any other documentary evidence of

the fiduciary’s authority to dispose

of property; and

Any other document related to or

affecting the estate’s disposition of

the firearm.

It should be noted that these rules only

apply to NFA firearms. It is also important

that the fiduciary be aware of any state laws

and restrictions since, as noted, if federal,

state or local laws prohibit transfer of the

firearm to the heir or transferee, the ATF

will not approve the transfer application.

New Jersey

In New Jersey, the licensing,

possession, and transportation of firearms is

regulated by statute N.J.S.A. 2C:58-1, et

seq., and administrative rules, N.J.A.C.

13:54-1.1, et seq. An heir or legatee can

receive a firearm from a fiduciary without

obtaining a permit to purchase a handgun or

a firearms purchaser identification card so

long as that person would otherwise be

legally qualified to obtain such documents.

New Jersey, similar to most states,

has prerequisites for obtaining a permit to

purchase a handgun or a firearms purchaser

identification card. Under the New Jersey

regulations, the applicant must meet the

following conditions:

For a firearms purchaser identification

card, he/she must be 18 years of age or

older; to obtain a handgun, 21 or older;

Never convicted of any crime or a

disorderly persons offense involving

domestic violence;

Not subject to a restraining order that

prohibits the possession of a firearm;

Not drug dependent as defined by

N.J.S.A. 24:21-2;

Never confined to a hospital, mental

institution or sanitarium for a mental

disorder;

Not be a habitual drinker;

Not suffer from a physical defect or

disease that makes him/her unsafe to

handle a firearm;

Never knowingly gave false information

on an application for a permit to

purchase a handgun or a firearms

purchaser identification card; or

Cannot refuse to waive the right of

confidentiality for records from any

institutional confinement.

An applicant will also be denied if

the local law enforcement chief determines

that it would not be in the interest of the

public health, safety and welfare for the

applicant to possess a firearm.

In the event that an applicant has

previously suffered from a physical defect or

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Page 4 of 4

disease, mental disorder or alcoholism, the

applicant may be issued a permit or

identification card if he/she can produce a

certificate of a medical doctor or psychiatrist

licensed in New Jersey or other satisfactory

proof that he/she is no longer suffering from

that particular disability in a manner that

would interfere with the handling of a

firearm.

Thus, a testator should consider

whether the heir or legatee can actually

possess a firearm when considering the

testamentary disposition of the firearm. An

heir or legatee who does not qualify to

acquire a firearm may retain ownership of

the weapon for the purpose of selling the

firearm for a period of 180 days; this period

may be extended by the chief of police of

the municipality where the heir/legatee

resides or the superintendent of the New

Jersey State Police. However, during the

pendency of this 180 day period, the firearm

must be placed in the custody of the chief of

police or superintendent.

Neither the statutes nor the

regulations address the fiduciary’s

responsibility or liability with respect to the

disposition of the firearm. Previously,

legislation was introduced to require a

fiduciary to notify the local police in the

municipality where the decedent resided of

the decedent’s death and to turnover the

firearm pending transfer to the heir/legatee.

However, such legislation was not passed.

Nonetheless, to minimize issues regarding

an heir/legatee’s ability to take possession of

a firearm and to avoid potential fiduciary

liability for improper transfer of a firearm, a

fiduciary should consult with estate counsel

familiar with New Jersey firearms laws and,

when in doubt, the fiduciary may consider

turning over the firearm to the local police

or state superintendent for safekeeping while

the fiduciary arranges disposition of the

firearm.

Conclusion

In today’s world, with the prevalence

of gun violence, changing regulations

concerning firearms, and the proliferation of

lawsuits relating to improper gun storage

and handling, it is imperative that

individuals who lawfully own firearms give

careful consideration to how they wish to

pass those firearms to others after their

deaths. It is also important that fiduciaries

and estate counsel be aware of the rules and

regulations governing the succession of

firearms. Legal practitioners should become

familiar with both federal law and the laws

of the jurisdictions in which they practice

governing transfers of firearms.

Sinha and Cohen are attorneys with

Witman Stadtmauer in Florham Park.

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NEW JERSEY GENERAL AND PERMANENT STATUTES (UPDATED THROUGH P.L. 2017, ch. 39 and JR 1 of 2017)

TITLE 2C THE NEW JERSEY CODE OF CRIMINAL JUSTICE

2C:58-3 Purchase of firearms

2C:58-3 Purchase of firearms. 2C:58-3. a. Permit to purchase a handgun. No person shall sell, give, transfer, assign or

otherwise dispose of, nor receive, purchase, or otherwise acquire a handgun unless the purchaser, assignee, donee, receiver or holder is licensed as a dealer under this chapter or has first secured a permit to purchase a handgun as provided by this section.

b. Firearms purchaser identification card. No person shall sell, give, transfer, assign or otherwise dispose of nor receive, purchase or otherwise acquire an antique cannon or a rifle or shotgun, other than an antique rifle or shotgun, unless the purchaser, assignee, donee, receiver or holder is licensed as a dealer under this chapter or possesses a valid firearms purchaser identification card, and first exhibits the card to the seller, donor, transferor or assignor, and unless the purchaser, assignee, donee, receiver or holder signs a written certification, on a form prescribed by the superintendent, which shall indicate that he presently complies with the requirements of subsection c. of this section and shall contain his name, address and firearms purchaser identification card number or dealer's registration number. The certification shall be retained by the seller, as provided in paragraph (4) of subsection a. of N.J.S.2C:58-2, or, in the case of a person who is not a dealer, it may be filed with the chief of police of the municipality in which he resides or with the superintendent.

c. Who may obtain. No person of good character and good repute in the community in which he lives, and who is not subject to any of the disabilities set forth in this section or other sections of this chapter, shall be denied a permit to purchase a handgun or a firearms purchaser identification card, except as hereinafter set forth. No handgun purchase permit or firearms purchaser identification card shall be issued:

(1) To any person who has been convicted of any crime, or a disorderly persons offense involving an act of domestic violence as defined in section 3 of P.L.1991, c.261 (C.2C:25-19), whether or not armed with or possessing a weapon at the time of the offense;

(2) To any drug dependent person as defined in section 2 of P.L.1970, c.226 (C.24:21-2), to any person who is confined for a mental disorder to a hospital, mental institution or sanitarium, or to any person who is presently an habitual drunkard;

(3) To any person who suffers from a physical defect or disease which would make it unsafe for him to handle firearms, to any person who has ever been confined for a mental disorder, or to any alcoholic unless any of the foregoing persons produces a certificate of a medical doctor or psychiatrist licensed in New Jersey, or other satisfactory proof, that he is no longer suffering from that particular disability in a manner that would interfere with or handicap him in the handling of

13

firearms; to any person who knowingly falsifies any information on the application form for a handgun purchase permit or firearms purchaser identification card;

(4) To any person under the age of 18 years for a firearms purchaser identification card and to any person under the age of 21 years for a permit to purchase a handgun;

(5) To any person where the issuance would not be in the interest of the public health, safety or welfare;

(6) To any person who is subject to a restraining order issued pursuant to the "Prevention of Domestic Violence Act of 1991," P.L.1991, c.261 (C.2C:25-17 et seq.) prohibiting the person from possessing any firearm;

(7) To any person who as a juvenile was adjudicated delinquent for an offense which, if committed by an adult, would constitute a crime and the offense involved the unlawful use or possession of a weapon, explosive or destructive device or is enumerated in subsection d. of section 2 of P.L.1997, c.117 (C.2C:43-7.2);

(8) To any person whose firearm is seized pursuant to the "Prevention of Domestic Violence Act of 1991," P.L.1991, c.261 (C.2C:25-17 et seq.) and whose firearm has not been returned; or

(9) To any person named on the consolidated Terrorist Watchlist maintained by the Terrorist Screening Center administered by the Federal Bureau of Investigation.

d. Issuance. The chief of police of an organized full-time police department of the municipality where the applicant resides or the superintendent, in all other cases, shall upon application, issue to any person qualified under the provisions of subsection c. of this section a permit to purchase a handgun or a firearms purchaser identification card.

Any person aggrieved by the denial of a permit or identification card may request a hearing in the Superior Court of the county in which he resides if he is a resident of New Jersey or in the Superior Court of the county in which his application was filed if he is a nonresident. The request for a hearing shall be made in writing within 30 days of the denial of the application for a permit or identification card. The applicant shall serve a copy of his request for a hearing upon the chief of police of the municipality in which he resides, if he is a resident of New Jersey, and upon the superintendent in all cases. The hearing shall be held and a record made thereof within 30 days of the receipt of the application for a hearing by the judge of the Superior Court. No formal pleading and no filing fee shall be required as a preliminary to a hearing. Appeals from the results of a hearing shall be in accordance with law.

e. Applications. Applications for permits to purchase a handgun and for firearms purchaser

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identification cards shall be in the form prescribed by the superintendent and shall set forth the name, residence, place of business, age, date of birth, occupation, sex and physical description, including distinguishing physical characteristics, if any, of the applicant, and shall state whether the applicant is a citizen, whether he is an alcoholic, habitual drunkard, drug dependent person as defined in section 2 of P.L.1970, c.226 (C.24:21-2), whether he has ever been confined or committed to a mental institution or hospital for treatment or observation of a mental or psychiatric condition on a temporary, interim or permanent basis, giving the name and location of the institution or hospital and the dates of confinement or commitment, whether he has been attended, treated or observed by any doctor or psychiatrist or at any hospital or mental institution on an inpatient or outpatient basis for any mental or psychiatric condition, giving the name and location of the doctor, psychiatrist, hospital or institution and the dates of the occurrence, whether he presently or ever has been a member of any organization which advocates or approves the commission of acts of force and violence to overthrow the Government of the United States or of this State, or which seeks to deny others their rights under the Constitution of either the United States or the State of New Jersey, whether he has ever been convicted of a crime or disorderly persons offense, whether the person is subject to a restraining order issued pursuant to the "Prevention of Domestic Violence Act of 1991," P.L.1991, c.261 (C.2C:25-17 et seq.) prohibiting the person from possessing any firearm, and other information as the superintendent shall deem necessary for the proper enforcement of this chapter. For the purpose of complying with this subsection, the applicant shall waive any statutory or other right of confidentiality relating to institutional confinement. The application shall be signed by the applicant and shall contain as references the names and addresses of two reputable citizens personally acquainted with him.

Application blanks shall be obtainable from the superintendent, from any other officer authorized to grant a permit or identification card, and from licensed retail dealers.

The chief police officer or the superintendent shall obtain the fingerprints of the applicant and shall have them compared with any and all records of fingerprints in the municipality and county in which the applicant resides and also the records of the State Bureau of Identification and the Federal Bureau of Investigation, provided that an applicant for a handgun purchase permit who possesses a valid firearms purchaser identification card, or who has previously obtained a handgun purchase permit from the same licensing authority for which he was previously fingerprinted, and who provides other reasonably satisfactory proof of his identity, need not be fingerprinted again; however, the chief police officer or the superintendent shall proceed to investigate the application to determine whether or not the applicant has become subject to any of the disabilities set forth in this chapter.

f. Granting of permit or identification card; fee; term; renewal; revocation. The application for the permit to purchase a handgun together with a fee of $2, or the application for the firearms purchaser identification card together with a fee of $5, shall be delivered or forwarded to the licensing authority who shall investigate the same and, unless good cause for the denial thereof appears, shall grant the permit or the identification card, or both, if application has been made therefor, within 30 days from the date of receipt of the application for residents of this State and

15

within 45 days for nonresident applicants. A permit to purchase a handgun shall be valid for a period of 90 days from the date of issuance and may be renewed by the issuing authority for good cause for an additional 90 days. A firearms purchaser identification card shall be valid until such time as the holder becomes subject to any of the disabilities set forth in subsection c. of this section, whereupon the card shall be void and shall be returned within five days by the holder to the superintendent, who shall then advise the licensing authority. Failure of the holder to return the firearms purchaser identification card to the superintendent within the five days shall be an offense under subsection a. of N.J.S.2C:39-10. Any firearms purchaser identification card may be revoked by the Superior Court of the county wherein the card was issued, after hearing upon notice, upon a finding that the holder thereof no longer qualifies for the issuance of the permit. The county prosecutor of any county, the chief police officer of any municipality or any citizen may apply to the court at any time for the revocation of the card.

There shall be no conditions or requirements added to the form or content of the application, or required by the licensing authority for the issuance of a permit or identification card, other than those that are specifically set forth in this chapter.

g. Disposition of fees. All fees for permits shall be paid to the State Treasury if the permit is issued by the superintendent, to the municipality if issued by the chief of police, and to the county treasurer if issued by the judge of the Superior Court.

h. Form of permit; quadruplicate; disposition of copies. The permit shall be in the form prescribed by the superintendent and shall be issued to the applicant in quadruplicate. Prior to the time he receives the handgun from the seller, the applicant shall deliver to the seller the permit in quadruplicate and the seller shall complete all of the information required on the form. Within five days of the date of the sale, the seller shall forward the original copy to the superintendent and the second copy to the chief of police of the municipality in which the purchaser resides, except that in a municipality having no chief of police, the copy shall be forwarded to the superintendent. The third copy shall then be returned to the purchaser with the pistol or revolver and the fourth copy shall be kept by the seller as a permanent record.

i. Restriction on number of firearms person may purchase. Only one handgun shall be purchased or delivered on each permit and no more than one handgun shall be purchased within any 30-day period, but this limitation shall not apply to:

(1) a federal, State, or local law enforcement officer or agency purchasing handguns for use by officers in the actual performance of their law enforcement duties;

(2) a collector of handguns as curios or relics as defined in Title 18, United States Code, section 921 (a) (13) who has in his possession a valid Collector of Curios and Relics License issued by the federal Bureau of Alcohol, Tobacco, Firearms and Explosives;

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(3) transfers of handguns among licensed retail dealers, registered wholesale dealers and registered manufacturers;

(4) transfers of handguns from any person to a licensed retail dealer or a registered wholesale dealer or registered manufacturer;

(5) any transaction where the person has purchased a handgun from a licensed retail dealer and has returned that handgun to the dealer in exchange for another handgun within 30 days of the original transaction, provided the retail dealer reports the exchange transaction to the superintendent; or

(6) any transaction where the superintendent issues an exemption from the prohibition in this subsection pursuant to the provisions of section 4 of P.L.2009, c.186 (C.2C:58-3.4).

The provisions of this subsection shall not be construed to afford or authorize any other exemption from the regulatory provisions governing firearms set forth in chapter 39 and chapter 58 of Title 2C of the New Jersey Statutes;

A person shall not be restricted as to the number of rifles or shotguns he may purchase, provided he possesses a valid firearms purchaser identification card and provided further that he signs the certification required in subsection b. of this section for each transaction.

j. Firearms passing to heirs or legatees. Notwithstanding any other provision of this section concerning the transfer, receipt or acquisition of a firearm, a permit to purchase or a firearms purchaser identification card shall not be required for the passing of a firearm upon the death of an owner thereof to his heir or legatee, whether the same be by testamentary bequest or by the laws of intestacy. The person who shall so receive, or acquire the firearm shall, however, be subject to all other provisions of this chapter. If the heir or legatee of the firearm does not qualify to possess or carry it, he may retain ownership of the firearm for the purpose of sale for a period not exceeding 180 days, or for a further limited period as may be approved by the chief law enforcement officer of the municipality in which the heir or legatee resides or the superintendent, provided that the firearm is in the custody of the chief law enforcement officer of the municipality or the superintendent during that period.

k. Sawed-off shotguns. Nothing in this section shall be construed to authorize the purchase or possession of any sawed-off shotgun.

l. Nothing in this section and in N.J.S.2C:58-2 shall apply to the sale or purchase of a visual distress signalling device approved by the United States Coast Guard, solely for possession on a private or commercial aircraft or any boat; provided, however, that no person under the age of 18 years shall purchase nor shall any person sell to a person under the age of 18 years a visual distress signalling device.

17

m. The provisions of subsections a. and b. of this section and paragraphs (4) and (5) of

subsection a. of N.J.S.2C:58-2 shall not apply to the purchase of firearms by a law enforcement agency for use by law enforcement officers in the actual performance of the officers' official duties, which purchase may be made directly from a manufacturer or from a licensed dealer located in this State or any other state.

amended 1979, c.179, s.11; 1981, c.363, s.2; 1982, c.173, s.2; 1983, c.479, s.4; 1991, c.261, s.19; 2000, c.145, s.1; 2001, c.3, s.1; 2003, c.73; 2003, c.277, s.4; 2009, c.104, s.2; 2009, c.186, s.2; 2013, c.114; 2016, c.74, s.1.

18

19

CONSENT FOR

MENTAL HEALTH RECORDS SEARCH This consent MUST be completed by the firearm applicant.

Failure to consent requires denial or disapproval of the application.

N.J.S.A. 30:4-24.3 provides that all records of any individual's commitment to a non- correctional institution for mental health reasons shall be confidential and shall not be disclosed except in limited circumstances or with the consent of the individual.

PART ONE (To be completed by the applicant) Name: (Last, Maiden, First, MI) Date of Birth: (Month, Day, Year) Social Security #: *See Privacy Act Notice Below.

Address: (Number & Street) (Municipality) (County) (State)

List Prior Addresses for past 10 years: � NOT APPLICABLE

ADDRESS 1: Dates Resided From: To:

(Number & Street) (Municipality) (County) (State)

ADDRESS 2: Dates Resided From: To:

(Number & Street) (Municipality) (County) (State)

I, am aware of my rights under N.J.S.A. 30:4-24.3, and the

Health Insurance Portability and Insurance Accountability Act (HIPAA), 45 C.F.R. 164-50, and consent to the disclosure of

my mental health records, including disclosure of the fact that said records may have been expunged, to the Chief of Police

and the Superintendent of State Police, or their designees, for the purpose of verifying my firearms permit application and

my fitness to own a firearm under N.J.S.A. 2C:58-3. I understand that copies of this authorization shall be considered

sufficient authorization for the release of records or for the disclosure of the fact of expungement.

Investigating Police Department Witness (Print Name)

X Signature of Witness

X Signature of Applicant Date

* Applicant's Social Security Number is requested pursuant to N.J.S.A. 2C:58-3(e) and disclosure is voluntary. The number will be used to expedite the application.

Without this number, the processing of the application may be delayed. This number is considered confidential

.

PART TWO (To be completed by County Adjuster's Office, Mental Health Institution and/or Doctor)

Record of Admission Date of Signature of Authorized

Commitment or Treatment Check Official or Doctor (Dr.: Provide Medical License #)

Yes No Expunged

County Adjuster's Office

Yes No Expunged

Institution or Doctor

PART THREE (To be completed by authorized official or doctor only if applicant has record of admission, commitment, or treatment at a hospital, mental institution or sanitarium for a mental disorder)

NAME OF HOSPITAL, MENTAL INSTITUTION ADMISSION DISCHARGE SIGNATURE OF AUTHORIZED

OR SANITARIUM (mo/day/yr) (mo/day/yr) OFFICIAL OR DOCTOR

to

to

S.P. 66 (Rev. 01/15)

Additional forms may be obtained through the New Jersey State Police, Firearms Investigation Unit,

P.O. Box 7068, West Trenton, NJ 08628-0068, or via the internet at www.njsp.org/info/forms.html.

20

http://www.njsp.org/info/forms.html

When are the Statements of the Decedent Admissible into Evidence in Estate Litigation?

Robert I. Aufseeser, J.D., LL.M.

Fact Pattern

6/5/20172

Ted is not married and has no children.

Ted owns a vacation home in Maine and a house in New Jersey. Both are encumbered by mortgages.

Ted’s partner Don lives with him in New Jersey.

The Maine property is owned with another as JTWROS.

The New Jersey property is owned by Ted outright.

Don claims that Ted tells him that he wants Don to have the house debt free when he dies.

21

Fact Pattern (cont.)

6/5/20173

Ted asks his attorney to prepare a Will to accomplish several key goals:

He wants the debt on the Maine property to be paid out of his estate;

He wants his NJ home and its contents to pass to Don;

He wants the balance of his estate to pass to various friends and relatives.


6/5/2017

In a written letter to his attorney, Ted writes:

“I want the debt encumbering my real estate liquidated by whatever means so that it passes to the beneficiaries free and clear and I don’t want it to be necessary for the properties to be sold in order to satisfy the debt.”

Ted went on to say that he had a $1M life insurance policy payable to his estate and another 3‐400k in a brokerage account.

He also wrote that: “I have viewed this cash as available to be directed to pay off the mortgage balances which may exist at the time.”

22


6/5/20175

As finally drafted, the Will specifically provides for the payoff of the debt encumbering the Maine property.

The Will also provides for the “payment of all just debts”.

Nothing was specifically provided with regards to the debt secured by the New Jersey property.

The question presented is whether Ted intended for Don to inherit his home in NJ debt free.

Questions Presented

6/5/20176

Can the decedent’s written statement to his attorney be admitted to interpret the language in the will?

Is Don permitted to testify at trial as to what Ted told him?

Under what circumstances are the decedent’s statements admissible?

23

Hearsay

6/5/20177

NJ R. Evid. 801.

“Statement” – oral or written assertion (can also be non‐verbal gesture if intended as an assertion)

“Declarant” – person who makes the statement

“Hearsay” – a statement, other than one made by the declarant while testifying, offered into evidence to prove the truth of the matter asserted

NJ R. Evid. 802.

“Hearsay is not admissible except as provided by these rules or by other law”.

Not Hearsay

6/5/20178

It follows that “if evidence is not offered for the truth of the matter asserted, the evidence is not hearsay and no exception to the hearsay rule is necessary to introduce that evidence at trial.” State v. Long, 173 N.J. 138, 152 (2002).

For example, when a statement is offered only to show that the statement was in fact made and that the listener took certain actions as result, or to show the probable state of mind induced in the listener, the statement is not hearsay. Carmona v. Resorts Intern. Hotel, 189 N.J. 354, 376‐377 (2007).

24

Not Hearsay - Example

6/5/20179

In Russell v. Rutgers Community Health Plan, Inc., N.J. Super. 445 (App. Div. 1995), the court held that a witness could testify that her daughter told her that the decedent may have had pneumonia.

The statement wasn’t made by the decedent, but since the statement was offered to prove that the witness knew how to seek treatment for pneumonia (and not that the decedent had pneumonia) the statement was allowed.

Hearsay – Public Policy

6/5/201710

Hearsay is a rule about fairness.

It would be unfair to admit a statement into evidence that cannot be cross‐examined or otherwise tested for credibility.

It would be unfair to allow self‐serving statements that cannot be challenged at trial

Should courts be granted latitude to determine the trustworthiness of the statement?

There are many statutory exceptions that may apply

25

Hearsay Exceptions – State of Mind

6/5/201711

NJ R. Evid. 803. Hearsay exceptions not dependent on declarant’s unavailability

803(c)(3): “A statement made in good faith of the declarant’s then existing state of mind, emotion, sensation or physical condition … but not including a statement of memory or belief … unless it relates to the execution, revocation, identification, or terms of the declarant’s will.”

Key Foundation Issues:

Is the statement being offered to prove the decedent’s state of mind at the time the statement was made?

If yes, is the decedent’s state of mind at issue?


6/5/201712

In Woll v. Dugas, 104 N.J. Super. 586 (Ch. Div. 1969), aff’d 112 N.J. Super. 366 (App. Div. 1970), the decedent’s attorney was permitted to testify as to statements made by the decedent.

The attorney was permitted to testify that he had spoken with the decedent who had told him that the decedent and his wife had reached an agreement as to the disposition of their estates, and that the decedent intended to effectuate this plan in a certain manner.

The testimony went to the decedent’s state of mind at the time the statement was made, and it was admissible to show an intention on the decedent’s part to create an estate plan at a future date.

26


6/5/201713

In Gresham v. Mass. Mut. Life Ins. Co., 248 N.J. Super. 64, 67 (App. Div. 1991), plaintiff was allowed to testify that the decedent, plaintiff’s late husband, told her after meeting with an agent that it was too late to convert his group life insurance policy to an individual policy.

In re Will of Smith, 108 N.J. 257 (1987), the decedent’s handwritten note to her attorney, which detailed her instructions for drafting her will, was admitted into evidence. The question was whether the decedent intended the note to be her last will and testament, and so it went to her state of mind. The Court held that the note could not be admitted to probate.


6/5/201714

In Manna v. Pirozzi, 44 N.J. Super. 227 (App. Div. 1957), an action concerning the transfer of stock by the decedent’s attorney‐in‐fact, the court admitted a letter written by the decedent as evidence of the decedent’s state of mind (and not to prove or probate the contents).

However, in State v. Boratto, 154 N.J. Super. 386 (App. Div. 1977), aff’d in part, rev’d in part 80 N.J. 506 (1979), the court held inadmissible the decedent’s verbal statement about the decedent’s concern for the witness’s family. The court held the decedent’s state of mind, as revealed by the conversation, was not an issue in the case.

27

Hearsay Exceptions – Reputation

6/5/201715

803(c)(19): Reputation Concerning Personal or Family History. “Evidence of a person’s reputation, among members of the person’s family by blood, adoption, or marriage … concerning a person’s birth, adoption, marriage, divorce, death … or other similar fact of the person’s personal of family history.”

If the statement by the decedent is used to prove his reputation within his family, a court may allow it.

No reported decisions are available to support such a claim.

Hearsay Exceptions – Reputation

6/5/201716

803(c)(21): Reputation as to Character. “Evidence reputation of a person’s character at a relevant time among the person’s associates or in the community.”

Presumably a statement by the decedent would be admissible to prove a character trait.

honesty, trustworthiness, truthfulness, deceit, etc.

The witness must have known the decedent’s reputation at the time, and have had a sufficient relationship with the decedent’s community. See Fitzgerald v. Stanley Roberts, Inc., 186 N.J. 286, 312 (2006); State v. Micci, 46 N.J. Super. 454 (App. Div. 1957).

28

Hearsay Exceptions – Trustworthiness

6/5/201717

804(b)(6). Trustworthy statements by decedents. “In a civil proceeding, a statement made by a person unavailable as a witness because of death if the statement was made in good faith upon declarant’s personal knowledge in circumstances indicating that it is trustworthy.”

This is the catch‐all hearsay exception.

Allows the court to weigh the trustworthiness of the statement and its evidentiary value against an adversary’s inability to cross‐examine.


6/5/201718

Bruning v. Eckman Funeral Home, 300 N.J. Super. 424 (App. Div. 1997).

Dispute between the decedent’s live‐in girlfriend and his estranged wife over the disposition of his remains.

The court held that the controlling statute at the time gave weight to the decedent’s intentions regarding his remains.

Although hearsay, the decedent’s statements were admissible because “if N.J.S.A. 8A:5‐18 did not authorize hearsay, we perceive no way to convey the decedent’s expressed intention to the court.” Also, the court made reference to trustworthy statements generally pursuant to 804(b)(6).

29


6/5/201719

804(b)(6) – Requirements:

1. That the declarant is deceased;

2. That the statement was made in good faith;

3. That the statement was made upon the declarant’s own personal knowledge; and

4. That there is a probability from the circumstances that the statement is trustworthy.


6/5/201720

The statement doesn’t have to be corroborated and there only needs to be a probability that the statement is trustworthy. See Estate of Grieco v. Schmidt, 440 N.J. Super. 557, 565‐567 (App. Div. 2015); Estate of Hanges v. Metropolitan Prop. & Cas. Ins. Co., 202 N.J. 369 (2010).

The court is looking for a good faith showing of trustworthiness

Entirely self‐serving statements inherently lack trustworthiness

30


6/5/201721

Lyon v. Glaser, 60 N.J. 259 (1972).

Inheritance Tax Case

Issue: Was the decedent a resident of New Jersey or Maryland at death? Impacts imposition of inheritance tax on intangible property.

Facts: She moved after her husband died. Affidavits were admitted into evidence containing declarations by the decedent as to her domicile.

Holding: “These declarations, although hearsay, are of course admissible and have substantial probative value on the issue of domicile.” at 262.


6/5/201722

Estate of Zahn, 305 N.J. Super. 260, 272 (App. Div. 1997).

Case about whether the decedent intended for his home mortgage to be paid out of his estate, or whether the property was to pass with the encumbrance attached.

After learning of an illness, the decedent transferred title to himself and his girlfriend as JTWROS. He then prepared a will leaving his residuary estate to his two children.

His will included the standard language directing his executors to “pay all of my just debts and funeral expenses as soon as practicable after my death.”

After being notified by the bank that she was delinquent on her mortgage payment, plaintiff brought suit to compel payment from the estate.

31


6/5/201723

Estate of Zahn, cont.

Plaintiff argued that the non‐exoneration provisions of N.J.S.A. 3B:25‐1 did not apply because she was not a devisee or heir within the meaning of the statute.

Middlesex County Chancery Court held for plaintiff finding that the estate was responsible for the debt.

Appellate Division reversed, holding that the mortgaged premises are the primary source of payment of mortgage indebtedness. See N.J.S.A. 2A:50‐2. In essence, the debt would not be a “just debt” of the estate until the value in the property was exhausted.


6/5/201724


What about the decedent’s probable intent?

Plaintiff argued that the decedent verbally told her that she was “to become the sole owner of the house, free and clear of any liens or encumbrances”.

Is that statement admissible to interpret the “just debt” provision of decedent’s will?

32

Doctrine of Probable Intent

6/5/201725

Under the doctrine of probable intent, NJ courts construe wills to “ascertain and give effect to the probable intention of the testator.” Fidelity Union Trust Co. v. Robert, 36 N.J. 561, 564 (1962).

In determining the testator’s subjective intent, “courts will give primary emphasis to his dominant plan and purpose as they appear from the entirety of his will when read and considered in the light of the surrounding facts and circumstances.” Fidelity Union Trust at 564‐565.

A court can “ascribe to the testator, those impulses which are common to human nature, and will construe the will so as to effectuate those impulses.” Id. at 565.


6/5/201726

The trial court is not limited by the words and phrases in the document being construed, and extrinsic evidence may “furnish … information regarding the circumstances surrounding the testator [and] should be admitted in ascertaining [the testator’s] probable intent under the will.” Wilson v. Flowers, 58 N.J. 250 (1971).

Extrinsic evidence, including a testator’s direct statements has been admissible, not to vary the terms of the will, but to explain ambiguities. Danelczyk v. Tynek, 260 N.J. Super. 426, 430 (App. Div. 1992).

33


6/5/201727

Wilson v. Flowers, 58 N.J. 250 (1971).

Will Construction Case

Issue: Did the testator’s use of the word “philanthropic” have the legal equivalence and meaning of the word “charitable”. (If not, the argument was that that the provision was void, which would benefit the intestate heirs).

Holding: A court may admit extrinsic evidence to: (1) show that an ambiguity exists, and (2) to shed light on the testator’s actual intent, BUT not to vary the terms of the Will.


6/5/201728


In Zahn, the appellate division held that the provision in the will regarding payment of debts was not ambiguous.

Also, the appellate division refused to allow the decedent’s purported statement to be admitted under the state‐of‐mind exception to the hearsay rule, and the court found that the statement was entirely self‐serving and lacked trustworthiness.

Ultimately, the appellate division reversed and held that the estate was not liable for the mortgage debt.

34

Back to Our Fact Pattern

6/5/201729

Ted dies and Don inherits his NJ property. The question is whether Ted intended for Don to take the property free of all encumbrances, or whether those encumbrances remain attached to the property.

These are also the facts of the case, In re Estate of Payne, 186 N.J. 324 (2006).

In Payne, the New Jersey Supreme Court applied the probable intent doctrine to find that the testator intended for his house to pass debt‐free.

Estate of Payne

6/5/201730

In Payne, the Court looked to the decedent’s written statement to his attorney and found it to be credible and admissible to show the decedent’s intent.

Unlike Zahn, where the court found serious evidentiary problems in admitting the decedent’s purported verbal statement to the plaintiff (i.e. that is was hearsay), in Payne, the decedent’s statement was written and trustworthy.

35

Estate of Payne

6/5/201731

The real issue in Payne was not the trustworthiness of the decedent’s statement, but rather its meaning.

In a dissenting opinion, Justice Rivera‐Soto took issue with the court’s finding that the statement is clear and the will ambiguous.

Justice Rivera‐Soto read the same language and found the will to be clear and the statement to be ambiguous.

Summary

6/5/201732

Statements by the Decedent are admissible in estate litigation if:

A. They are not hearsay; or

B. They are hearsay, but fall within an exception such as:

1. The decedent’s state of mind;

2. The decedent’s reputation;

3. General trustworthiness.

These statements can be used to show ambiguities in the will, and the decedent’s probable intent.

36

6/5/201733

Robert I. Aufseeser, J.D., LL.M.

Ansell Grimm & Aaron, P.C.

1500 Lawrence Avenue

Ocean Township, NJ 07712

732.643.5272

[email protected]

www.ansellgrimm.com

37

------ Reprinted with permission of LexisNexis.

IN THE MATTER OF THE ESTATE OF THEODORE M. PAYNE, DECEASED.

A-12 September Term 2005

SUPREME COURT OF NEW JERSEY

186 N.J. 324; 895 A.2d 428; 2006 N.J. LEXIS 390

January 4, 2006, Argued

April 20, 2006, Decided

PRIOR HISTORY: [***1] On certification to the

Superior Court, Appellate Division.

In re Estate of Payne, 185 N.J. 35, 878 A.2d 852, 2005

N.J. LEXIS 973 (2005)

CASE SUMMARY:

PROCEDURAL POSTURE: The court granted appel-

lant partner's petition for certification, challenging the

judgment of the New Jersey Superior Court, Appellate

Division, which affirmed a trial court judgment that the

partner was not entitled to certain New Jersey real estate

debt-free upon application of the doctrine of probable

intent to the will of a testator. The partner had filed the

will contest action against respondent, the executor of the

testator's estate.

OVERVIEW: The partner asserted that he had been the

testator's mate and had lived with him for approximately

four years. The partner contended that it was the testa-

tor's intent to devise the New Jersey property to him

debt-free by requiring the estate to pay the outstanding

mortgage on the same. The trial court, in its application

of the doctrine of probable intent, concluded that the

testator was unable to carry out that desire because of the

priority attached to real estate he jointly owned with a

third-party in the State of Maine, which was explicitly

intended to transfer debt-free to that joint owner, leaving

the estate with insufficient residual assets to accomplish

any other bequests. The court disagreed with the lower

courts' conclusions upon finding that a letter by the testa-

tor to his attorney evidenced the testator's probable intent

and was highly relevant. The court found that the letter

demonstrated that the testator intended all of his real

estate to pass to his beneficiaries free and clear and that

the properties were not to be sold to pay off any mort-

gage balances. The court also held that a priority existed

to pay the debts of the Maine property first.

OUTCOME: The court reversed the judgment of the

lower court and remanded the case to the trial court for

further proceedings.

CORE TERMS: mortgage debts, mortgage, testator,

probable intent, real estate, beneficiary, partner, free and

clear, debt-free, decedent, life insurance, executor's, de-

visee, ambiguity, citation omitted, extrinsic evidence,

impulse, estate tax, right of survivorship, bequeathed,

ownership, jointly, revised, die, testator's intent, accom-

plish, effectuate, vacation home, conversation, encum-

bering

[HN1] In interpreting a will, a court's aim is to ascertain

the intent of the testator. When a court says it is deter-

mining the testator's intent, the court means his probable

intent. A court adheres to the view of the doctrine of

probable intent, which states that, in determining the

testator's subjective intent, courts will give primary em-

phasis to his dominant plan and purpose as they appear

from the entirety of his will when read and considered in

the light of the surrounding facts and circumstances. A

trial court should ascribe to the testator those impulses

which are common to human nature and construe the will

so as to effectuate those impulses. Courts are enjoined to

strain toward effectuating the testator's probable intent to

accomplish what he would have done had he envisioned

the present inquiry.

[HN2] A trial court is not limited simply to searching

out the probable meaning intended by the words and

phrases in a will when determining a testator's intent.

Extrinsic evidence may furnish information regarding the

39

Page 2

186 N.J. 324, *; 895 A.2d 428, **;

2006 N.J. LEXIS 390, ***

circumstances surrounding the testator and should be

admitted to aid in ascertaining the testator's probable

intent under the will. The testator's own expressions of

his or her intent are highly relevant. Once the evidence

establishes the probable intent of the testator, the trial

court may not refuse to effectuate that intent by indulg-

ing in a merely literal reading of the instrument.

[HN3] Under N.J. Stat. Ann. § 3B:25-1 (2004), a general

direction in a will to pay debts shall not be deemed a

direction to pay a mortgage or security interest.

[HN4] Under N.J. Stat. Ann. § 3B:23-14, shares of the

distributees abate as may be found necessary to give ef-

fect to the intention of the testator.

SYLLABUS

(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).

In the Matter of the Estate of Theodore M.

Payne, Deceased (A-12-05)

Argued January 4, 2006 -- Decided April 20, 2006

WALLACE, J., writing for a majority of the

Court.

The issue before the Court is whether the decedent,

Theodore Payne, intended to bequeath his New Jersey

property to his partner debt-free.

Payne met Don Burton in 1997 when both were suf-

fering from AIDS. In May 1997, they began living to-

gether in Payne's residence in Morristown. At the time,

Payne was a Managing Director of Finance at Metropoli-

tan Life, and Burton was disabled.

Payne had jointly purchased a vacation home in

Harpswell, Maine with Frederick "Rick" Wohlfarth,

which provided for a right of survivorship. Payne and

Wohlfarth had lived together as partners but, at the time

they purchased the vacation home, [***2] their partner-

ship had ended. The men remained friends and agreed

that the first to die would satisfy the balance of the mort-

gages on the property and that each would provide for

that provision in his respective will. Payne and Wohl-

farth exchanged drafts of their wills to ensure each con-

tained similar language concerning the payment of mort-

gage debts on the Maine property. In his March 13, 1998

will, Payne bequeathed to Wohlfarth his half interest in

the Maine property and a sum equal to the amount neces-

sary to pay off the mortgage debts on the Maine property

reduced by the proceeds of any life insurance policy on

Payne's life payable to Wohlfarth. Payne also bequeathed

the personal property located in Morristown to Wohlfarth

and divided the residue among other beneficiaries. There

was no provision for Burton in this will.

In July 1998, Payne sold the Morristown residence

and bought a home in Harding Township, New Jersey.

Burton lived in the home with Payne. According to Bur-

ton, while traveling with Payne to Maine in the summer

of 1999 or 2000, they discussed the care of Payne's two

dogs upon Payne's death. Burton told Payne that he was

concerned about being able to provide a home [***3]

for himself and the dogs should Payne die. Burton claims

that Payne told him not to worry because he would leave

the house to Burton and that Payne's life insurance pro-

ceeds would pay off the mortgage on the New Jersey

home. Burton also claimed that a similar conversation

took place on another trip to Maine during the summer of

2000. At that time, Payne allegedly again said that Bur-

ton would inherit the New Jersey property debt-free.

At some point, Payne contacted his attorney, Jack

Wolff, to change his 1998 will. On August 15, 2000,

Wolff sent Payne a revised draft. The primary change in

the will provided a gift to Burton of Payne's personal

property located in the New Jersey home. In November

2000, Payne reviewed the draft, outlined several changes

and mailed the will back to Wolff. The will neither speci-

fied a bequest of the New Jersey home to Burton nor that

it be inherited debt-free. Wolff made the changes and

sent another draft to Payne on November 21, 2000.

Payne's deteriorating health forced him to leave his

job in September 2001. Burton assisted Payne with his

hygiene needs, the preparation of meals, transportation to

and from medical appointments, and the care of Payne's

[***4] dogs. Payne still had not signed the revised will

and on October 1, 2001, Payne wrote to Wolff comment-

ing that the will only gave the contents of the New Jersey

home to Burton, even though he intended to give the

house and contents to Burton. Payne also inquired about

issues concerning language in the will relating to the

Maine property. Wolff made certain changes and for-

warded a revised draft to Payne on October 15, 2001.

Again, there was no reference to a bequest of the New

Jersey home to Burton. Burton discussed with Payne his

concerns about this proposed draft and they both agreed

that Burton should be referred in the will as "partner"

rather than "friend." In addition, Burton wondered why

the will expressly provided for payment of mortgage

debts for the Maine property but did not contain similar

language for the New Jersey property. Payne responded

that the specific language was required for the Maine

property because it was jointly owned but that the clause

40

Page 3

186 N.J. 324, *; 895 A.2d 428, **;

2006 N.J. LEXIS 390, ***

in his will directing payment of all his just debts provid-

ed for the debt on the New Jersey property.

Payne wrote Wolff on November 11, 2001, instruct-

ing him to refer to Burton as "partner," to prepare a Pow-

er of Attorney [***5] and Medical Directive in favor of

Burton, and to provide guidance on the financial and tax

aspects of planning his estate. Crucial language in this

letter refers to: liquidating the debt encumbering his real

estate so that it passes to his beneficiaries free and clear;

not wanting the properties sold to satisfy the debt; and

desiring that his life insurance, worth slightly over $

1million, be used to pay off the mortgage balances.

Payne suggested that they discuss these issues when he

comes to sign the will and other documents. After receiv-

ing this letter, the only change Wolff made was to desig-

nate Burton as "partner." On March 4, 2002, Wolff sent

Payne the revised will, power of attorney, and living

will.

Payne was hospitalized on March 13, 2002, the day

before he was sign the documents in Wolff's office.

Wolff came to the hospital the following day and, after

determining that Payne was lucid and wanted to execute

the will and related documents, had Payne sign these

papers. The next day, Payne lapsed into a coma and re-

mained in that condition until his death on April 21,

2002. Daulton Lewis was named executor of the will

and, ultimately, Payne's estate satisfied the mortgage on

[***6] the Maine property but refused to pay the debt on

the New Jersey property.

Burton sued the estate, alleging that at the time of

Payne's death, he had been living with Payne as his part-

ner for about four years, that Payne had told him that he

would inherit the New Jersey property debt-free, and that

the November 11, 2001 letter to Wolff expressed that

intent. Answers were filed by Lewis and various other

beneficiaries. At the bench trial, Burton testified about

the relationship and Payne's expressed intention to be-

queath the New Jersey property to Burton debt-free.

Wolff testified that Payne had not instructed him to do

the same thing regarding mortgage debts for the New

Jersey property that he did for the Maine property. Wolff

also stated that he did not interpret the November 11th

letter to mean that Payne wanted the mortgage debts on

the New Jersey property satisfied out of his estate. Lewis

and Wohlfarth also testified.

The trial court found that the November 11th letter

evidenced Payne's desire to find a way to protect Burton

from the mortgage payments but nonetheless concluded

that Payne failed to meet the burden of establishing

Payne's intention of giving him the property debt-free.

[***7] The court reasoned that Payne was looking in

other directions to protect Burton and never expressed an

intention that the other beneficiaries bear the expense of

having the estate satisfy the mortgage. The court rejected

the "all my just debts" clause as evidence of Payne's in-

tention to cover the mortgage debts on the real estate,

especially in light of the detailed language regarding the

Maine property.

The Appellate Division affirmed, finding that the

trial court properly applied the doctrine of probable in-

tent in that Payne was unable to carry out his desire to

provide Burton with a debt-free property because of the

priority attached to the Maine property and the lack of

sufficient residual assets remaining in the estate to ac-

complish the other bequests.

The Supreme Court granted certification.

HELD: The application of the doctrine

of probable intent demonstrates that The-

odore Payne intended to bequeath his

New Jersey property to his partner debt-

free.

1. In interpreting a will, the goal is to ascertain the

probable intent of the testator. Primary emphasis should

be on the testator's dominant plan and purpose as they

appear from the entirety of the will [***8] in considera-

tion of the surrounding facts and circumstances. The

court should ascribe to the testator those impulses that

are common to human nature and construe the will to

effectuate those impulses. Courts are to effectuate the

testator's probable intent to accomplish what he or she

would have done had he or she envisioned the present

inquiry. Extrinsic evidence should be admitted to aid in

ascertaining probable intent. (Pp. 11-14)

2. The most important evidence of Payne's probable

intent is set forth in the November 11, 2001 letter to his

lawyer. The fifth and sixth paragraphs of the letter clear-

ly evidence Payne's probable intent and are consistent

with an intention that the "all my just debts" clause was a

direction for the estate to pay the mortgage debts on the

New Jersey property. There is a clear and unambiguous

expression of Payne's intent that his beneficiaries, Burton

and Wohlfarth, receive their respective real estate debt-

free and that neither beneficiary should be required to

sell the property to pay off the mortgages. Payne's use of

the plural "beneficiaries" and "properties" evidences that

he was referring to both Wohlfarth and Burton and to

both the Maine and [***9] New Jersey properties. (Pp.

14-17)

3. The Court's reasoning also supports the conclu-

sion that Payne's probable intent was to pay off the mort-

gage debts on the Maine property first and then pay off

the debt on the New Jersey property. (P. 18)

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186 N.J. 324, *; 895 A.2d 428, **;

2006 N.J. LEXIS 390, ***

Judgment of the Appellate Division is REVERSED

and the matter is REMANDED to the trial court for fur-

ther proceedings consistent with this opinion.

JUSTICE RIVERA-SOTO, dissenting, is of the

view that it is the November 11, 2001 letter that is am-

biguous not the will, which clearly demonstrates that the

mortgages on the Maine home were to be satisfied from

the estate, while no such provision was made in respect

of the New Jersey residence. Justice Rivera-Soto would

be guided by deference to the trial court's findings

properly given them by the Appellate Division.

CHIEF JUSTICE PORITZ and JUSTICES

LONG, LaVECCHIA, ZAZZALI, and ALBIN join in

JUSTICE WALLACE's opinion. JUSTICE RIVERA-

SOTO filed a separate dissenting opinion.

COUNSEL: Dennis T. Smith argued the cause for appel-

lant, Donald P. Burton (Pashman Stein, attorneys; Mi-

chael S. Stein, of counsel; Mr. Smith and Mr. Stein, on

the briefs).

John P. Beyel argued the [***10] cause for respondent

Daulton J. Lewis, Executor of the Estate of Theodore M.

Payne, Deceased (McElroy, Deutsch, Mulvaney & Car-

penter, attorneys).

Neal M. Frank argued the cause for respondent Freder-

ick P. Wohlfarth.

JUDGES: Justice WALLACE delivered the opinion of

the Court. Justice RIVERA-SOTO, dissenting. Chief

Justice PORITZ and Justices LONG, LaVECCHIA,

ZAZZALI, ALBIN and WALLACE. Justice RIVERA-

SOTO.

OPINION BY: WALLACE

OPINION

[**429] [*327] Justice WALLACE delivered the

opinion of the Court.

In this will contest, decedent had executed a will

with a specific provision for his estate to pay to the joint

tenant of a property he owned in Maine an amount

equivalent to the mortgage debts on that property. Other

than the "payment of all my just debts" clause, the will

did not have a provision for the estate to pay the mort-

gage debts on decedent's home in New Jersey. Decedent

bequeathed his New Jersey property to his partner, who

lived with him in that residence. The trial court conclud-

ed that decedent's partner and not the estate was respon-

sible for payment of the mortgage debts on the New Jer-

sey property. The Appellate Division affirmed. We con-

clude that application [***11] of [**430] the doctrine

of probable intent demonstrates that decedent intended to

bequeath the New Jersey property to his partner debt-

free. We reverse.

I.

Decedent Ted Payne met Don Burton in 1997. Both

men were suffering from AIDS. By May 1997, they be-

gan living together at Payne's residence in Morristown.

At that time, Payne was a [*328] Managing Director of

Finance at Metropolitan Life, and Burton was disabled.

Payne had previously acquired a vacation home in

Harpswell, Maine. He purchased the property jointly

with Frederick "Rick" Wohlfarth with the right of survi-

vorship. Payne and Wohlfarth previously had lived to-

gether as partners but at the time they purchased the

property their relationship had ended. They remained

friends and agreed that the first to die would satisfy the

balance of the mortgages on the property and that each

would provide for that in his will.

Payne and Wohlfarth exchanged drafts of their wills

to ensure the language concerning the payment of the

mortgage debts on the Maine property would be similar.

In his March 13, 1998, will, Payne bequeathed to Wohl-

farth his half interest in the Maine property and a sum

equal to the amount necessary to pay off the mortgage

debts [***12] on the Maine property reduced by the

proceeds of any life insurance policy on Payne's life pay-

able to Wohlfarth. Payne also bequeathed the personal

property located in Morristown to Wohlfarth and divided

the residue among nieces, nephews, godchildren, chari-

ties, and educational institutions. The March 13, 1998,

will made no provision for Burton.

In July 1998, Payne sold the Morristown residence

and purchased a home in Harding Township, New Jer-

sey. Burton resided in the home with Payne. According

to Burton, while traveling to Maine in the summer of

1999 or 2000, he and Payne discussed the care of Payne's

two dogs upon Payne's death. Burton expressed concern

about his ability to provide a home for himself and the

dogs on his limited income. He claimed that Payne told

him not to worry because he would leave the house to

him and that his life insurance proceeds would pay off

the mortgage on the house. Burton also maintained that a

similar conversation took place on another trip to Maine

during the summer of 2000. At that time, Payne allegedly

again stated that Burton would inherit the New Jersey

property debt-free.

[*329] At some point, Payne contacted his attor-

ney, Jack Wolff, to change his [***13] 1998 will. On

August 15, 2000, Wolff mailed to Payne a revised draft.

The primary change in the will provided for the gift to

Burton of Payne's personal property located in the New

Jersey home.

42

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186 N.J. 324, *; 895 A.2d 428, **;

2006 N.J. LEXIS 390, ***

Payne reviewed the draft of the will and on Novem-

ber 16, 2000, wrote to Wolff outlining several other

changes. Payne specified that there was a second mort-

gage on the Maine property and that his estate should

pay that mortgage. In addition, he noted that the address

of the New Jersey real estate should be listed as Harding

Township and not Morristown. Wolff made the correc-

tions in the will and forwarded another draft to Payne on

November 21, 2000.

Payne's deteriorating health forced him to leave his

position with Metropolitan Life in September 2001. It

became necessary for Burton to assist Payne with his

hygiene needs, the preparation of meals, transportation to

and from his medical appointments, and the care of his

dogs.

Payne still had not executed his revised will. On Oc-

tober 1, 2001, he wrote to Wolff explaining that the will

appeared to [**431] give only the contents of the house

to Burton, but his intent was to give the house and the

contents to Burton. Payne also inquired whether he

should [***14] retain the reference to the Maine proper-

ty in the will because a friend informed him that it would

pass automatically to the surviving owner and that inclu-

sion in the will might cause adverse tax consequences.

Wolff made the changes and on October 15, 2001,

forwarded a revised draft to Payne. The draft deleted the

reference to a gift of the Maine property to Wohlfarth.

Wolff also expressed his desire to review the deed to the

Maine property to confirm that title was taken jointly

with the right of survivorship. He also noted the possibil-

ity of federal estate tax consequences even though the

Maine property would pass outside of the will.

[*330] Payne reviewed the latest draft of the will

with Burton, who expressed several concerns. Burton

believed the description of him as a "friend" failed to

accurately describe their relationship. They agreed that

the will should refer to Burton as Payne's "partner." Bur-

ton also questioned why the will provided for the pay-

ment of the mortgage on the Maine property but lacked

similar language concerning the New Jersey property.

Payne responded that it was necessary to provide ex-

pressly for payment of the mortgage debts on the Maine

property because it [***15] was jointly owned property,

and that the clause in his will directing payment of all his

just debts provided for the debt on the New Jersey prop-

erty.

Following that discussion, Payne wrote Wolff on

November 11, 2001, instructing him to refer to Burton as

his "partner" instead of as his "friend." He enclosed a

copy of the Maine deed to verify that the property was

held as joint tenants with the right of survivorship with

Wohlfarth. Payne requested that Wolff prepare a Power

of Attorney and Medical Directive in favor of Burton and

asked for guidance concerning the tax and financial as-

pects of planning his estate due to its complexity. The

crucial language in the November 11, 2001, letter pro-

vided that

[a]s may beevident from my will, I

want the debt encumbering my real estate

liquidated by whatever means so that it

passes to the beneficiaries free and clear

and I don't want it to be necessary for the

properties to be sold in order to satisfy the

debt, which, I assume, would come due

upon my death. Providing for the mort-

gage financing on the house in Maine has

been a prominent issue with Oakey Point,

which Mr. Wohlfarth and I may resolve

by using credit life insurance [***16] in a

refinancing which we are presently con-

templating.

At present, the major source of cash

to the estate would come from life insur-

ance proceeds of about $ 1 million and I

have viewed this cash as available to be

directed to pay off the mortgage balances

which may exist at the time. However, this

might not be true if estate taxes are as-

sessed on the gross value of the real es-

tate, which is currently worth between $

1.7 million and $ 2.2 million, and there is

a big tax liability to satisfy ahead of ad-

dressing the mortgages. There is another

$ 300,000-$ 400,000 (assuming the stock

market is bottoming out) of investments

which would be available to the estate to

pay taxes and debt.

It has been suggested that I structure

the life insurance proceeds to be paid into

a trust outside of the estate where the trust

would be directed to use the proceeds to

repay the real estate debt. I am not in-

clined to create another level of complexi-

ty such as this unless it is necessary.

[*331] [**432] Maybe we can sort

through some of these issues when I come

in to sign the will and other documents.

[(emphasis added).]

After receiving that letter, the sole change Wolff made in

the [***17] will was to designate Burton as "partner."

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186 N.J. 324, *; 895 A.2d 428, **;

2006 N.J. LEXIS 390, ***

On March 4, 2002, Wolff wrote to Payne enclosing the

revised will, power of attorney, and living will.

Wolff arranged to have Payne execute the docu-

ments in his office on March 14, 2002. Unfortunately,

Payne was hospitalized on March 13, 2002. The follow-

ing day Burton telephoned Wolff, informed him of

Payne's hospitalization, and requested that Wolff deliver

the original documents to the hospital for Payne to exe-

cute. Wolff went to the hospital and spoke to Payne in

the Intensive Care Unit. After asking Payne several ques-

tions, Wolff was satisfied that Payne was lucid and

wanted to execute the will and related documents. Payne

then signed the will, power of attorney and living will.

The next day Payne lapsed into a coma and re-

mained in that condition until his death on April 21,

2002. Daulton Lewis was named executor of the will.

Lewis informed Burton that he was responsible for pay-

ing the outstanding debt on the New Jersey property.

Burton replied that Payne wanted any mortgages on the

house satisfied from his estate and intended that the

property would pass to him debt-free.

At the time of Payne's death, the approximate value

of his real [***18] estate was $ 900,000 for the New

Jersey property and $ 375,000 for his one-half interest in

the Maine property. The New Jersey property was en-

cumbered by a mortgage in the amount of $ 347,190 and

a line of credit of $ 92,458, and the Maine property was

encumbered by a mortgage of $ 302,450 and a second

mortgage of $ 106,092. The estate ultimately received

life insurance proceeds totaling $ 1,053,425. Payne's

estate satisfied the obligations on the Maine property but

refused to pay the debt on the New Jersey property be-

cause it was bequeathed to a named beneficiary.

[*332] Burton filed a complaint against the estate.

He alleged that at the time of Payne's death, he had been

living with Payne as his partner for approximately four

years, that Payne informed him that he would inherit the

New Jersey property debt-free, and that the November

11, 2001, letter from Payne to Wolff expressed that in-

tent. Answers were filed by the executor and various

other beneficiaries. At the bench trial, Burton testified

that his relationship with Payne was like a marriage in

every way. He outlined three conversations he had with

Payne in which Payne expressed his desire to give Bur-

ton the New Jersey property debt-free.

[***19] Wolff, who had drafted the will, testified

that Payne instructed him to provide for the estate to pay

the balance of the mortgages on the Maine property but

had not instructed him to do the same for the mortgage

debts on the New Jersey property. Wolff acknowledged

that he had neither discussed with Payne the difference in

treatment of the two properties nor estate tax issues.

When he received the November 11, 2001, letter, Wolff

did not interpret the letter to mean that Payne wanted the

mortgage debts on the New Jersey property satisfied out

of his estate. It was Wolff's belief that except for chang-

ing the description of Burton from "friend" to "partner,"

the will was satisfactory to Payne. On cross-examination,

Wolff explained that despite the reference in the Novem-

ber 11, 2001, letter that Payne wanted the mortgage debts

encumbering the real estate paid off so "it passes to my

beneficiaries free and clear," he believed Payne was only

referring to the Maine property. Wolff admitted that fol-

lowing the November 11, 2001, letter, he never [**433]

met with Payne to sort through some of the issues raised

in the letter and never discussed with Payne whether his

use of the word "properties" was [***20] a mistake.

Lewis, the executor of the estate, testified that he

was a long-time friend of Payne, and that Payne was the

godfather to his daughter. He said that his daughter was

one of numerous beneficiaries under the residuary clause

of Payne's will. It was [*333] not until after Payne's

death that he became aware that Payne had named him

executor. Lewis, who was a lawyer, said that Wohlfarth

was one of his clients. Lewis recalled a conversation

with Payne and Wohlfarth wherein they discussed a tes-

tamentary plan in which the first to die would pay off the

mortgage debts on the Maine property.

Wohlfarth testified that he had both a personal and a

business relationship with Payne. Even after their close

personal relationship ended, he said they continued to

maintain a business relationship. In 1997, the two of

them purchased the Maine property jointly, each contrib-

uting to the purchase price and being obligated on the

mortgage. Wohlfarth stated that Lewis was his attorney

and had drafted his will. Following a discussion with

Lewis, it was Wohlfarth's understanding that "at some

point the money in the estate would be disbursed to pay

off the various mortgages." He had agreed with Payne

that [***21] the first to die would pay off the mortgage

debts on the Maine property either through the estate or

with life insurance proceeds. He and Payne had ex-

changed wills and both had a similar clause about paying

off the mortgage debts on the Maine property.

The trial court found that the November 11, 2001,

letter was evidence of Payne's desire to find a way that

Burton would be protected from the mortgage payments.

However, the court concluded that Payne was looking in

other directions for that help and never expressed an in-

tent that other beneficiaries be saddled with the expense

of having the estate satisfy the mortgage. The court re-

jected the "all my just debts" clause of the will as evi-

dencing Payne's intention to cover the mortgage debts on

the real estate because he "had a detailed disposition with

respect to the [Maine] property owned by decedent and

Wohlfarth." The court reasoned that it would not be nec-

essary to specifically provide for the debt on the Maine

44

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186 N.J. 324, *; 895 A.2d 428, **;

2006 N.J. LEXIS 390, ***

property if "the all my debts clause could just have easily

covered the same item with respect to the Maine proper-

ty." Additionally, the court held that Payne's alleged in-

tention to have the "all my just debts" clause apply

[***22] to [*334] the mortgage debts for both proper-

ties was inconsistent with Wolff's testimony that Payne

was detail oriented in their dealings. The court concluded

that Burton failed to meet the burden of establishing that

Payne intended to give him the New Jersey property

debt-free.

The Appellate Division affirmed in an unpublished

opinion. The panel found that the trial court properly

applied the doctrine of probable intent "by attempting to

accomplish what the testator would have done if con-

fronted with the issues." The panel concluded that the

trial court "essentially found that although Payne would

have liked to provide Burton with the property debt-free,

he was unable to do so in light of the priority he attached

to the Maine property and the lack of sufficient residual

assets remaining in the estate to accomplish his other

bequests."

We granted Burton's petition for certification. 185

N.J. 35, 878 A.2d 852 (2005).

II.

Burton contends that the trial court failed to properly

apply the doctrine of [**434] probable intent in inter-

preting the will. Specifically, Burton argues that the

court failed to consider that the common human impulse

is to make appropriate provisions for one's spouse and

that [***23] same sex couples are entitled to that rea-

sonable inference. Further, Burton claims the trial court

applied the incorrect standard of proof.

The executor of the estate disagrees. He argues that

the controlling statute, N.J.S.A. 3B:25-1, makes the doc-

trine of probable intent inapplicable to this case, and that

in any event, the evidence did not establish Payne's prob-

able intent to pass the New Jersey property to Burton

free and clear of debt.

Wohlfarth adds that the doctrine of probable intent

should not apply in this case because the will was clear

and unambiguous. Further, he argues that the common

human impulse to provide appropriate care for one's

spouse is not a relevant consideration.

[*335] III.

[HN1] In interpreting a will, our aim is to ascertain

the intent of the testator. "[W]hen we say we are deter-

mining the testator's intent, we mean his probable intent."

Fidelity Union Trust Co. v. Robert, 36 N.J. 561, 564, 178

A.2d 185 (1962) (citation omitted). We continue to ad-

here to the view of the doctrine of probable intent ex-

pressed in Fidelity Union. In that case, the Court stated

that in determining the testator's subjective intent, "courts

[***24] will give primary emphasis to his dominant plan

and purpose as they appear from the entirety of his will

when read and considered in the light of the surrounding

facts and circumstances." Id. at 564-65, 178 A.2d 185.

The trial court should "ascribe to the testator 'those im-

pulses which are common to human nature and . . . con-

strue the will so as to effectuate those impulses.'" Id. at

565, 178 A.2d 185 (citation omitted). More recently, this

Court emphasized that "[c]ourts are enjoined to 'strain'

toward effectuating the testator's probable intent 'to ac-

complish what he would have done had he envisioned

the present inquiry.'" In re Estate of Branigan, 129 N.J.

324, 332, 609 A.2d 431 (1992) (citation omitted).

[HN2] The trial court is not "limited simply to

searching out the probable meaning intended by the

words and phrases in the will." Engle v. Siegel, 74 N.J.

287, 291, 377 A.2d 892 (1977). Extrinsic evidence may

"furnish[] information regarding the circumstances sur-

rounding the testator [and] should be admitted to aid in

ascertaining [the testator's] probable intent under the

will." Wilson v. Flowers, 58 N.J. 250, 260, 277 A.2d 199

(1971). [***25] To be sure, the testator's own expres-

sions of his or her intent are highly relevant. Id. at 262-

63, 277 A.2d 199. Once the evidence establishes the

probable intent of the testator, "the court may not refuse

to effectuate that intent by indulging in a merely literal

reading of the instrument." Id. at 260, 277 A.2d 199.

We note also, that at the time of Payne's death,

N.J.S.A. 3B:25-1 provided that "unless the Will of the

testator shall expressly or impliedly direct that the mort-

gage interest be otherwise paid," the [*336] property

passing to a devisee "shall be primarily liable for the

mortgage debt." Effective 2004, the Legislature amended

N.J.S.A. 3B:25-1 to make it clear that [HN3] a "general

direction in the will to pay debts shall not be deemed a

direction to pay the mortgage or security interest." L.

2004, c. 132, § 88. Prior to that amendment, the Appel-

late Division noted that a direction in the will to pay

"'just debts' does not clearly indicate that the outstanding

mortgage is included in the executor's responsibilities."

In re Estate of Zahn, 305 N.J. Super. 260, 270-71, 702

A.2d 482 (App. Div. 1997). [***26]

[**435] With this background, we turn now to re-

view the evidence to ascertain Payne's probable intent.

The most important evidence of Payne's probable intent

is set forth in his November 11, 2001, letter to his attor-

ney. Before discussing that letter, we restate the pertinent

circumstances surrounding Payne's revisions of his will.

Payne had reviewed and made changes on several

drafts of his will. Each draft contained a direction to pay

off his just debts and an express provision to pay to

Wohlfarth an amount equivalent to the debt on the Maine

45

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2006 N.J. LEXIS 390, ***

property. It is uncontested that Payne and Wohlfarth had

equally contributed to purchasing and maintaining the

Maine property and both had executed the Maine mort-

gages. Payne had agreed with Wohlfarth that the first to

die would pay off any mortgage debts on the Maine

property even though the surviving owner was still obli-

gated on those debts.

It is reasonable to infer that Payne believed that up-

on his death, unless he made a special provision in his

will, his estate would be responsible only for his one-half

share of the mortgage debts on the Maine property. Thus,

a specific bequest in the will to pay off the entirety of the

mortgage debts on the [***27] Maine property was nec-

essary to effectuate the desire of Payne and Wohlfarth.

The crucial document in determining Payne's intent

is his November 11, 2001, letter. The first paragraph of

the letter expressed satisfaction with the will, except that

Payne wanted [*337] Burton identified as his "partner."

The fifth and sixth paragraphs clearly evidence Payne's

probable intent and are consistent with an intention that

the "all my just debts" clause was a direction for the es-

tate to pay the mortgage debts on the New Jersey proper-

ty. Payne stated

[a]s may be evident from my will, I

want the debt encumbering my real estate

liquidated by whatever means so that it

passes to the beneficiaries free and clear

and I don't want it to be necessary for the

properties to be sold in order to satisfy the

debt, which, I assume, would come due

upon my death.

That sentence is a clear and unambiguous expression

of Payne's intentions that his beneficiaries, Burton and

Wohlfarth, receive their respective real estate debt-free

and that neither beneficiary be required to sell the prop-

erty to pay off the mortgages. Payne's use of the plural

for "beneficiaries" and for "properties" evidences that he

was referring [***28] to both Wolfarth and Burton and

the Maine and the New Jersey properties. Moreover, the

interpretation that Payne intended the "all my just debts"

clause in his will to satisfy the mortgage debts on the

New Jersey property is consistent with the opening

phrase in his letter that "as may be evident from my

will." That is, it was only "evident" from his will that the

property would pass to his beneficiary free and clear if

the just debts clause required his estate to pay the mort-

gage debts on the New Jersey property.

After expressing his desire that payment of the

mortgage debts on the Maine property was "a prominent

issue," Payne stated that the $ 1 million in life insurance

proceeds was available to pay off the mortgage balances.

He recognized, however, that "this might not be true if

estate taxes are assessed on the gross value of the real

estate, which is currently worth between $ 1.7 million

and $ 2.2 million and there is a big tax liability to satisfy

ahead of addressing the mortgages." The estimated val-

ues that Payne listed for his real estate is further proof

that he was discussing all of his real estate because if he

were referring only to the Maine property the value of

the [***29] [**436] real estate would have been sub-

stantially less than $ 1 million, i.e. $ 375,000.

[*338] In short, the November 11, 2001, letter

demonstrated that Payne intended his real estate to pass

to his "beneficiaries free and clear" and that the "proper-

ties" should not have to be sold to pay off "the mortgage

balances." The use of the plural form in those several

instances evinces Payne's intention to pass both the New

Jersey property and the Maine property to his beneficiar-

ies, Burton and Wohlfarth, free and clear of mortgage

debts.

We conclude that Payne's probable intent was to

give the New Jersey property to Burton free and clear of

mortgage debts.

IV.

The reasoning that persuades us to find in favor of

Burton on the New Jersey property and to interpret the

"just debts clause" to require the estate to pay off the

mortgage debts on the New Jersey property also supports

our conclusion that Payne's probable intent was to pay

off the mortgage debts on the Maine property first and

then to pay off the mortgage debts on the New Jersey

property. In his November 11, 2001, letter, Payne rein-

forced that position by stating that payment of the mort-

gage debts on the Maine property "has been a prominent

[***30] issue." Further, Payne provided for the payment

of the mortgages on the Maine property in his March 13,

1998, will, and he never wavered in that regard. At all

times, Payne expressed his intent to pay off the mortgage

debts on the Maine property by a specific bequest to

Wohlfarth.

We conclude that if Payne were faced with the ques-

tion of priority as between payment of the mortgage

debts on the Maine property and the mortgage debts on

the New Jersey property, his probable intent would be to

pay the Maine debts first. See N.J.S.A. 3B:23-14 [HN4]

("[s]hares of the distributees abate as may be found nec-

essary to give effect to the intention of the testator.")

V.

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2006 N.J. LEXIS 390, ***

The judgment of the Appellate Division is reversed,

and the case is remanded to the trial court for further

proceedings consistent with this opinion.

DISSENT BY: WALLACE

DISSENT

[*339] Justice RIVERA-SOTO, dissenting.

In this case, the testator held ownership interests in

two homes in different states. More importantly, the na-

ture of testator's ownership in those [***31] two proper-

ties was different: he owned his vacation home in Maine

in joint ownership with another, which joint ownership

had a right of survivorship, while he alone owned his

primary New Jersey home. The testator's will reflected

this dichotomy: although it specifically provided that, as

part of his estate, the mortgages on the Maine home were

to be satisfied out of his estate, there was no parallel pro-

vision made for any mortgages that may have encum-

bered his New Jersey home.

In the face of clearly dissimilar treatment by the tes-

tator of his two separate real property holdings, the ma-

jority holds that both the trial court and the Appellate

Division erred in determining this testator's probable

intent and that, instead, the "application of the doctrine

of probable intent demonstrates that decedent intended to

bequeath the New Jersey property to his partner debt-

free." Ante 186 N.J. at 327, 895 A.2d at 429-30 (2006)

(slip op. at 2,). I cannot agree.

The only credible proofs tendered that the testator's

will did not represent fairly the testator's intent consisted

of extrinsic evidence in the form of a letter from the tes-

tator to his counsel that preceded the [**437] testator's

[***32] execution of the will by several months. 1 Un-

like the majority's expansive application of extrinsic evi-

dence in order to divine the testator's probable intent,

caution mandates that we hew closely to the limits we

have placed on the use of extrinsic evidence as a barome-

ter of a testator's probable intent. As we made clear in

Wilson v. Flowers, 58 N.J. 250, 263, 277 A.2d 199

(1971):

[I]n deciding whether there is an ambigui-

ty, a court should always admit extrinsic

evidence including direct statements of in-

tent since experience teaches that lan-

guage [*340] is so poor an instrument

for communication or expression that or-

dinarily all such evidence must be exam-

ined before a court can be satisfied of

whether an ambiguity exists. We do not,

of course, mean to imply that such evi-

dence can be used to vary the terms of the

will, but rather that it should be admitted

first to show if there is an ambiguity and

second, if one exists, to shed light on the

testator's actual intent.

[(citation omitted.)]

1 The only other evidence tendered concerning

the purported ambiguity consisted solely of the

devisee's claim of oral promises allegedly made

by the testator to the effect that the devisee would

receive the New Jersey home free and clear of all

debts. Neither the trial court, nor the Appellate

Division, nor the majority, nor I credit those alle-

gations.

[***33] Held side-by-side, there is no ambiguity in

the explicit terms of the will generated by that letter. The

testator simply does not state in that letter what the ma-

jority holds here, that it was the testator's intent that his

New Jersey home pass unencumbered to his devisee. On

the contrary, it is the letter that is ambiguous while the

will itself is patently clear: the mortgages on the Maine

vacation home were to be satisfied from the estate, while

no such provision was made in respect of the New Jersey

home. 2

2 The majority correctly notes that, in the ab-

sence of a specific testamentary direction that

property is to pass to a devisee free and clear of

any debts, the devise is "as is," that is to say, it

passes to the devisee subject to whatever encum-

brances it may have at the time of passing. Ante,

186 N.J. at 335-36, 895 A.2d at 434 (2006).

In these circumstances, I would be guided by the

deference for the trial court's findings properly accorded

to them by the Appellate Division. [***34] Therefore, I

would affirm for substantially the reasons thoughtfully

expressed by both the trial court and the panel here.

I respectfully dissent.

47

------ Reprinted with permission of LexisNexis.

IN THE MATTER OF THE ESTATE OF CHARLES A. ZAHN, DECEASED.

A-4074-96T1F

SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION

305 N.J. Super. 260; 702 A.2d 482; 1997 N.J. Super. LEXIS 417

September 30, 1997, Argued

October 21, 1997, Decided

SUBSEQUENT HISTORY: [***1] Approved for

Publication October 21, 1997.

PRIOR HISTORY: On appeal from the Superior

Court of New Jersey, Chancery Division, Probate Part,

Middlesex County.

CASE SUMMARY:

PROCEDURAL POSTURE: Appellant executor chal-

lenged an order of the Superior Court of Middlesex

County (New Jersey), which directed him to pay out of

the proceeds of the estate all costs associated with the

note and mortgage of property which was formerly held

in joint tenancy between plaintiff surviving joint tenant

and the decedent. Appellant claimed error in finding that

the exoneration statute applied.

OVERVIEW: Plaintiff surviving joint tenant filed an

action seeking reimbursement from appellant, executor

of deceased joint tenant's estate, for payments made on

the mortgage. The court found that the trial court erred

because common law exoneration only applied to heirs,

devisees and a particular class of widows. The court

found that there was no ambiguity in decedent's will, that

the executors were directed to pay all just debts and fu-

neral expenses as soon as practicable after death, and that

the mortgage debt was not a "just debt" of the estate until

the value of the real estate was exhausted. The court

found that payment to plaintiff would effectively disin-

herit decedent's daughters, and that there was no indica-

tion of a probable intent on the part of the decedent to

disinherit his daughters in favor of plaintiff. The court

reversed and remanded the matter to the trial court for

the plaintiff to produce some additional evidence of de-

cedent's intention to exonerate her from the payment of

the mortgage debt.

OUTCOME: The order requiring appellant executor to

pay the existing debt on plaintiff surviving joint tenant's

mortgage was reversed because the statute did not by

implication require exoneration of a joint tenant whose

interest was a gift from decedent. The case was remand-

ed to the trial court to allow plaintiff to produce evidence

of decedent's intention to exonerate her from payment of

the mortgage debt.

CORE TERMS: mortgage, exoneration, mortgage debt,

testator's, executor's, devisee, joint tenants, decedent,

heir, widow's, deed, common law, free and clear, gift,

joint tenancy, real estate, encumbrance, surviving, dow-

er, security interest, probable intent, personal estate, ex-

onerate, daughters, joint tenant's, reimbursement, person-

ally, notice, common law, funeral expenses

[HN1] See N.J. Stat. Ann. § 3B:25-1.

[HN2] Under the probable intent doctrine, New Jersey

courts construe wills to ascertain and give effect to the

probable intention of the testator. In determining the tes-

tator's subjective intent, courts will give primary empha-

sis to his dominant plan and purpose as they appear from

the entirety of his will when read and considered in the

light of the surrounding facts and circumstances. A court

can ascribe to the testator, those impulses that are com-

mon to human nature, and will construe the will so as to

effectuate those impulses.

[HN3] In ascertaining the probable intent of the testator,

courts are not limited to the express language of the will

49

Page 2

305 N.J. Super. 260, *; 702 A.2d 482, **;

1997 N.J. Super. LEXIS 417, ***

and may look to extrinsic evidence including the testa-

tor's own expressions of intent.

COUNSEL: Stewart M. Hutt argued the cause for appel-

lant F. Howard Zahn (Pinto & Butler, attorneys; Lisa M.

Butler, on the brief).

Salvatore P. DiFazio argued the cause for respondent

Nina Fichter (DiFazio, Radom & Wetter, attorneys; Su-

san J. Radom, on the brief).

JUDGES: Before Judges DREIER, KEEFE and

WECKER. The opinion of the court was delivered by

DREIER, P.J.A.D.

OPINION BY: DREIER

OPINION

[*263] [**483] The opinion of the court was de-

livered by

DREIER, P.J.A.D.

Defendant F. Howard Zahn, one of the executors of

the Estate of Charles A. Zahn, appeals by leave granted

from an interlocutory order directing it to pay all costs

associated with the note and mortgage of property which

was formerly held in joint tenancy between plaintiff,

Nina Fichter, and the decedent.

In 1994, Charles A. Zahn ("Zahn") bought a single-

family house located in Jamesburg, New Jersey, and took

title in his own name. In part payment of the purchase

price of the house, Zahn executed a promissory note in

[***2] his name to NatWest Home Mortgage Corpora-

tion for $ 120,000, secured by a first purchase-money

mortgage on the real estate. Thereafter, Zahn entered into

a relationship with plaintiff, and they lived together in

the house until his death the following year.

In November 1995, upon discovering that he was se-

riously ill, Zahn conveyed title to the house to plaintiff

and himself as joint tenants with a right of survivorship.

According to plaintiff, Zahn informed her prior to the

transfer that after his death, she was "to become the sole

owner of the house, free and clear of any liens or encum-

brances."

Zahn died December 27, 1995, leaving a will which

named his brother, defendant F. Howard Zahn, and his

friend, Philip H. Shore, executors of his estate. Pursuant

to the will, Zahn directed his named executors to "pay all

of my just debts and funeral expenses as soon as practi-

cable after my death." He then bequeathed his entire es-

tate to his two children, Tasha A. Zahn and Heather N.

Zahn. Zahn had not changed his [**484] will to name

plaintiff as a beneficiary. Zahn's will was admitted to

probate on February 14, 1996.

[*264] Following his death, NatWest Home Mort-

gage Corporation notified plaintiff [***3] that payments

under the mortgage loan were delinquent and foreclosure

proceedings would commence if the payments were not

satisfied. To prevent foreclosure, plaintiff paid the mort-

gage on the house and subsequently sought reimburse-

ment from Zahn's estate. When defendant refused, plain-

tiff filed this action seeking reimbursement for payments

made on the mortgage.

Plaintiff claimed she qualified for exoneration from

the mortgage and the underlying note, and she was not

subject to the nonexoneration provisions of [HN1]

N.J.S.A. 3B:25-1, which provides:

When property subject to a mortgage or

security interest descends to an heir or

passes to a devisee, the heir or devisee

shall not be entitled to have the mortgage

or security interest discharged out of any

other property of the ancestor or testator,

but the property so descending or passing

to him shall be primarily liable for the

mortgage or secured debt, unless the will

of the testator shall expressly or impliedly

direct that the mortgage or security inter-

est be otherwise paid.

Plaintiff argued that since she was not an heir or devisee

within the definition of N.J.S.A. 3B:25-1, and Zahn's will

did not expressly [***4] direct her to satisfy the mort-

gage or security interest underlying the house, she was

not responsible for paying such debts from the value of

the property or from her own assets. Therefore, she could

look to the estate for reimbursement for any payments

made on the mortgage.

Defendant filed an answer and counterclaim claim-

ing the applicability of N.J.S.A. 3B:25-1 and that plaintiff

is solely and personally responsible for paying the debt

as well as her share of the New Jersey transfer inher-

itance tax and attorney's fees.

The trial court found that the nonexoneration statute

applied only to heirs and devisees, and since plaintiff

was neither, repayment of the mortgage was not her re-

sponsibility. In so holding, the court characterized Zahn's

act of conveying title to himself and plaintiff as joint

tenants as "a gift of a property to her subject to the pay-

ment of the mortgage by Mr. Zahn." Consequently, the

court ordered defendant to pay all costs associated with

the note and mortgage of the Jamesburg property, and

held that plaintiff [*265] was entitled to reimbursement

50

Page 3

305 N.J. Super. 260, *; 702 A.2d 482, **;

1997 N.J. Super. LEXIS 417, ***

from defendant for any payments made on the mortgage

debt. We note, however, that the conveyance could just

as [***5] easily have been characterized as a gift of

Zahn's net interest in the property, after the payment of

the mortgage debt. This will be discussed in more detail

infra.

According to defendant's brief (documentation of

these facts was not provided), a review of the estate indi-

cates that each of Zahn's daughters is entitled to receive $

54,772.50, and plaintiff is to receive $ 171,465, if the gift

was only of the net equity in the property. The estate also

contained the proceeds of a joint bank account of $

50,348, presumably passing to the daughters. Defendant

contends that reimbursing plaintiff for her payments on

the mortgage would bankrupt the estate, thereby exclud-

ing Zahn's daughters from any share of the estate. Thus,

defendant claims that plaintiff should pay the mortgage

debt out of the proceeds from the sale of the Jamesburg

property which she sold for $ 260,000 on July 17, 1997.

There are two approaches we will take to analyze

this problem. First, we will view the law of exoneration

as it has developed in New Jersey; second, we will at-

tempt to divine the testator's probable intention to see if

we must remand this matter for a factual hearing. We

find, however, that [***6] both approaches lead to the

same result, namely, that plaintiff is not entitled to exon-

eration. We will explain.

Defendant contends that the common law and

N.J.S.A. 3B:25-1 must lead us to conclude that a surviv-

ing joint tenant, who takes property that is encumbered

by a mortgage securing a note on which only the de-

ceased joint tenant was personally liable, has no right of

exoneration. Defendant argues that New Jersey cases

decided prior to the enactment [**485] of N.J.S.A.

3B:25-1 and its predecessor N.J.S.A. 3:26A-1, L. 1924, c.

164, § 1 restricted the right of exoneration of debts from

the estate to three classes of beneficiaries: heirs, devi-

sees, and widows asserting their right of dower in the

encumbered property. N.J.S.A. 3B:25-1 and the earlier

enactment extinguished the right of exoneration for two

of the three [*266] classes, heirs and devisees. From

this, defendant concludes that because the statute did not

specifically terminate the common law right of exonera-

tion for widows claiming dower, solely their common

law right of exoneration was preserved. As defendant

does not fall within this protected class, she has no rec-

ognized right of exoneration.

As support [***7] for this contention, defendant

traces a line of cases interpreting the common law on

exoneration. First, in Krueger v. Ferry, 41 N.J. Eq. 432,

5 A. 452 (Ch.1886),aff'd, 43 N.J. Eq. 295, 14 A.

811(E.&A.1887) , the court considered whether creditors

who purchased mortgaged property from a decedent's

estate could look to it for satisfaction of the underlying

mortgage debt. Id. at 436-37, 5 A. 452. In denying relief

to the creditors, the court limited the right to call upon a

decedent's executor to exonerate land from a mortgage

debt for which the decedent was personally liable to

three classes of individuals: heirs-at-law, devisees or

widows. Id. at 437, 5 A. 452. In Hill v. Hill, 95 N.J. Eq.

233, 122 A. 818 (E.&A.1923) , which again articulated

our common law rule on exoneration, the Court stated

that against a claim of an heir or devisee, at common law

the personal estate is primarily liable for the payment of

debts, and consequently, the heir-at-law or a devisee was

entitled to request the executor "to exonerate the land by

discharging the mortgage debt out of the personal es-

tate." Id. at 235, 122 A. 818. The Court reasoned that

because the personal estate enjoyed the funds received

from the mortgage, [***8] and because historically the

personal estate has been considered the natural source for

debt payments, an heir or devisee could direct the execu-

tor to pay the outstanding mortgage from the personal

estate. Id. at 235-36, 122 A. 818. 1 See also Norris v.

Pellinger, 133 N.J. Eq. 209, 211, 31 A.2d 398 (Ch.

1943). The Court in In re [*267] Staiger, 104 N.J. Eq.

149, 144 A. 619 (E.&A.1929) , reiterated but narrowed

the ruling in Krueger by explaining that not all widows

were entitled to exoneration from a mortgage debt; ra-

ther, exoneration was applicable only to widows seeking

to assert their right to dower. Id. at 152-53, 144 A. 619. 2

Staiger is the last statement of the rule by the highest

court of this State, prior to the 1924 statute, now N.J.S.A.

3B:25-1.

1 This argument, of necessity, has less logic

when applied to a case, as here, of a purchase-

money mortgage. No money was withdrawn from

the property for the use of the mortgagor, thus

benefiting his estate. Even in the case of a non-

purchase-money mortgage, if the mortgage was

placed on the property prior to a transfer to a

third party, the logic of the Hill Court's reasoning

also is questionable.

[***9]

2 We need not determine here whether the rule

expressed in Staiger would extend, after dower

and curtesy were abolished by N.J.S.A. 3B:28-2

as of May 28, 1980, to real estate included in a

widow's elective share under N.J.S.A. 3B:8-1 or

the principal marital residence in which a spouse

has a right of joint possession under N.J.S.A.

3B:28-3.

Defendant reasons that since N.J.S.A. 3B:25-1 re-

versed the common law right to exoneration solely with

respect to heirs and devisees, the only remaining individ-

uals permitted to request an executor to exonerate real

estate from mortgage debt are widows seeking to claim

51

Page 4

305 N.J. Super. 260, *; 702 A.2d 482, **;

1997 N.J. Super. LEXIS 417, ***

their right to dower. N.J.S.A. 3B:25-1 by its terms did not

create any new right in a surviving joint tenant to qualify

for exoneration of mortgage on property owned in joint

tenancy. On the contrary, the nonexoneration statute pre-

serves the common law which, after adoption of N.J.S.A.

3B:25-1, only recognizes exoneration for widows claim-

ing their right to dower without mortgage encumbrances.

Plaintiff contests this analysis and maintains that the

trial court [***10] correctly interpreted the plain mean-

ing of N.J.S.A. 3B:25-1. According to N.J.S.A. 3B:25-1,

when an heir or devisee takes property that is subject to a

mortgage or security interest, that heir or devisee is not

entitled to have the encumbrance discharged out of the

ancestor or testator's estate. Instead, under N.J.S.A.

[**486] 2A:50-2, it is the property that is primarily lia-

ble for the mortgage or secured debt, unless, as stated in

N.J.S.A. 3B:25-1, the will of the testator expressly or

impliedly directs payment of such debt. Plaintiff con-

tends that because she neither fits within the statutory

definition of an "heir" or "devisee," N.J.S.A. 3B:1-1, she

is not subject to the statutory restrictions imposed on

heirs and devisees [*268] under N.J.S.A. 3B:25-1. Con-

sequently, plaintiff's common law right of exoneration is

preserved.

This might be so if there were such a common law

right to be preserved. The trial court's analysis was

flawed because New Jersey cases, discussed earlier, re-

veal that common law exoneration was only applied to

heirs, devisees and a particular class of widows. See

Staiger, supra, 104 N.J. Eq. at 152-53, 144 A. 619;

Krueger, supra, [***11] 41 N.J. Eq. at 437, 5 A. 452.

No New Jersey case law supports the trial judge's con-

clusion that under the common law surviving joint ten-

ants are entitled to request the executor of the deceased

joint tenant's estate to satisfy mortgage debts on property

held in joint tenancy so that title passes to the surviving

joint tenant free and clear of debt.

The court mistakenly described the transfer of the ti-

tle to plaintiff as a joint tenant as "a gift of property to

her subject to the payment of the mortgage by Mr.

Zahn." As noted, this simply is not the law. 3 Assuming

that Zahn conveyed ownership to himself and plaintiff as

joint tenants as a gift to plaintiff, she took the property

subject to the mortgage. This is reiterated in Pomeroy:

"Where a mortgagor conveys by deed absolutely silent

with respect to an outstanding mortgage, the grantee, of

course, takes the land encumbered by the mortgage, if he

has actual notice of it, or constructive notice by record or

otherwise." 4 John Norton Pomeroy, A Treatise on Equi-

ty Jurisprudence, § 1205, at 613 (5th ed.1941).

3 Nor is there a factual basis for the conclusion,

except for plaintiff's uncorroborated account of

Zahn's earlier statement to her of his intention.

This will be discussed infra.

[***12] Plaintiff asserts that she did not sign the

promissory note, nor, before Zahn's death, did she have

any responsibility for paying the mortgage. Only Zahn,

as the obligor, had such an obligation. This merely

means that she is not liable for any deficiency if there

were a foreclosure sale. Her not being an obligor sheds

no light on the extent of the gift to her or the [*269]

estate's obligation to pay the debt. 4 While plaintiff may

not be personally liable for the mortgage debt, the court

should have ruled that the property is the primary fund

out of which this debt should be paid. As we have al-

ready noted, under New Jersey law, the mortgaged prem-

ises are the primary source of payment of a mortgage

indebtedness. N.J.S.A. 2A:50-2. If Zahn had survived, his

personal estate would be protected until the property was

sold and a deficiency established. His testamentary estate

should be entitled to no less protection. Cf. Estate of

Colquhoun v. Estate of Colquhoun, 177 N.J. Super. 491,

496, 427 A.2d 87 (App.Div.1981),modified, 88 N.J. 558,

443 A.2d 1045 (1982).

4 Whether plaintiff had actual or constructive

notice of the existing mortgage is also irrelevant.

By virtue of the recording act, N.J.S.A. 46:21-1,

she is deemed to have notice.

[***13] Analysis of case law from other jurisdic-

tions also undermines the trial judge's conclusion. In In

re Estate of Young v. Phillip, No. A-96-423, 1997 Neb.

App. LEXIS 105, 1997 WL 426191, at *1 (Neb.Ct.App.

July 1, 1997), the facts were somewhat different from the

case before us in that joint tenants had both assumed the

obligation of the underlying debt, and there had also

been an express direction in the decedent's will that the

mortgage (deed of trust) debt be exonerated. Id. at *3.

In holding the estate responsible for satisfaction of

the note, the court analyzed the language of the will and

the attendant circumstances under which the will was

made to arrive at a conclusion which embodied the testa-

tor's intent. Id. at *5. The court also stated the general

rule concerning exoneration rights of joint tenants:

"[T]he general rule is that a surviving joint tenant does

not qualify for exoneration of a mortgage on joint tenan-

cy property unless there is language in the decedent's will

clearly expressing an intention that the mortgage debt be

paid." Ibid. Because the language in the decedent's

[**487] will in Young clearly indicated that his estate

must pay all mortgage debts in his name, the court

[***14] [*270] concluded that the estate must pay the

balance of the note. Id. at *6.

The same analysis was applied by the California

Court of Appeals in In re Estate of Dolley v. Dolley, 265

52

Page 5

305 N.J. Super. 260, *; 702 A.2d 482, **;

1997 N.J. Super. LEXIS 417, ***

Cal. App. 2d 63, 71 Cal. Rptr. 56 (1968). In Dolley, the

testator alone bought a house for himself and his wife,

which he purchased, giving a promissory note secured by

a deed of trust. Id. 71 Cal. Rptr. at 58-59. After the loan

was granted, the residence was transferred by a joint ten-

ancy deed. Id. 71 Cal. Rptr at 59. When the testator died,

$ 39,000 remained unpaid on the note. Ibid. After the

testator's will was probated, the executors refused to dis-

charge the trust deed encumbrance despite the wife's

claim that she was entitled to the house free and clear of

the encumbrance. Ibid.

In denying the wife's request for exoneration of the

mortgage debt from the testator's estate, the court con-

cluded that, absent language in the decedent's will clearly

expressing an intent that the mortgage debt be paid, a

surviving joint tenant is not entitled to exoneration of a

mortgage debt on joint tenancy property. Id. 71 Cal.Rptr.

at 61-62. Because the will contained only a general

clause directing the executor to pay all just [***15]

debts and expenses, id. 71 Cal.Rptr at 58, and did not

include express language instructing the executors to pay

the mortgage indebtedness, the court refused to recog-

nize the joint tenant's right of exoneration. Id. 71

Cal.Rptr. at 62-63. The court refused to presume that the

testator intended the executors to pay the mortgage. Id.

71 Cal.Rptr. at 63. The court noted that if the testator

wanted the estate to pay the mortgage, he could have

easily accomplished this task "by the inclusion of not

more than three words, such as 'free and clear.'" Ibid.

Without words to the contrary, the court characterized

the wife's arguments as "pure conjecture." Ibid.

Unlike the will in Young, there is no clear and un-

ambiguous language concerning the payment of mort-

gages in Zahn's will. According to the will, Zahn directed

that his "Executors shall pay all of my just debts and

funeral expenses as soon as practicable after my death."

Reference to the payment of Zahn's "just debts" [*271]

does not clearly indicate that the outstanding mortgage is

included in the executor's responsibilities. Like the will

in Dolley, Zahn's will is silent regarding satisfaction of

his mortgage indebtedness. The language of the will ex-

presses [***16] no intent on Zahn's part to order his

estate to exonerate the mortgage debt on the house he

shared with plaintiff.

Even analyzing Zahn's will under New Jersey's lib-

eral probable intent doctrine cannot result in an affir-

mance of the trial court's decision. [HN2] Under the

probable intent doctrine, New Jersey courts construe

wills to "ascertain and give effect to the 'probable inten-

tion of the testator.'" Fidelity Union Trust Co. v. Robert,

36 N.J. 561, 564, 178 A.2d 185 (1962). See also In re

Estate of Branigan, 129 N.J. 324, 331-32, 609 A.2d 431

(1992); Danelczyk v. Tynek, 260 N.J. Super. 426, 428-30,

616 A.2d 1311 (App.Div.1992), and cases cited therein.

In determining the testator's subjective intent, "courts

will give primary emphasis to his dominant plan and

purpose as they appear from the entirety of his will when

read and considered in the light of the surrounding facts

and circumstances." Fidelity Union, supra, 36 N.J. at

564-65, 178 A.2d 185. A court can "ascribe to the testa-

tor, 'those impulses which are common to human nature,

and will construe the will so as to effectuate those im-

pulses.'" Id. at 565, 178 A.2d 185.

This court has held that [HN3] in ascertaining the

probable intent of the testator, courts are [***17] not

limited to the express language of the will and "may look

to extrinsic evidence including the testator's own expres-

sions of intent." Danelczyk, supra, 260 N.J. Super. at

430, 616 A.2d 1311. The use of extrinsic evidence how-

ever is limited. Ibid. Extrinsic evidence including a testa-

tor's direct statements has been admissible, not to vary

the terms of the will, but to explain ambiguities. Ibid.

Here, there is no ambiguity in Zahn's will. Zahn directed

his executors to "pay all of my just debts and funeral

expenses as soon as practicable after my death." The

mortgage debt is not a "just debt" of the estate until the

value of the real estate is exhausted. N.J.S.A. 2A:50-2.

See [**488] also In re Estate of Dolley, supra, 71 Cal.

Rptr. at 58-62.

[*272] Following these guidelines, the only evi-

dence that Zahn intended defendant to pay the mortgage

on the property held in joint tenancy with plaintiff is her

uncorroborated statement that "decedent informed [her]

that it was the decedent's intention that upon his death

[she] was to become the sole owner of the house, free

and clear of any liens or encumbrances." This conversa-

tion, however, was not memorialized in a change to

Zahn's [***18] will, the deed conveying the property or

some other writing. Moreover, proof of this statement,

made before the conveyance, faces serious evidentiary

problems under N.J.R.E. 804(b)(6) (trustworthy state-

ments by deceased declarants), N.J.R.E. 803(c)(3) (then-

existing mental state of a declarant), and even the Parol

Evidence Rule. If the statement was made at the time of

the deed, and Fichter attempted to vary the terms of the

writing by adding an implied oral "free and clear of any

mortgage debt" term, the parol evidence rule would bar

the claim. If the statement was made before or after the

deed was signed, and is claimed to vary Zahn's will, the

statement would be akin to a will amendment, outside of

the scope of N.J.S.A. 3B:3-2. It is also outside of the dec-

laration of mental state evidence rule which specifically

excludes statements relating "to the ... terms of declar-

ant's will." N.J.R.E. 803(c)(3). There is also a serious

question of the trustworthiness of the statement under

N.J.R.E. 804(b)(6), as it is extremely self-serving, and in

any event relates solely to decedent's intention at the time

of the statement, not at the time of transfer. The relevant

53

Page 6

305 N.J. Super. 260, *; 702 A.2d 482, **;

1997 N.J. Super. LEXIS 417, ***

intention [***19] under Fidelity Union and its progeny

is the state of mind when the will was executed.

According to defendant, requiring the estate to pay

the mortgage would bankrupt the estate, "leaving nothing

for the decedent's children," and giving plaintiff a total

gain of approximately $ 289,500. These alleged mone-

tary facts do not appear to be disputed, and they

strengthen the argument that Zahn did not intend his ex-

ecutors to pay the mortgage on the joint tenancy proper-

ty. It therefore seems reasonable to believe that Zahn

would not have intended, when he signed his will, to

have bankrupted his estate to satisfy the mortgage debt if

he later transferred [*273] his real estate to a joint ten-

ant. More importantly, if Zahn intended the estate to pay

the mortgage, he would have included that directive in a

codicil to his will or in some other operative writing such

as the deed by simply stating that plaintiff takes the resi-

dence "free and clear" of the mortgage. Without such

concrete language, it is difficult if not impossible to de-

termine that Zahn would have bequeathed his entire es-

tate to his daughters, yet have intended to give them

nothing if the real estate was later transferred to a joint

[***20] tenant.

Despite plaintiff's strained arguments, the probable

intent doctrine also guides us to reverse and remand the

matter to the trial court. The issue of Zahn's intention

need be revisited by the trial judge only if plaintiff can

come forward with some additional evidence of dece-

dent's intention to exonerate her from the payment of the

mortgage debt. Otherwise, the trial court should deter-

mine the monetary amount necessary to satisfy the mort-

gage debt and order the debt to be paid out of the pro-

ceeds from the sale of the residence.

In sum, we determine that N.J.S.A. 3B:25-1 does not

by implication require exoneration of a joint tenant

whose interest was a gift from a decedent who was the

sole obligee on the mortgage debt. The facts alleged at

this stage of the proceeding also show no probable intent

of Zahn effectively to disinherit his daughters in favor of

plaintiff.

Reversed and remanded for further proceedings in

accordance with this opinion.

54

Amendments to Rule 4:86

Christine H. O’Donnell, Esq.

The amendments to Rule 4:86, governing actions for the appointment of a guardian for

an incapacitated person or for the appointment of a conservator, were enacted effective

September 1, 2016 in order to codify the Judiciary Guardianship Program, which was created to

monitor the well-being of incapacitated persons and to provide additional protections for such

persons. In addition, the rule changes clarify the role of the Surrogate in guardianship

proceedings, and update procedures intended to provide uniformity across the counties for

filing and reporting requirements.

The amendments affect both the filing of guardianship actions and the reporting

requirements for guardians.

Rule 4:86-1, which formerly had addressed the required contents of the complaint for

guardianship, now provides that all guardianship actions, other than those with respect to

veterans (governed by N.J.S.A. 3B:13-1) or kinship legal guardianship (governed by N.J.S.A.

3B:12A-1), shall be brought pursuant to Rules 4:86-1 through -8 for the appointment of a

general, limited or pendent lite guardian. Additionally, the rule requires the Surrogate to

maintain judiciary records of all such actions. Under the new rule provisions, each vicinage is

required to operate a Guardianship Monitoring Program in collaboration with the Superior

Court, Chancery Division, Probate Part and the Administrative Office of the Courts.

Guardianship support and monitoring, including training and review of inventories and

accountings, shall be within the purview of the AOC. The Surrogate is not responsible for

review of any filings, other than a formal accounting which is subject to audit.

55

Rule 4:86-2 was amended to include the required elements of the complaint for

guardianship formerly contained in Rule 4:86-1. The Rule further provides that a Certification

of Assets must be attached to the complaint, in the form promulgated by the AOC. This

document can be located on the judiciary website at

http://www.judiciary.state.nj.us/forms/12011_guardian_cert_assets.pdf. The form requires

that the plaintiff list all real property; stocks, bonds, mutual funds, securities and investment

accounts; checking, savings and CD accounts; pensions and retirement accounts; miscellaneous

personal property; sources of monthly income, and liabilities/encumbrances of the AIP. If the

plaintiff is unable to obtain that information, as will almost certainly be the case if the plaintiff

is not a family member or someone closely involved with the AIP’s care prior to the need for

guardianship, the complaint must state the reason(s) that the plaintiff is unable to supply the

information, and the Certification of Assets must contain the information that the plaintiff does

have available.

In addition, affidavits or certifications of two physicians, or a physician and a

psychologist, must accompany the complaint, in a form promulgated by the AOC. This form can

be found at http://www.judiciary.state.nj.us/forms/12012_guardian_cert_physcian.pdf. The

form contains substantially the same information as was included in the required physician or

psychologist certifications prior to the rule change. It also requires the physician to opine

whether the AIP has capacity in the areas of medical, legal, residential, educational, vocational

and financial decision-making.

Finally, paragraph (b)(3) of the new rule requires that a Case Information Statement be

filed, and that it include the AIP’s date of birth and Social Security number. This provision was

56

http://www.judiciary.state.nj.us/forms/12011_guardian_cert_assets.pdf

http://www.judiciary.state.nj.us/forms/12012_guardian_cert_physcian.pdf

troubling to practitioners, since it conflicted with Rule 1:38-7(c)(2), which requires a

certification in the initial pleading that confidential personal identifiers, including Social Security

numbers, were redacted from documents submitted to the Court. The concern is that if service

of the CIS is included with service of all of the other documents, every interested party will have

access to the AIP’s date of birth and Social Security number. The Case Information Statement,

which can be found at http://www.judiciary.state.nj.us/forms/11920_adult_guard_cis.pdf, also

requires the age and relationship to the AIP of both the plaintiff and any proposed guardian.

Rule 4:86-3A is a new rule which requires the Surrogate to review the complaint prior to

docketing to ensure that venue is proper and that all requirements of Rule 4:86-2 have been

met. If so, the Surrogate shall docket the complaint. If not, the Surrogate shall process the

complaint in accordance with Rule 1:5-6, which provides that an incomplete filing (for example,

filing fee is not included or document is not signed) may be stamped “received, but not filed”

and returned to plaintiff’s counsel. If the required correction is made and the documents

returned within ten days, the complaint will be deemed filed as of the first date received.

Paragraph (c) of this rule requires the Surrogate to make the complete guardianship file

available to the court upon request.

Rule 4: 86-4 addresses the provisions required in the Order for Hearing. The AOC has

created a form Order Fixing Guardianship Hearing Date, which can be found at

http://www.judiciary.state.nj.us/forms/12013_order_hearing_dt_guardian.pdf. The new rule,

in addition to the requirements contained in the old rule, provides that the Order for Hearing

must contain a provision requiring the proposed guardian to complete the AOC guardianship

training, which is a video that can be viewed online at njcourts.gov/guardianship as well as

57

http://www.judiciary.state.nj.us/forms/11920_adult_guard_cis.pdf

http://www.judiciary.state.nj.us/forms/12013_order_hearing_dt_guardian.pdf

guardianship training guides for both guardian of the person and guardian of the estate. In

addition, the new form of Order provides that the report of court-appointed counsel is due ten

days prior to the hearing date, rather than three days, and indicates whether or not the court-

appointed attorney is to be paid or whether it is a pro bono assignment.

This rule also delineates the duties of court-appointed counsel, and provides for the

appointment of a Guardian Ad Litem by the Court, if necessary. Finally, paragraph (e) provides

for the payment of fees to the attorney for the party seeking guardianship, appointed counsel,

and the guardian ad litem (if any) out of the estate of the AIP. Note, though, that there is no

authority to award fees for counsel privately retained by the AIP. See In re. D.W., 2016 WL

3981043 (N.J. Super. A.D. July 26, 2016 (not approved for publication).

Rule 4:86-5 changes the requirements for filing proof of service to ten days prior to the

hearing date. In addition, the proposed guardian must complete the guardianship training prior

to the hearing unless good cause is shown why it could not be completed. The rule requires

that the AIP attend the court hearing unless both the plaintiff and court-appointed counsel

certify that the AIP is unable to appear because of physical or mental incapacity. There is no

need for a judicial finding that the appearance of the AIP would be harmful to his or her health

or safety.

Rule 4:86-6 addresses the hearing and provisions of the Judgment of Incapacity. The

AOC has created a form Judgment of Incapacity, which can be found at

http://www.judiciary.state.nj.us/forms/11802_grdnshp_model_order.pdf. There is a separate

form of Judgment when only a guardian of the person has been appointed, located at

http://www.judiciary.state.nj.us/forms/11988_grdnshp_jdgmt_incap_person.pdf. The

58

http://www.judiciary.state.nj.us/forms/11802_grdnshp_model_order.pdf

http://www.judiciary.state.nj.us/forms/11988_grdnshp_jdgmt_incap_person.pdf

proposed form of Judgment must be filed with the Surrogate ten days before the hearing date.

Both the Rule and the form of Judgment provide that the guardian must qualify within thirty

days of appointment. The guardianship acceptance must include a provision acknowledging

that the guardian has completed the guardianship training.

The AOC’s form of Judgment includes provisions designed to preserve the dignity and

self-determination of the (now) incapacitated person, and requires the guardian to

• Ascertain and consider those characteristics of the incapacitated person which

define his/her uniqueness and individuality, including but not limited to likes,

dislikes, hopes, aspirations, and fears;

• Encourage the incapacitated person to express preferences and participate in

decision-making;

• Give appropriate deference to the expressed wishes of the incapacitated person;

• Protect the incapacitated person from injury, exploitation, undue influence, and

abuse;

• Promote the incapacitated person’s right to privacy, dignity, respect, and self-

determination; and

• Make reasonable efforts to maximize opportunities and individual skills to

enhance self-direction.

In addition, the Rule requires that the guardian file an inventory within 90 days, and file annual

accountings and reports of the incapacitated person’s well-being as provided in the Judgment

of Incapacity.

59

The form Judgment allows the judge to indicate which accounting form will be required

of the guardian. A formal accounting is the preferred method if the guardianship estate is

valued at over $5,000,000. The comprehensive accounting form, which can be found online at

http://www.judiciary.state.nj.us/forms/11801_grdnshp_comprehensive.pdf, is preferred for

guardianship estates valued between $1,000,000 and $5,000,000, while the EZ accounting form

(http://www.judiciary.state.nj.us/forms/11800_grdnshp_ez_accting.pdf) is preferred for

guardianship estates under $1,000,000. If the incapacitated person has no assets or income

other than Social Security, the form Judgment allows the judge to provide that a copy of the

Representative Payee report filed with Social Security may be filed in lieu of an accounting, as

long as the guardian is also the Representative Payee.

The Rule contains new provisions regarding the duties of the Surrogate in guardianship

matters. The Surrogate is directed to provide the complete guardianship file to the court for

review no later than seven days prior to the guardianship hearing. The Surrogate must notify

the court in the event that the guardian fails to qualify within thirty days; or, having qualified,

fails to timely file the required reports. Although the Surrogate is required to notify the court if

they receive information regarding “emergent allegations of substantial harm to the physical or

mental health, safety and well-being, and/or the property or business affairs, of an alleged or

adjudicated incapacitated person”, the Surrogate is under no obligation to review the

inventories, reports of well-being or annual accountings of the guardian, other than formal

accountings which are subject to audit.

Rule 4:86-7 was substantially changed to address the rights retained by an adjudicated

incapacitated person, including the right to be treated with dignity and respect; the right to

60

http://www.judiciary.state.nj.us/forms/11801_grdnshp_comprehensive.pdf

http://www.judiciary.state.nj.us/forms/11800_grdnshp_ez_accting.pdf

privacy; the right to equal treatment under the law; the right to have personal information kept

confidential; the right to communicate privately with an attorney or other advocate; the right

to petition the court to modify or terminate the guardianship and petition for access to funds to

cover fees and costs of the same; the right to request the court to review the guardian’s

actions, and to request removal and replacement of the guardian, and to request that the court

restore the adjudicated incapacitated individual to full or partial capacity. Paragraph (c)

provides that an incapacitated person, or an interested person on his or her behalf, may seek

review of a guardian’s conduct and/or review of a guardianship by filing a motion setting forth

the basis for the relief requested.

Rule 4:86-10, which deals with appointment of guardians for persons with

developmental disabilities, has been substantially amended. The first important change is that

the procedures outlined in the Rule apply not only to persons over age eighteen who are

receiving services through the Division of Developmental Disabilities (DDD), but also to those

who are eligible to receive services. N.J.S.A. 30:6D-24 defines “developmental disability” as

follows:

[A] severe, chronic disability of a person which: (1) is attributable to a mental or physical impairment or combination of mental or physical impairments; (2) is manifest before age 22; (3) is likely to continue indefinitely; (4) results in substantial functional limitations in three or more of the following areas of major life activity, that is, self-care, receptive and expressive language, learning, mobility, self-direction and capacity for independent living or economic self-sufficiency; and (5) reflects the need for a combination and sequence of special interdisciplinary or generic care, treatment or other services which are of lifelong or extended duration and are individually planned and coordinated. Developmental disability includes, but is not limited to, severe disabilities attributable to an intellectual disability, autism,

61

cerebral palsy, epilepsy, spina bifida and other neurological impairments where the above criteria are met.

Although one certification or affidavit must be from a practicing physician or licensed

psychologist, the rule change allows a copy of the Individualized Education Program (IEP)

prepared no more than two years prior to the filing of the complaint to be submitted in lieu of a

second certification, or a certification from a licensed care professional who has personal

knowledge of the AIP’s functional capacity. This change will make it easier for parents seeking

guardianship of their developmental disabled children to file the forms as pro se plaintiffs. In

addition, the Rule removes references to “mentally” incapacitated individuals, making it clear

that it also applies to physical incapacity.

62

Published 02/2017, CN 12011 (Certification of Assets) page 1 of 2

Filing Attorney Information or Pro Se Litigant:

Name

NJ Attorney ID Number

Law Firm/Agency Name

Address

Telephone Number

Superior Court of New Jersey

Chancery Division - Probate Part

In the Matter of, County

Docket Number

, Name of Alleged Incapacitated Person (AIP)

an Alleged Incapacitated Person

Civil Action

Certification of Assets

I, , of full age, hereby certify as follows:

This certification is made by me in support of an application for a declaration of incapacity for

. (Check one)

The alleged incapacitated person, , possesses no property, or

possesses only Social Security benefits, a State-funded Personal Needs Allowance, and/or funds held in

trust for his/her benefit. (Note: If you select this option, check “None” in the following schedules)

OR

The following schedules contain a complete and accurate statement and valuation of all real and personal

property and income of , based upon my diligent inquiry.

Schedule A: Real Property

None Unknown

All interests in real property including real property held in common or jointly with other(s) and, if held jointly,

describe the interest.

0

Schedule B: Stocks, Bonds, Mutual Funds, Securities and Investment Accounts

None Unknown

Include all interests in stocks, bonds, mutual funds, securities and investment accounts including interests held in

common or jointly with other(s) or in trust, and, if held jointly, describe the interest.

# Description (include name of financial institution, account type, number of shares or last four digits of account and date value fixed)

Face Value Market Value

1. $ $

2. $ $

Total Schedule B $ 0.00

# Description: Address (include county and state) Municipal Tax

Assessed Value Market Value

1. $ $

2. $ $

Total Schedule A $ 0.0

63

Published 02/2017, CN 12011 (Certification of Assets) page 2 of 2

Schedule C: Money on Hand None Unknown

Checking and savings accounts and certificates of deposit in banks and notes or other indebtedness due the

alleged incapacitated person.

# Description (include name of financial institution, account type, last four digits of account and date value fixed)

Value

1. $ 2. $

Total Schedule C $ 0.00

Schedule D: Pensions, retirement accounts None Unknown

IRA’s, 401(k), annuities, profit sharing plans, etc. Include last four digits of account.

# Description (include name of financial institution, account type, last four digits of account and date value fixed)

Value

1. $

2. $

Total Schedule D $ 0.00

Schedule E: Miscellaneous Personal Property

None Unknown

Tangible personal property, motor vehicles, recreation vehicles, employment bonus or award, interest in a

partnership or unincorporated business, articles or collections have either artistic or intrinsic value, etc.

# Description Value

1. $

2. $

Total Schedule E $ 0.00

Schedule F: Liabilities/Encumbrances

None Unknown

If any asset listed in this certification has a secured associated debt, such as a mortgage or a car loan, indicate

below. List all other debts.

# Description Encumbrance

Amount

1. $

2. $

Total Schedule F $ 0.00

Schedule G: Sources of Monthly Income

None Unknown

# Description Value

1. $

2. $

Total Schedule G $ 0.00

I hereby certify and say that the foregoing statements made by me are true to the best of my knowledge, and that I

will supplement this form as may be necessary should additional information become available. I am aware that

if any of the foregoing statements made by me are willfully false, I am subject to punishment.

Date Signature

Print Name

64

Published 02/2017, CN 12012 (Certification of Physician or Psychologist) page 1 of 2


Name



Address

Telephone Number

I, , (check one) M.D., D.O., Ph.D., Psy.D., of full age,

hereby certify as follows:

1. This certification is made by me in support of an application for a declaration of incapacity for

, an alleged incapacitated person.

2. was born on . S/He is years old. S/He

weighs pounds and is approximately in height. S/He has hair and

eyes.

3. Select one:

I am a (check one) physician psychologist licensed to practice in the State of . I

currently maintain an office at . I

am, and have been, in the actual practice of for years.

OR

I am an employee of the Division of Developmental Disabilities authorized to conduct

psychological evaluations as part of my duties.

4. I earned a degree in , from .

in . I received my license to practice in the State of in . My area of specialty is

.

5. I examined the alleged incapacitated person on . This examination took place at

.

6. Select one:

I have been treating the alleged incapacitated person for ,

since .

OR

I am not treating the alleged incapacitated person for , but have

merely examined her/him for the purpose of evaluating her/his mental capacity.

In the Matter of,



County

Docket Number

, Name of Alleged Incapacitated Person (AIP)


Civil Action

Certification of

Physician or Psychologist

65

Published 02/2017, CN 12012 (Certification of Physician or Psychologist) page 2 of 2

7. During my examination, I observed that s/he was (describe findings or attach report)

8. As a result of my examination and a review of her/his history, my diagnosis is . The prognosis for recovery is .

9. In my opinion, the alleged incapacitated person is:

unfit and unable to govern herself/himself and to manage her/his affairs in all areas.

OR

unfit and unable to govern herself/himself and to manage her/his affairs in some areas but does

have capacity in the areas listed below (select all that apply):

medical decision making legal decision making residential decision making

educational decision making vocational decision making financial decision making

other (please describe)

10. My opinion is based upon the examination of the alleged incapacitated person, and the history of

her/his condition. The factual basis for my diagnosis and prognosis, and my opinion as to any areas

in which the individual retains capacity, is: (describe or attach report)

11. It is my opinion that the alleged incapacitated person (check one) is is not capable of

attending the court hearing in this matter. If the alleged incapacitated person is not capable of

attending the court hearing the following are the reasons for the individual’s inability:

12. I am not related either through blood or marriage, to the alleged incapacitated person, nor to a

proprietor, director or chief executive officer of any institution for the care and treatment of the

mentally ill in which the alleged incapacitated person is living or in which it is proposed to place

her/him; nor am I professionally employed by the management thereof as a resident physician or

psychologist; nor am I financially interested therein.

I hereby certify and say that the foregoing statements made by me are true to the best of my

knowledge, and that I will supplement this form as may be necessary should additional information

become available. I am aware that if any of the foregoing statements made by me are willfully false,

I am subject to punishment.

Date Signature

Print Name

66

Published 02/2017, CN 11920 (Adult Guardianship CIS)

New Jersey Judiciary

Adult Guardianship

Case Information Statement Use for initial Chancery Division Probate Part Pleadings under Rule 4:5-1

Pleading will be rejected for filing, under Rule 1:5-6(c), if information is not

completed or signature is not affixed

For Chambers or Surrogate’s Office Use Only

Date Filed:

Docket Number:

Chambers:

Surrogate’s Office:

Plaintiff Alleged Incapacitated Person (AIP): Name (last, first, middle initial) Name (last, first, middle initial)

Address: Street Address: Street

City State Zip City State Zip

Age Telephone Relationship to AIP Date of Birth Social Security Number

Case Type

Title 30 (DDD) Title 3B (DD) Title 3B (All Others)

Is the Plaintiff the proposed guardian? Yes No

Are any other person(s) proposed guardian(s)? Yes No

All person(s) proposed as guardian(s): (Attach additional sheets if necessary to list all proposed guardian(s))

Name (last, first, middle initial) Name (last, first, middle initial)



Age Telephone Relationship to AIP Age Telephone Relationship to AIP

Other person(s) or entities to be noticed: (Attach additional sheets if necessary to list all parties to be noticed, including DDD

Administrator and County Adjuster, if applicable)

Name (last, first, middle initial) Name (last, first, middle initial)



Age Telephone Relationship to AIP Age Telephone Relationship to AIP

Does any party need an interpreter? If yes, for whom and for what language?

Yes No

Does any party need an accommodation for a disability? If yes, please identify the party and requested accommodation

Yes No

I certify that I have completed this form to the best of my knowledge and ability, and will supplement this form as may be necessary should additional information become available. I further certify that, except as required on this page, confidential personal identifiers have been redacted from documents now submitted to the court, and will be redacted from all documents submitted in the future in accordance with Rule 1:38-7(b).

Date Attorney/Plaintiff Signature

67

Published 02/2017, CN 12013 (Order Fixing Guardianship Hearing Date and Appointing Attorney for AIP) page 1 of 2


Name



Address

Telephone Number

THIS MATTER having been opened to the court by , plaintiff(s), for a

judgment declaring , an incapacitated person and appointing a guardian of

the person and/or estate (property) pursuant to applicable New Jersey statutes and Rules of Court, and for such

other relief as the court may deem just, and the court having read and considered the verified complaint, the

supporting certifications or affidavits, and all other papers and pleadings filed in this matter, and for good cause

shown:

IT IS on this day of , 20 , ORDERED that:

1. This matter be set down for hearing before this court at the County Courthouse, , New Jersey on the day of , 20 , at a.m. p.m. or

as soon thereafter as plaintiff may be heard, to determine the issues of incapacity of

and the appointment of a guardian.

2. A copy of the verified complaint, supporting affidavits or certifications and this Order, shall be served on

the alleged incapacitated person, by personally serving the same at least 20 days prior to the date scheduled for the

hearing.

3. A separate notice shall be personally served on the alleged incapacitated person stating that if he/she

desires to oppose the action he/she may appear either in person or by attorney and may demand a trial by jury.

4. A copy of the verified complaint, supporting affidavits or certifications and this Order shall also be served

on all the next-of-kin and other parties-in-interest identified in the verified complaint by certified mail, return

receipt requested at least 20 days prior to the date scheduled for the hearing. If applicable, a copy of the verified

complaint, supporting affidavits or certifications and this Order shall be served on the County Adjuster and the

Regional Administrator for the Division of Developmental Disabilities.

5. , Esquire office address ,

telephone number , be and hereby is appointed as attorney for the alleged incapacitated person.

Said attorney shall personally interview the alleged incapacitated person, examine the medical records, make

inquiry of persons having knowledge of the alleged incapacitated person’s circumstances, his/her physical and

mental state and his/her property, make reasonable inquiries to locate any Will or other testamentary substitutes,

powers of attorney or health care directives previously executed by the alleged incapacitated person, or to

In the Matter of,

,




County

Docket Number

Civil Action

Order Fixing Guardianship Hearing

Date and Appointing Attorney for

Alleged Incapacitated Person

69

Published 02/2017, CN 12013 (Order Fixing Guardianship Hearing Date and Appointing Attorney for AIP) page 2 of 2

discover any interests the alleged incapacitated person may have as a beneficiary of a will or trust. Said attorney

shall prepare a written report of findings and recommendations (and, if applicable, an affidavit of services) to be

filed with the Court and with the plaintiff(s) and other parties who have filed a written response at least ten (10)

days prior to the hearing.

SELECT ONE:

The attorney appointed to represent the alleged incapacitated person is appointed pro bono (without cost);

OR

The attorney appointed to represent the alleged incapacitated person is to be paid. Pursuant to

R. 4:86-4(d), the court may direct that counsel be paid from the assets of the alleged incapacitated person,

or if such assets are insufficient, then from the party seeking guardianship or otherwise.

6. If the alleged incapacitated person obtains counsel other than that appointed by the above paragraph, such

counsel shall notify the court and appointed counsel at least ten (10) days prior to the hearing date.

7. A copy of the verified complaint, supporting affidavits or certifications and this Order shall be

immediately served on the attorney for the alleged incapacitated person by personal service, certified mail, return

receipt requested. If acceptable to the court-appointed attorney, service may be via facsimile, by regular mail,

and/or by email.

8. The attorney above appointed to represent the alleged incapacitated person is hereby regarded as a

HIPAA (Health Insurance Portability and Accountability Act) representative for the alleged incapacitated person

and shall have the right and power to examine complete medical records, including medical and psychiatric

records and written charts, pertaining to the alleged incapacitated person, and to visit and confer with the alleged

incapacitated person.

9. The attorney above appointed to represent the alleged incapacitated person shall have the right and power

to examine financial and legal documents and records pertaining to the alleged incapacitated person.

10. The plaintiff shall file with the County Surrogate a proof of service of the pleadings required by this order

to be served on the alleged incapacitated person and the parties in interest no later than ten (10) days before the

date this matter is scheduled to be heard.

11. Any next-of-kin and other party-in-interest who wishes to be heard with respect to any of the relief

requested in the verified complaint shall file with the Surrogate of County at the following location:

, together with the applicable filing fee and serve upon the

attorney for the plaintiff and the attorney for the alleged incapacitated person at the address set forth above, a

written answer, an answering affidavit, a motion returnable on the date this matter is scheduled to be heard or

other written response ten (10) days before the date this matter is scheduled to be heard.

12. If applicable, any proposed guardian shall complete guardianship training as promulgated by the

Administrative Director of the Courts, by viewing or otherwise reviewing the Court Appointed Guardian Tutorial

posted on the Judiciary’s website at njcourts.gov/guardianship and receiving copies of the relevant guardianship

training guide(s).

J.S.C.

70

http://www.njcourts.gov/guardianship/

Revised: 02/2017, CN 11802 (Judgment of Incapacity and Appointment of Guardian(s) of the Person and Estate) page 1 of 3


Name



Address

Telephone Number

THIS MATTER being opened to the Court by , plaintiff(s), by and through

his/her attorney, in the presence of ,

attorney for the then alleged incapacitated person, and , the then alleged

incapacitated person, and no demand having been made for a jury trial, and the Court sitting without a jury having

found from the report of counsel together with the report of the examining physician or psychologist and other

supporting document and proofs given that is an incapacitated person who

lacks sufficient capacity to govern himself/herself or to manage his/her affairs, and it further appearing that

, consents to serve as Guardian(s) of the Person and Estate (Property) of

, and for good cause shown:

IT IS on this day of , 20 , ORDERED AND ADJUDGED that:

1. GUARDIANSHIP TYPE: is an incapacitated person and is unfit and unable to govern himself/herself and manage his/her affairs. This is a guardianship:

As to the Person General Limited As to the Estate General Limited

Limited Guardianship: The incapacitated person is able at this time to govern himself/herself and manage

his/her own affairs with respect to the following areas:

Check if applicable:

The subject of this guardianship is incapacitated as a result of developmental disability.

Firearms: Pursuant to 18 U.S.C. 922(g)(4), the incapacitated person does not retain the right to possess

firearms.

2. GUARDIAN APPOINTMENT: be and hereby is/are appointed

Guardian(s) of the Person and Estate of the incapacitated person and that Letters of Guardianship of the

Person and Estate be issued upon his/her/their (a) qualifying according to law, (b) acknowledging to the

Surrogate completion of guardianship training and receipt of the guardianship training guides, and (c) unless

waived for extraordinary reasons, entering into a surety bond unto the Superior Court of New Jersey in the

In the Matter of:

,

an Incapacitated Person



County

Docket No.

Civil Action

Judgment of Incapacity and

Appointment of Guardian(s) of the

Person and Estate

71


amount of $ , which bond shall contain the conditions set forth in N.J.S.A. 3B:15-7 and

R. 1:13-3. The court shall approve the bond as to form and sufficiency.

3. Upon qualifying, the Surrogate shall issue Letters of Guardianship of the Person and Estate to

and thereupon the guardian(s) be and hereby is/are authorized to

perform all the functions and duties of a Guardian of the Person and Estate as allowed by law, except as

limited herein or in areas where the incapacitated person retains decision making rights.

4. In exercising the authority conferred by this Judgment, the guardian(s) shall:

• Ascertain and consider those characteristics of the incapacitated person which define his/her uniqueness

and individuality, including but not limited to likes, dislikes, hopes, aspirations, and fears;

• Encourage the incapacitated person to express preferences and participate in decision-making;

• Give appropriate deference to the expressed wishes of the incapacitated person;

• Protect the incapacitated person from injury, exploitation, undue influence, and abuse;

• Promote the incapacitated person’s right to privacy, dignity, respect, and self-determination; and

• Make reasonable efforts to maximize opportunities and individual skills to enhance self-direction.

5. GUARDIAN LIMITATIONS: If applicable, the authority of the guardian(s) is limited as follows, and all limitations shall be stated in the Letters of Guardianship.

The Guardian(s) of the Estate may not alienate, mortgage, transfer or otherwise encumber or dispose of

real property without court approval.

6. The guardian(s) appointed hereunder shall be considered the personal representatives under the Standards for Privacy of Individually Identifiable Health Information ("Privacy Rule") issued pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), and shall have full and complete access to all records of the incapacitated person.

7. INVENTORY: The Guardian(s) shall file with the Court an inventory of all of the incapacitated person’s property and income, along with a Report of Guardian Cover Page, within 90 days. Said inventory shall be available for inspection by any party in interest in this guardianship action, upon request to the Surrogate’s

Court to review the inventory.

8. REPORTING AS TO PERSON:

, as Guardian(s) of the Person, is/are hereby directed to file annually

a report of the well-being of the incapacitated person, along with a Report of Guardian Cover Page.

OR

The filing of a report of well-being is hereby waived for the reasons stated on the record.

9. REPORTING AS TO ESTATE (PROPERTY):

, as Guardian(s) of the Estate, is/are directed to file annually, along

with a Report of Guardian Cover Page..

Formal accounting (presumptive if guardianship estate valued over $5,000,000);

Comprehensive accounting (presumptive if guardianship estate valued $1,000,000 - $5,000,000);

EZ accounting (presumptive if guardianship estate valued under $1,000,000); or

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Copy of the Social Security Representative Payee Report (presumptive if guardian is also

representative payee for Social Security benefits and incapacitated person has no other assets or

income);

OR

The filing of a Periodic Accounting is hereby waived for the reasons stated on the record.

If an informal accounting is ordered, said Periodic Accounting does not replace or satisfy the duty to file and

bring on for approval a formal accounting as required by law or as ordered by the court.

10. The report(s) indicated in paragraphs 8 and/or 9 above is/are to be filed not later than fourteen (14) days after

the anniversary date of this judgment with the County Surrogate. The report(s) to be filed by the guardian(s)

shall be filed by the Surrogate and shall be made available by the Surrogate to any party in interest entitled to

review pursuant to R. 1:38-3(e), as well as to the following parties or persons: ,

and the reference in this Judgment shall constitute a showing of a special interest as required by R. 1:38-3(e)

for the purpose of reviewing such reports.

11. The Guardian(s) of the Person and Estate is/are hereby directed to advise the County Surrogate within ten (10)

days of any changes in the address or telephone number of himself or herself or the incapacitated person or

within thirty (30) days of the incapacitated person’s death or of any major change in status or health. If the

incapacitated person dies during the guardianship, the Guardian(s) will notify the Surrogate in writing and

forward a copy of the death certificate upon receipt.

12. The Guardian(s) of the Person and Estate is/are agent(s) of the court and shall cooperate fully with any court staff, Surrogate staff, or volunteers until the guardianship is terminated by the death or return to capacity of the incapacitated person, or the Guardian’s death, removal or discharge.

13. COUNSEL FOR INCAPACITATED PERSON:

The court-appointed attorney for the alleged incapacitated person, having reported to the court and

advocated on behalf of the incapacitated person, is hereby discharged with the appreciation of the court

for his or her pro bono services, with no further obligation to act as attorney for the incapacitated person.

OR

The court having reviewed the affidavit or certification of services of ,

Esquire, previously filed with the court, the Guardian of the Estate shall, within days of the date of

this Judgment, pay , Esquire, court-appointed attorney for the then

alleged incapacitated person, a fee of $ for professional services rendered and $

for expenses incurred, which disbursements from the funds of the incapacitated person’s estate are hereby

approved. Court-appointed counsel, having reported to the court and advocated on behalf of the

incapacitated person, be and hereby is discharged with no further obligation to act as attorney for the

incapacitated person.

14. Any power of attorney previously executed by the incapacitated person be and hereby is revoked. Any advance directive for healthcare previously executed by the incapacitated person is voided as to proxy designation, but the guardian(s) shall consider the preferences expressed in such advance directive.

15. Plaintiff(s) shall serve a Judgment upon the Guardian(s) and all interested parties and attorneys of record within seven (7) days of receipt.

J.S.C.

73

Revised 02/2017, CN 11800 (EZ Accounting) page 4 of 6

Notice to Interested Parties: Interested parties should act to protect the welfare and/or finances of an adult

incapacitated person under legal guardianship. Within the time and in the manner provided by law, interested

parties may file a motion to object to actions taken by the guardian or to seek review of the guardianship.

Although some guardianship reports are subject to review by authorized Judiciary and/or Surrogate personnel,

interested parties remain responsible for requesting court review as to any misstatements or misconduct by a

guardian.

If you are Guardian of the Estate, Complete the Following Questions

Guardian’s Name: Docket Number:

Incapacitated Person’s Name:

A. If a bond is required, is one filed that covers this period? Yes No NA

B. Have you identified, traced and collected all of the incapacitated person’s assets Yes No NA

since your appointment? If No, please explain.

C. Have all of the incapacitated person's past and current state and federal tax returns Yes No NA

been prepared and filed and all tax payments made? If No or N/A, please explain.

PART I. Income and Disbursements

SUMMARY

1. Beginning Cash Balance

2. SCHEDULE A-EZ: Income 0.00

3. SCHEDULE B-EZ: Disbursements 0.00

4. Ending Cash Balance (Add lines 1 & 2 and subtract line 3) 0.00

Schedule A --EZ: INCOME

#

Source of Income (e.g. employment, social security)

Description (e.g. 12 months times $ amount, or lump sum of $

amount, etc.)

Total Income

Amount

1

2

3

4

5

Total Income Received (Schedule A: Income) 0.00

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Schedule B --EZ: DISBURSEMENTS

# Category Payment Date/Period Payee Amount Spent

1

2

3

4

5

Total All Disbursements (Schedule B-EZ: Disbursements) 0.00

PART II. Assets

List all assets in which the incapacitated person has an interest, including interests held in common or

jointly with other(s) and, if held jointly, describe the interest. State whether the ownership or title of

the property has changed since the last report to the court (prior EZ Accounting, Inventory, or

Affidavit of Assets).

Schedule A – Real Property

Has the ownership of the property changed since the inventory or last report?

If Yes, list the property and the disposition of same:

Yes

No

NA

Schedule B – Stocks, Bonds, Mutual Funds, Securities and Investment Accounts

Has the ownership of the property changed since the inventory or last report?


Yes

No

NA

Schedule C – Money on hand, checking and savings accounts and certificates of deposit in banks and

notes or other indebtedness due the incapacitated person.

Has the ownership of the property changed since the inventory or last report? Yes No NA


Schedule D – Pensions, retirement accounts (IRA’s, 401(k), annuities, profit sharing plans, etc.

Has the ownership of the property changed since the inventory or last report? Yes No


NA

Schedule E – Miscellaneous Personal Property – (tangible personal property, motor vehicles,

recreation vehicles, etc.).

Has the ownership of the property changed since the inventory or last report? Yes No


NA

NOTE: The Judiciary’s Guardian Support/Guardianship Monitoring Program webpage, found at

www.njcourts.gov/guardianship, features general court information, forms, frequently asked

questions, and helpful links.

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http://www.njcourts.gov/guardianship/


Is information or assistance, whether from the court or a community

agency, required? If Yes, please describe:

Yes No

Optional:

In addition to the information provided above, the court should be aware of the following issues related

to the incapacitated person and/or the guardianship:

CERTIFICATION

, certifies that I/we am/are the Guardian(s) of the within named (insert your name)

incapacitated person and that the attached report of well-being is to the best of my/our personal knowledge,

complete and true statement of my/our activities as Guardian(s). I/we will supplement this form as may be

necessary should additional information become available. I/We am/are aware that if any of the foregoing

statements are willfully false, I/we am/are subject to punishment.

Date Signature of Guardian

Print Name

If applicable: Date Signature of Co-Guardian

Print Name

If applicable: Date Signature of Co-Guardian

Print Name

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Negotiating Charitable Gifts and Bequests:

Naming Rights, Standing for Enforcement and More

John L. Pritchard, Esq.

I. Enforceability of Pledges to Charities.

A. Pledges enforceable in New Jersey, based upon public policy, even though there is no consideration. More Game Birds in America, Inc. v. Boettger, 125 N.J. Law. 97, 101 (E.&A. 1942).

B. And even the Statute of Frauds is no defense to prevent the enforcement of a charitable pledge. Jewish Federation of Central New Jersey v. Barondess, 234 N.J. Super. 526, 528-529 (Law Div. 1989).

C. In most other jurisdictions, the lack of consideration means that charitable pledges are not enforceable. See “Lack of Consideration as Barring Enforcement of Promise to Make Charitable Contribution or Subscription - Modern Cases” 86 ALR4th 241 (1991; Supp. 2001).

D. In New York, if there is no consideration, detrimental reliance by the charity will be required in order to enforce a charitable pledge. In re Kramer, 2016 N.Y. App. Div. Lexis 4110 (2d Dept. 2016), aff’g 36 Misc. 3d 1207(A) (Sur. Ct. Kings Co. 2012).

E. A variety of tax and compliance problems can theoretically be caused if an enforceable pledge is not enforced.

F. Other charitable entities, such as a “Donor Advised Fund”, may not be used, or should not be used, to satisfy a donor’s legal obligation.

II. Naming Rights.

A. At what point, or under what circumstances can something be renamed?

B. For how long will the name remain?

C. May a renovation or addition justify a new name, or a competing name?

D. Return of funds, if terms violated? Or go to another charity?

E. Even if an asset is transferred to new entity, does the obligation continue?

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F. If the gift furthers the charitable mission, the ego benefit to the donor should not be considered to cause the charitable deduction to fail.

G. “Unnaming” policies may be required by the donee to protect their reputation and in the event of a scandal involving the honored donor.

III. Reversions.

A. A charitable deduction under IRC 170 generally requires a completed irrevocable gift.

B. Examples of permissible restrictions are found in Treas. Reg. § 1.170A-1(e).

C. A retained right to place restrictions after the gift is made could cause the gift to be considered to be incomplete.

D. A possible reversion back to the donor upon the failure of a condition will cause the gift to be nondeductible, unless the reversion is "so remote as to be negligible." Treas. Reg. § 20.2055-2(b)(1).

E. The phrase "so remote as to be negligible" is considered to mean a "chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction", and "so highly improbable and remote as to be lacking in reason and substance. Briggs v. Commissioner, 72 T.C. 646 (1979).

F. Rather than causing a reversion, the documents could provide that a violation of the conditions will trigger a gift over to another charitable organization.

IV. Investment by Organization.

A. “Internal mutual fund”.

B. Annual reports.

V. Review of an Organization’s “Standard Contract”.

A. Objectionable terms.

B. “Variance power”.

C. Release from any future liability or actions.

D. Indemnification.

E. Hold harmless.

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F. Availability of cy pres, or specific alternative if not practical?

G. Rather than cy pres, and rather than a reversion, should there be a gift over to another entity?

H. Rather than cy pres, there could be a reversion back to a charitable organization, which was actually the donor, which could receive the gift, without triggering the adverse consequences of a reversion to the individual who was really the source of the gift, or his estate.

VI. Awards Named for the Donor.

A. The terms of the agreement can describe:

1. Name of the award

2. Nature of the recognition, such as a plaque, “lucite”, or silver serving tray.

3. Who decides the recipient.

4. Who may or may not receive the award. It may be advisable to specify that the award goes to some form of a “front line” persons, to prevent the board members from giving it to each other.

5. How many years it will be awarded. The organization might thereafter continue to make the award, as the employees, staff, volunteers, etc. “buy into” the name, and the significance of the award.

B. Tends to grow in prestige, as limited plums.

C. Inexpensive, and usually not in competition for naming rights.

VII. Standing to Enforce.

A. Does the donor, his estate, his family, his charitable foundation, have standing to enforce an agreement or conditions? The traditional view is that a gift for the benefit of the public leaves only the attorney general the power to enforce.

B. In New Jersey, if the donor has not retained any rights, the donor, “as the founder of the charity, has a standing to appear in court to restrain the diversion of the property donated from the charitable uses for which it was given.” Mills v. Davison, 54 N.J.Eq. 659, 667 (E.&A. 1896). In this case the donor was still surviving.

79

C. In Smithers v. St. Luke's-Roosevelt Hospital Center, 723 N.Y.S.2d 426 (App. Div. 2001), it was held that the personal representative of the decedent’s estate had standing to enforce the terms of a gift.

VIII. Techniques in Drafting and Planning.

A. Leave the recipient organization open, to be decided by executor or trustee after death, based upon which organization will give the best naming rights

B. Leaving the recipient open prevents the organizations from an aggressive review of the administration of the estate, as they have no enforceability rights, and executor deals with “development” persons, rather than the organizations attorneys

C. Good and specific identification of organization.

D. Variance power in the executor, if there are tax problems, if the charity no longer exists, if the charity does not qualify for a tax deduction, or any ambiguity in the identification of the donee organization.

E. Identify who will have the power of enforcement, as a condition, or as part of an agreement.

F. Authorize the executor or trustee to enter into an agreement which such fiduciary finds acceptable.

G. Identify an organization created under the law of a U.S. state, which supports a foreign charity, or no deduction may be allowed.

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DONATION AGREEMENTSCHOLARSHIP FUND

THIS AGREEMENT is made and entered into on this . day of , 20 , between(the Donor) and the

noii-profil corporation (the Foundation).

IT IS AGREED:

TRANSFER. The Donor hereby gives, assigns, transfers, and delivers to the Foundation, the sum of: $____ .This property and all future gifts and other additions (the Property) shall he held, administered, and distributed in accordance with thisAgreement.

SEGREGATION OF FUNDS. The Properly shall he held hy the Foundation under the name of

Scholarship Fund (the Fund). The income and principal of the Fund may he either commingled with other Foundation assets or heldin a separate account.

PURPOSE OF THE FUND. To provide financing of scholarships according to the criteria detailed in Attachment A to thisAgreement.

CHARITABLE USE. The principal and income from the Fund shall be granted or expended for or in furtherance of the purposes ofthe Fund. The applicable laws and governing instruments of the Foundation require that the Foundation have legal control over thedonated property. If the purpose for which the Fund was established is no longer possible or practical, after consultation with theBoard of Directors, the Foundation may designate an alternate use or uses similar to the original purpose of the Fund. No restrictionor condition is or will be imposed upon the administration of this Fund which prevents the Foundation from freely and effectivelyemploying the assets or income therefrom in furtherance of charitable purposes.

VARIANCE POWER. The Board of Directors of the Foundation assures that (lie assets which establish this fund and the future valueof those assets w i l l be reserved for the charitable purposes of the community or area served by giving the Board of Directors of theFoundation the power to: (a) receive gifts from any source, whether such gifts be permanent or temporary, or reject gifts in accordancewi th the Foundation's G i f t Acceptance Policy and Investment and Spending Policy; (b) modify fund restrictions and conditionsthrough the exercise of i t s variance power; notwithstanding any provision in the Bylaws or in any instrument making a transfer,creating or adding to a fund or trust of the Foundation. Such power shall include the authori ty (i) to vary the terms of any gift as wellas the power to modify any restriction or condition on the dis t r ibut ion of funds for any specified charitable purposes or to specifiedorganizations if in the sole judgment of the governing body (without the necessity of the approval of any participating trustee,custodian, or agent), such restriction or condition becomes, in effect, unnecessary, incapable of fu l f i l lment , or inconsistent with thecharitable needs of the community or area served; and ( i i ) to replace any Trustee, Custodian or Agent for breach of fiduciary dulyunder the laws of (he Slate of

ADMINISTRATIVE FEE: The Foundation shal l assess a reasonable fee for establishing and administering the Fund based on thecurrent fee schedule for Funds as published by the Foundation. The administrative fee w i l l be taken from the income generated by theFund.

WITNESS THE EXECUTION HEREOF as of the day and year first above written.

DONOR(S):

81

SAMPI.H * SAMPLF • SAMPI.F * SAMPLF ; SAMPI.F * SAMPLF *

DONATION A<;RKEMENT

ATTACHMENT A

SCHOLARSHIP FUNDSCHOLARSHIP RECIPIENT SELECTION CRITERIA

At least one scholarship recipient shall be selected at the end of each school year.

The recipient shall be a

The annual scholarship amount to be awarded shall be $ . However, if at some future time,the Fund becomes large enough to be an endowment fund, the annual scholarship amount shall bedetermined by the guidelines used at such time by the Foundation for annual disbursements fromendowment funds, thereby allowing the Fund to remain in perpetuity.

Disbursement of the scholarship shall be after and prior to

The scholarship must be used tor

The recipient shall be a

Special consideration shall be given to



A standard application form used by the Foundation shall be completed by each applicant.

The recommended recipient shall be submitted for approval to theFoundation by .

(DONOR) shall be notified as to the selected recipient prior to publicannouncement or payment of the scholarship award.

82

Scholarship Agreement

with

83

Agreement

This Scholarship Aareement ("Agreement") is made as of by andbetween the 1 ; " ••"• ' " not-for-profitcorporation with its principal office^ located at

and tht , a private foundation with anaddress at ("Grantor").

WHEREAS, Grantor desires to establish theScholarship Program (the "Program"); and,

WHEREAS, UNCF has agreed to administer said Program in accordance with thefollowing terms and conditions.

NOW THEREFORE, in consideration of the mutual covenants contained herein,UNCF and Grantor hereby agree to be legally bound as follows:

ARTICLE IDescription of Grant

Program Name:

Grantor (name and address):

Grantee:

Amount of Grant:

Term: Perpetual

To provide scholarships to financially challengedPurpose of Grant: college students during their sophomore, junior

or senior years in college.

84

ARTICLE IIProgram Description

1. Purpose

The Grant shall be used solely to establish the Program—which shall be anendowed scholarship program that will provide an annual pool ofscholarship funds based or current endowment spending policy.The spending policy allows ' to award scholarships equal to five (5%)percent of the average endowment market over the past twelve (12)quarters. The spending amount is limited to accumulated earnings on theendowment. Under no circumstances should pay scholarshipawards from the endowment principal amount.

2. Program Administration

a. Grantor shall provide the Grant to : in the amount of and inaccordance with the payment schedule in this Agreement.

b. shall administer and manage the Program which includesonline applications, applicant relations, awarding, and reporting.

c. The . Donor Relations Team will be responsible foradministering the Program. A team member will serve as the primarycontact for Grantor and will be the project leader directing all aspectsof the Grant's fulfillment.

d. _ shall preliminarily screen all applications to ensure they are incompliance with the Program. " shall then select the awardees.Awardees will be notified in writing by '

e. Scholarship funds shall be released by to the awardrecipients' college or university upon confirmation of studenteligibility,

f. •' shall receive an administration fee equal to ten percent (10%)of the amount annually distributed.

3. Selection Criteria

a. Applicants for the Program must meet the following criteria:

i. Possess a minimum cumulative grade point average of 3.0 ona 4.0 scale.

ii. Complete a Free Application for Federal Student Aid("FAFSA") form. (Required for need based programs.)

85

iii. Have a demonstrated, unmet financial need as verified bytheir college or university. (Required for need basedprograms.)

iv. Preference will be given to students of color.

v. Be an undergraduate student who is sophomore, junior orsenior at a '

vi. Be an undergraduate student who is majoring in fashion,fashion marketing, or some other very similar major, such astextile and apparel design.

4. Application Process

Students shall submit an online application for the Program, complete witha letter of recommendation, a one-page personal statement of careerinterest, and a current transcript. The application shall be available via

? website at Al! application materials must bereceived by the applicable

86

5. Timeline

The parties shall administer the Program in accordance with the proposedtimeline below:

Date Activity

2017 and go forward

April 2017 Application opens.

June 2017 Application closes.to read, rank, and select

June 2017 finalists ' • informs Grantor of theranked rinansts.

verifies students' eligibility viainstitution's financial aid office, selects

. . . i™*-*- the recipients, provides the names ofJuly-August 2017 . . ^ . ~ . *•*• - - *' a recipients to Grantor, notifies recipients

of award, and sends funds torecipients' institutions.

^ , „-,,,-, Annual report to the Grantor to includeDecember 2017 . . ,, . , . , ..recipients contact information.

ARTICLE IIIGeneral Conditions

1. Grant

Grantor shall pay 5 • on or before ~ - for the Program.

Budget: Interest earnings shall be determined annually and theadministrative fee assessed. The remaining balance shall be available fordistribution and divided evenly into two (2) scholarship awards to bedisbursed based on the eligibility criteria.

2. Accounting & Record Keeping Requirements

shall maintain vouchers, bills, invoices, cancelled checks, receiptsand other records ("Materials") which document the receipt anddisbursement of funds for this Program for at least three (3) years followingthe final disbursement of funds. Grantor may examine, upon reasonablenotice and during normal .. business hours, such Materials or Grantormay request copies of such Materials at its expense. Grantor may alsorequest an audit of Program Materials at its expense. All Materials with

87

respect to this Program shall, to the extent permitted by law, remainconfidential and ' and Grantor shall, except as required by law, refrainfrom disclosing any such records without the written consent of the otherparty.

3. Reporting

a. shall furnish Grantor with written reports on the progress ofthe Program and the financial management of the Grant funds.

b. These written reports shall be provided once annually inclusive ofthe student's contact information to the Grantor. The Grantor willsend a small brochure which describes the life o f '

4. Expiration or Termination of Program

a. Endowed scholarship programs are perpetual and shall continue aslong as there are funds to distribute.

i. In the event it become impossible or impractical for , todisburse the scholarship funds in accordance with the Grantpurpose for whatever reason, the remaining funds shall bereturned to the Grantor.

b. Upon the expiration of this Agreement and Program, , shallprovide a written report in accordance with Article 111, § 3 of thisAgreement within thirty (30) days of the expiration date.

5. Indemnification

a. Grantor will at all times indemnify, defend, and hold harmless .including its officers, directors, employees and agents thereof fromand against any and all claims, damages, liabilities, costs andexpenses (including, without limitation, reasonable attorneys' fees)(hereafter "Claims"), arising under this Agreement, including but notlimited to Claims arising from or related to Grantor's termination ofthe Program; Grantor's withdrawing or withholding funding for theProgram after has allocated, promised, or committed funds;any breach by Grantor of any representation, warranty or agreementmade herein; and Grantor's negligence or misconduct. Grantor shallhave no obligation to indemnify for any Claims that are theresult of ' negligence or willful misconduct.

b. Notwithstanding anything to the contrary contained herein, neither

88

nor Grantor shall under any circumstances be liable forconsequential, incidental, punitive, special, exemplary or indirectdamages, or lost profits in connection with claims made by any party,regardless of the form of action, or whether in contract or tort.

c. The above indemnification shall not prevent any action by theGrantor to enforce the provisions of this Agreement, or through anyarbitration if applicable.

6. Relationship of the Parties

Despite the use of the term "Partner" or "Partnership" in this Agreement orelsewhere, nothing herein shall be construed as creating a partnership, jointventure or employment relationship between the parties or other groupsidentified in this Agreement. Except as expressly provided for herein, neitherparty is authorized to act as an agent or to contract for the other in any way.

7. Publicity & Recognition

a. Neither party may use the name, trade name, trade mark or servicemark of the other party without the prior written approval of that party.Notwithstanding the foregoing, the parties may identify the name ofthe other party as the grantor or administrator of the Program inpromotion, marketing and application materials.

b. Grantor hereby gives • permission to publicly recognize theGrant and this Program in its annual report, on its website, and invarious other of its publications.

c. Any news releases with respect to the Grant shall be coordinatedwith the Grantor. No press release shall be issued without theapproval of both parties.

d. For any students who receive the scholarship, • will provide thestudent's contact information to the Grantor. The Grantor will senda small brochure which describes the life of

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8. Notices

Notices under this Agreement shall be provided in writing and shall bedeemed given when delivered or mailed by registered or certified mail asfollows:

If to If to Grantor

With a copy to: With a copy to: (if applicable)

9. Compliance with Tax Laws

' and Grantor agree to work cooperatively to execute and deliver toeacn other any documentation necessary or required for compliance withapplicable Internal Revenue Service regulations governing disclosure andreporting of charitable contributions and educational scholarships, includingbut not limited to, Internal Revenue Code Sections 4966, 4945, and 117.

10. Arbitration

The parties shall exercise good faith and fair dealing in interpreting andadministering this Agreement. Any controversy or claim arising out of orrelating to this Agreement or breach thereof shall be settled by arbitration inaccordance with the rules and procedures of the American ArbitrationAssociation and the judgment rendered by such Arbitrator(s) may beentered in any court having jurisdiction.

90

11. Governing Law

This Agreement shall be governed in all respects, interpreted and enforcedby and under the laws of the District of Columbia, without regard to theapplicable conflict of laws principles thereof. The District of Columbia shallbe the sole venue for any legal action or lawsuit relating to this Agreementand Grantor waives any claim of lack of jurisdiction or forum nonconveniens.

12. Counterparts

This Agreement may be signed and delivered in counterparts and viafacsimile or electronic signature, all of which together shall be treated as anoriginal.

13. Entire Agreement

This Agreement, including any attachments or exhibits hereto, constitutesthe entire agreement between the parties. The rights and obligations of theparties under this Agreement cannot be changed, modified, assigned orwaived except by written agreement executed by both parties whichreferences this Agreement. This Agreement shall be fully binding on theparties, their successors, successors-in-interest, assigns, representativesand transferees.

14. Signatures

Original signatures transmitted and received via facsimile or other electronictransmission of a scanned document, (e.g., .pdf or similar format) are trueand valid signatures for all purposes hereunder and shall bind the parties tothe same extent as that of an original signature.

[SIGNATURE PAGE TO FOLLOW]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreementeffective as of the day and year first written above.

GRANTQB

By: By:

Name: Name:Title- . Title:

Date: Date:

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Changes to the New Jersey tax laws warrant immediate attention!

by Glenn A. Henkel, Esq.

On October 14th, New Jersey Governor Chris Christie signed legislation raising the state’s gas tax to help replenish the state’s expired transportation trust fund. As a tradeoff, the law takes steps to encourage residents to remain in the state after retirement. First, it phases out the estate tax, effective January 1, 2018, and that will have a profound impact on the manner that our New Jersey clients will plan for their estates. Second, there is an enhanced retirement income exclusion that is phased in between now and 2020. This article will discuss estate planning issues for New Jersey residents and it will also highlight several issues that planners will need to know.

While the major highlight in this new legislation is the repeal of the estate tax after 2018, since it

is really a “phase out,” there is always the potential that the tax may not, in fact disappear. Moreover,

the New Jersey inheritance tax is retained (a significant trap for unwary). The rules for 2017 decedents

allow a $2 million exemption per decedent, including a change in the manner that the tax is computed.

The way the law is drafted allows an easy fix to retain the tax if the state later decides to keep the 2017

tax format. The current tax law is a “cliff,” meaning that the tax applies on all estates subject to tax but

the new law provides a “credit” reducing the tax even on larger estates. The other provision is the

enhanced pension exclusion that looks good, but it may not apply to some of our clients. Consider that

the New Jersey estate tax repeal together with the other changes in the transportation trust fund law

creates an unfunded hole in the New Jersey budget of more than a billion in 2018. Before client’s hurry

home to New Jersey, they should look into the details.

Under the new law, the New Jersey estate tax will be phased out for decedents passing after

January 1, 2018. Presently the exemption of $675,000 is the lowest in the country and the exemption

will increase to $2 million for decedents who pass away after January 1, 2017. What does this mean for

those living in New Jersey? What changes to planning and documents might be advisable to consider for

New Jersey domiciliaries? Will it bring back former New Jersey residents who “changed” their domicile

to a no-tax state? For many, it has been the INCOME tax that has caused clients to leave from New

Jersey (maybe climate too). Because the current law only allows a meager $20,000 pension exclusion

(married filing joint), the new law adds an increased pension exclusion that is likewise phased in and

makes New Jersey more competitive regionally.

The newly adopted pension exclusion increases the thresholds from $20,000 in 2016 to $40,000

in 2017, $60,000 in 2018, $80,000 in 2019 and to $100,000 for 2020 and thereafter (all married filing

jointly). For single taxpayers, the current $15,000 exclusion goes to $30,000 (2017), $45,000 (2018),

$60,000 (2019) and $75,000 (2020). However, this benefit is provided only to taxpayers who are below

the gross income threshold. Even a mere $1 of gross income over the exemption, denies the taxpayer of

the benefit. Under current law, the pension exclusion is denied if the persons New Jersey taxable

income is more than $100,000. Thus, while the law is a step in the right direction, it is not that attractive

to high net worth individual.

For the estate tax, New Jersey law provides that there are no estate tax changes for 2016 decedents (leaving in place the $675,000 exemption threshold based upon the 2001 provisions in IRC

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Section 2011) and there is no tax for 2018 decedents. For 2017 decedents, the tax is imposed based upon the prior I.R.C. Section 2011 “credit” rate chart as it existed in 2001 that is now incorporated into the statute, but the computed tax is reduced by a “credit” of $99,600, the tax that would have been imposed on a $2,000,000 estate.

Whether the State will be financially able to forgo the estate tax revenues in 2018 and thereafter remains to be seen, but that will be an issue for a future legislature and a future Governor. The lost revenue effects even just for the estate tax repeal are huge, almost $500 million in fiscal 2020 and more than $500 million fiscal 2021 and fiscal 2022. As mentioned, the 2017 tax computation could be a precursor to future rules so they are worth study.

The new New Jersey tax computation for 2017 decedents is keyed to the definition of “taxable estate” contained in Internal Revenue Code Section 2051. That reference has raised an interesting interpretive question. When the existing New Jersey tax was keyed to the 2001 tax code, there was no deduction for state estate tax. (IRC Section 2058 that allows a state estate tax deduction is only effective for decedents passing after 2005). Now, because of the reference to the current tax code, the state tax to be paid is a deduction in arriving at the tax- thus, there is a circular computation to arrive at the tax. Maybe this will be fixed in a technical correction. However, as of now, the computation is a “circular,” meaning you deduct the tax against the tax and need a computer or algebraic formula to determine the amount owed. The allowance of a deduction could also raise questions about taxes paid to other jurisdictions where an estate could attempt to claim both a credit for tax paid and a deduction.

One major benefit is that this definition of the tax base in IRC Section 2051 starts with the “gross estate” less deductions, which is before adding back prior gifts made. As a result, like it was for the pre-2017 rules, gifting still reduces the estate and thereby, using a gifting strategy reduces the estate tax. Before gifting however, advisors should make sure that the assets being given away do not result in a higher income tax cost. When assets are gifted, the donee receives “carryover” income tax basis rather than the “step up” that can occur at death. It is usually not a good idea to save estate tax at a cost of and increased income tax, unless the tax is lower (analysis is needed before the gift) or the asset will not be sold (e.g., a vacation home or a family business). Another consideration with gifting is that under the old rules, the gifts escaped estate tax. However, there was still a tax on the assets remaining in the estate, so there would be some tax due. To avoid any tax at all, a donor had to gift all the way down to a retained asset base of just $100,000. Now, because of the “credit” on the first, $2,000,000, a retained asset base of $2,000,000 will escape the tax entirely. This is a great opportunity for deathbed planning however, while there is generally no “3-year” rule for estate tax, there remains a rule for inheritance tax that will impose an inheritance tax on all gift within three years of passing.

Another benefit to the new system is that the pre-2017 “simplified method” of computing the

estate tax will be repealed. This approach was not “simple” and often resulted in more tax than under

the usual so called “706 method” named after the federal tax return Form 706.

In the end, the New Jersey estate tax change is welcome relief, but for clients with estate above

the $2 million exemption amount, prudence would suggest that they retain their existing plans. With the

potential that the Trump administration will repeal or modify the federal estate tax, many clients will be

eager for simplification to their planning however, let’s not act too quickly for our New Jersey residents.

If an estate is below the $2 million sum, then perhaps the simplification may be useful. However, for

many others, immediate changes may not be warranted.

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Another key factor to consider is that New Jersey also imposes an inheritance tax. The New Jersey inheritance tax is not repealed as a result of this effort. The New Jersey inheritance tax does not generally apply to transfers to a spouse, child, or grandchild who are referred to “Class A” beneficiaries. Unfortunately, the New Jersey Inheritance tax subjects transfers to siblings, and children in law at a rate of 11% (on an amount over $25,000) known as Class “C” beneficiaries. This rate rises on transfer above $1.1 million reaching a high of 16%. Others non relatives are taxed at a 15% rate (16% over $700,000). While a “step child” is a preferred “Class A” beneficiary, the transfer to a “Step grandchild” causes a 15% tax. The New Jersey inheritance tax remains a costly trap for unsuspecting taxpayers. As noted above, unlike the rules for the New Jersey estate tax, in inheritance tax carries with it a three-year inclusion of gifts in the tax base.

Many of the questions in a spousal estate tax planning structure relate to the plan in place from the passing of a first spouse until the passing of the survivor. A common approach taken in wills (or revocable trusts when used as the primary dispositive document), is to incorporate a ‘credit shelter trust’ and a marital disposition (either outright or in trust). The purpose of the credit shelter trust was generally to make assets available to the surviving spouse but to avoid them being included (or taxed) in the surviving spouse’s estate for estate tax purposes. In other words, this technique to limit the tax seeks to allow the heirs to inherit assets tax free sheltered by the exemption of both parents.

In New Jersey, some families would employ a state exemption level credit shelter trust of $675,000, a “gap” trust funded with the difference between the federal exemption and the New Jersey exemption (then $675,000). The excess above the federal exemption would be bequeathed to a “Qualified Terminable Interest Trust” or “QTIP” as defined in IRC Section 2056(b)(7) or other marital deduction qualifying bequest. The estate, post-death, could then determine how to characterize the gap trust. For smaller estates some practitioners may have relied on outright bequests and the provision of a credit shelter trust that is created by a “disclaimer” by the surviving spouse. While that type of dispositive scheme might appear not to require any modification that may be too superficial of an analysis. Practitioners must evaluate the plan in light of the recent legislative developments made, pending or anticipated. Because of the pending changes happening over time, a plan for a 90 year old client might differ from the plan for a 60 year old client. However, it may be beneficial to review existing documents, particularly those with tax driven formula clauses as tax thresholds change.

With the repeal of the New Jersey estate tax (or possible federal repeal), a “Disclaimer Trust” plan may become the default planning approach for moderate wealth taxpayers. If spouses have been married for a long time and the children are “common children” of the marriage, such that it could be anticipated that a surviving spouse would not be expected to disinherit the children of the predeceasing spouse, then a disclaimer trust may provide the greatest opportunity for flexibility. Disclaimer trusts, however, are not effective in achieving non-tax planning objectives.

A disclaimer trust estate plan would devise the entire estate to the surviving spouse. If the inheritance is “disclaimed’ by the survivor, the will or revocable trust can direct the inheritance to a trust for the spouse as permitted by I.R.C. § 2518. By granting a surviving spouse this option, the surviving spouse can choose whether funding the trust with the estate is appropriate based upon a variety of circumstances at that time, such as (1) the size of the combined estates at the first death; (2) the applicable federal/state estate tax exemption; (3) the likelihood that the surviving spouse will reside in a state with a state estate tax (4) will a trust provide opportunities for income tax planning and “basis” shifting. While all of these uncertainties may remain at the death of the first spouse, this flexible plan is premised on the assumption that we may know more at that time than when the wills and estate plan were drafted.

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Another issue to consider is that since the federal American Taxpayer Relief Act of 2012 (signed January 1, 2013) the federal government has permitted “portability” of the federal estate tax exemption. Portability was designed with an eye toward eliminating the need for the complexity of traditional “by-pass/credit shelter/family trust” planning used to shelter tax by preserving the estate tax exemption of each spouse of a married couple. In general terms, “portability” of estate tax exemption allows one spouse to inherit the assets of their deceased spouse – which used none of the exemption permitted for non-marital and non-charitable transfers and also and inherit the unused exemption. The technical term for this “unused” exemption is the “Deceased Spouse Unused Exemption” or “DSUE.” In the context of planning for New Jersey domiciliaries, assuming the estate tax remains, the state does not allow for “portability” of exemptions.

Procedurally, the administration of a New Jersey has always been hampered by the process that protects the State collection of the tax. In New Jersey, there is a lien for estate tax on the estate of a decedent. The executor/personal representative could always access half of the funds without discharging the lien (known as a “blanket waiver”) but the balance of the estate could be released only on receipt of clearance from the New Jersey Division of Taxation. The Division would issue “inheritance and estate tax waiver” forms that prove the tax has been paid and the institution holding funds would require these “waivers” to make final release of the estate assets. For estates where no tax is due, a “Self-executing waiver” process could be used. These are the forms L-8 (for cash/stocks/bonds/intangibles) or form L-9 for real estate. Under new procedures, the “self-executing waiver” process will be updated to apply only where the estate is less than $2,000,000. However, there may be a delay in spreading the word since many institutions are aware of the pre-2017 $675,000 threshold. In other words, there may be some time before institutions will be aware to use the new rules.

Finally, another trap for unwary is that in 2015, the federal “Surface Transportation and Veterans’

Health Care Choice Improvement Act of 2015” (H.R. 3236) relaxed filing due dates for federal tax

returns placed on extension. For federal taxes, a fiduciary can get a 5 ½ month extension on income tax

returns (Form1041) from April 15 until September 30. At present that rule will not apply for New Jersey

purposes (Pennsylvania too). Thus, while federal tax returns can be extended to September 30 the New

Jersey return will still be due Sept 15 (if extended).

In sum, the ever-changing tax landscape will cause our New Jersey clients to review their estate

planning documents. For a change, the news from Trenton is good news, but before changes are

implemented, advisors should carefully consider the fine print. Compound this with possible federal tax

changes and clients will undoubtedly want to eliminate tax planning in favor of simplicity. Simplicity may

be appropriate for some, but not all, clients and estate planners will need to be ready to figure out

which ones can or should change and which ones should not change. Be careful out there!

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New Jersey estate tax repeal: what you need to know!

by Glenn A. Henkel, Esq.

Last October, Governor Christie signed legislation raising the state’s gas tax to help

replenish the state’s expired transportation trust fund. As a tradeoff to tax increases, the law

took tax reduction steps to encourage residents to remain in the state after retirement. It

phases out the estate tax, effective January 1, 2018, and provides an enhanced retirement

income exclusion that is phased in between now and 2020. If the changes actually happen,

it could have a profound impact on the manner that our New Jersey clients will plan for their

estates.

The major highlight in this new legislation is the repeal of the estate tax after 2018.

Since it is a “phase out,” there is always the potential that the tax may not, in fact disappear.

Recall that as part of the November 8, 2016, ballot “Public Question 2,” a majority of New

Jersey voters approved a constitutional amendment that dedicates all gas tax revenue to

transportation projects (not the tax relief.) Thus, whether the State will be financially able to

forgo the estate tax revenues in 2018 and thereafter will be an issue for a future legislature

and a future Governor. The lost revenue effects for the estate tax repeal alone are huge,

almost $500 million in fiscal 2020 and more than $500 million fiscal 2021 and fiscal 2022.

Under the legislation, the rules for 2017 decedents allow a $2 million exemption per

decedent, including a change in the manner that the tax is computed. The 2017 tax

computation could be a precursor to future rules so they are worth study. The way the law is

drafted allows an easy fix to retain the tax if the state later decides to keep the 2017 tax

format. The pre-2017 tax law was a “cliff,” meaning that the tax applied on all estates

subject to tax, but the new law provides a “credit” providing a tax benefit even on larger

estates.

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What does this mean for those living in New Jersey? What changes to planning and

documents might be advisable to consider for New Jersey domiciliaries? Will it bring back

former New Jersey residents who “changed” their domicile to a no-tax state? For many, it

has been the INCOME tax that has caused clients to leave from New Jersey (maybe climate

too). Because the pre-2017 law only allows a meager $20,000 pension exclusion (married

filing joint), the new law adds an increased pension exclusion that is likewise phased in and

makes New Jersey more competitive regionally. It increases the thresholds from $20,000 in

2016 to $40,000 in 2017, $60,000 in 2018, $80,000 in 2019 and to $100,000 for 2020

and thereafter (all married filing jointly). For single taxpayers, the current $15,000 exclusion

goes to $30,000 (2017), $45,000 (2018), $60,000 (2019) and $75,000 (2020).

However, this benefit is provided only to taxpayers who are below the gross income threshold.

Under current law, the pension exclusion is denied if the persons New Jersey taxable income

is more than $100,000. Even a mere $1 of gross income over the exemption, denies the

taxpayer of the benefit. Thus, while the law is a step in the right direction, it is not that

attractive to high net worth individual.

For the estate tax, New Jersey law provides that there are no estate tax changes for

2016 decedents (leaving in place the $675,000 exemption threshold based upon the 2001

provisions in IRC Section 2011) and there is no tax for 2018 decedents. For 2017 decedents,

the tax is imposed based upon the prior I.R.C. Section 2011 “credit” rate chart as it existed

in 2001 that is now incorporated into the statute, but the computed tax is reduced by a “credit”

of $99,600, the tax that would have been imposed on a $2,000,000 estate.

The new New Jersey tax computation for 2017 decedents is keyed to the definition of

“taxable estate” contained in Internal Revenue Code Section 2051. That reference has raised

an interesting interpretive question. When the existing New Jersey tax was keyed to the 2001

tax code, there was no deduction for state estate tax. (IRC Section 2058 that allows a state

estate tax deduction is only effective for decedents passing after 2005). Now, because of the

reference to the current tax code, the state tax to be paid is a deduction in arriving at the

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tax- thus, there is a circular computation to arrive at the tax. Maybe this will be fixed in a

technical correction. However, as of now, the computation is a “circular,” meaning you deduct

the tax against the tax and need a computer or algebraic formula to determine the amount

owed. The allowance of a deduction could also raise questions about taxes paid to other

jurisdictions where an estate could attempt to claim both a credit for tax paid and a deduction.

One major benefit is that this definition of the tax base in IRC Section 2051 starts with

the “gross estate” less deductions, which is before adding back prior gifts made. Thus, like it

was for the pre-2017 rules, gifting still reduces the estate and thereby, using a gifting strategy

reduces the estate tax.

Before gifting however, advisors should make sure that the assets being given away do

not result in a higher income tax cost. When assets are gifted, the donee receives “carryover”

income tax basis rather than the “step up” that can occur at death. It is usually not a good

idea to save estate tax at a cost of and increased income tax, unless the tax is lower (analysis

is needed before the gift) or the asset will not be sold (e.g., a vacation home or a family

business). Another consideration with gifting is that under the old rules, the gifts escaped estate

tax. However, there was still a tax on the assets remaining in the estate, so there would be

some tax due. To avoid any tax at all, a donor had to gift all the way down to a retained

asset base of just $100,000. Now, because of the “credit” on the first, $2,000,000, a

retained asset base of $2,000,000 will escape the tax entirely. This is a great opportunity for

deathbed planning however, while there is generally no “3-year” rule for estate tax, there

remains a rule for inheritance tax that will impose an inheritance tax on all gift within three

years of passing.

The first caveat is that the New Jersey inheritance tax is retained (a significant trap

for unwary). The New Jersey inheritance tax does not generally apply to transfers to a

spouse, child, or grandchild who are referred to “Class A” beneficiaries. Unfortunately, the

New Jersey Inheritance tax subjects transfers to siblings, and children in law at a rate of 11%

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(on an amount over $25,000) known as Class “C” beneficiaries. This rate rises on transfer

above $1.1 million reaching a high of 16%. Others non relatives are taxed at a 15% rate

(16% over $700,000). While a “step child” is a preferred “Class A” beneficiary, the

transfer to a “Step grandchild” causes a 15% tax. The New Jersey inheritance tax remains

a costly trap for unsuspecting taxpayers. Unlike the rules for the New Jersey estate tax, in

inheritance tax carries with it a three-year inclusion of gifts in the tax base.

The second caveat, the potential repeal of the FEDERAL estate tax by the Trump

administration, could create more confusion in the way that clients will plan their estates. In

the end, the New Jersey estate tax change is welcome relief, but for clients with estate

above the $2 million exemption amount, prudence would suggest that they retain their existing

plans. With the potential that the Trump administration will repeal or modify the federal estate

tax, many clients will be eager for simplification to their planning however, let’s not act too

quickly for our New Jersey residents.

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Steve Leimberg's Estate Planning Email Newsletter - Archive Message #2470 Date: 23-Oct-16 From: Steve Leimberg's Estate Planning Newsletter

Subject: Martin M. Shenkman, Richard Greenberg & Glenn Henkel: New Jersey Estate Tax Has Been Repealed! What's Next?.

Martin M. Shenkman, Richard Greenberg & Glenn Henkel:

New Jersey Estate Tax Has Been Repealed! What’s Next?

On October 14th, New Jersey Governor Chris Christie signed legislation raising the state’s gas tax by 23 cents per gallon, from the 49th highest in the nation to the sixth, to help replenish the state’s expired transportation trust fund. As a trade-off, the bill will lower the New Jersey sales tax and will also phase out the state’s estate tax on January 1, 2018. Now, Martin M. Shenkman, Richard Greenberg and Glenn Henkel provide members with their analysis of this important development.

Martin M. Shenkman, CPA, MBA, PFS, AEP, JD is an attorney in private practice in Fort Lee, New Jersey and New York City who concentrates on estate and closely held business planning, tax planning, and estate administration. Marty is the author of 42 books and more than 1,000 articles. He is the Recipient of the 1994 Probate and Property Excellence in Writing Award, the Alfred C. Clapp Award presented by the 2007 New Jersey Bar Association and the Institute for Continuing Legal Education; Worth Magazine’s Top 100 Attorneys (2008); CPA Magazine Top 50 IRS Tax Practitioners, CPA Magazine, (April/May 2008). His article “Estate Planning for Clients with Parkinson’s,” received “Editors Choice Award.” In 2008 from Practical Estate Planning Magazine his “Integrating Religious Considerations into Estate and Real Estate Planning,” was awarded the 2008 “The Best Articles Published by the ABA,” award; he was named to New Jersey Super Lawyers (2010-15); his book “Estate Planning for People with a Chronic Condition or Disability,” was nominated for the 2009 Foreword Magazine Book of the Year Award; he was the 2012 recipient of the AICPA Sidney Kess Award for Excellence in Continuing Education; he was a 2012 recipient of the prestigious Accredited Estate Planners (Distinguished) award from the National Association of Estate Planning Counsels; and he was named Financial Planning Magazine 2012 Pro-Bono Financial Planner of the Year for his efforts on behalf of those living with chronic illness and disability. In June of 2015 he delivered the Hess Memorial Lecture for the New York City Bar Association. His firm's website is www.shenkmanlaw.com where he posts a regular blog and where you can subscribe to his free quarterly newsletter Practical Planner. Marty sponsors a free website designed to help advisers better serve those living with chronic disease or disability www.chronicillnessplanning.org which is in the process of being rebuilt.

Here is their commentary:

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EXECUTIVE SUMMARY:

The New Jersey estate tax will be phased out. The New Jersey estate tax exemption, presently $675,000, the lowest in the country, will increase to $2 million after January 1, 2017 and will then be eliminated after January 1, 2018. What does this mean for those living in New Jersey? What changes to planning and documents might be advisable to consider for New Jersey (and in some cases other states, such as New York) domiciliaries ? What will it mean for those that at one time lived in New Jersey but “changed” domicile to a no-tax state? What might this repeal mean to those living in nearby states that have an estate tax (e.g., New York)? What changes to planning and documents might be advisable to consider?

While this article focuses on the recent New Jersey changes and planning in New Jersey, this guidance in many instances will be useful to practitioners in other jurisdictions as well.

FACTS:

A deal was reached on September 30, 2016 between the Governor and key legislative leaders regarding funding for the Transportation Trust Fund (“TTF”).

The highlights are as follows:

• TTF has been reauthorized for 8 years - $2 billion per year (which aggregates $32 billion when combined with all State and Federal funding).

• There will be a 23 cent per gallon increase in the gas tax.

• The earned income tax credit will be increased from 30% of the federal limit to 35%.

• The New Jersey gross income tax exclusion for pensioners and retirees, will be increased reportedly to $100,000.

• The New Jersey estate tax will be reduced and in phases and then eliminated by 2018.

• Sales tax is phased down to 6.875% (effective 1/1/2017), and then to 6.625% (effective 1/1/2018).

On October 5, 2016, both houses of the State Legislature were called into a special committee hearing and voting session but needed to reconvene October 7, 2016 to approve the legislation. The legislation was signed by Governor Christie on Friday October 14, 2016. The cuts amount to a $1.4 billion tax cut by full implementation in 2021, according to the Governor’s office.

The New Jersey law provides that there are no estate tax changes for 2016 decedents (leaving in place the $675,000 exemption threshold) and there is no tax for 2018

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decedents.

However for 2017 decedents, the tax is imposed based upon the prior I.R.C. Section 2011 “credit” rate chart as it existed in 2001 reduced by a “credit” of $99,600, the tax that would have been imposed on a $2,000,000 estate. Whether the State will be financially able to forgo the estate tax revenues in 2018 and thereafter remains to be seen, but that will be an issue for a future legislature and a future Governor.

COMMENT:

Planning in a Decoupled State

New Jersey is one of a minority of states that retained a state estate tax after the changes to the Federal Tax Code after the Economic Growth Tax Relief and Reconciliation Act of 2001 (commonly referred to as the first “Bush tax cuts”). As a result, planning in New Jersey has been complex and quite different from states that had not decoupled. Since 2002, New Jersey imposed a separate estate tax. In New Jersey, spouses could leave assets tax free to their spouse or tax-free to charity, but a tax would be imposed on transfers to others to the extent the value of those transfers exceeded $675,000. While the New Jersey estate tax rate has been much lower than the federal rate, it was and is still significant with the marginal rate reaching 16%, and as a result has caused planning issues with respect to inter-spousal planning for New Jersey clients.

BEWARE: In addition to the estate tax, New Jersey also imposes an inheritance tax. But the inheritance tax does not generally apply to transfers to a spouse, child, or grandchild who are referred to “Class A” beneficiaries. Unfortunately for taxpayers, the recent legislation does not appear to have changed the New Jersey Inheritance tax, which generally subjects transfers to siblings at a rate of 11% and to many others at a 15% rate. The New Jersey inheritance tax may thus remain a costly trap for unsuspecting taxpayers.

Another issue to consider is that since the federal American Taxpayer Relief Act of 2012 (signed January 1, 2013), The federal government has permitted “portability” of the federal estate tax exemption. Portability was designed with an eye toward eliminating the need for the complexity of traditional “by-pass/credit shelter/family trust” planning used to shelter tax by preserving the estate tax exemption of each spouse of a married couple. In general terms, “portability” of estate tax exemption allows one spouse to inherit the assets of their deceased spouse – which used none of the exemption permitted for non-marital and non-charitable transfers and also and inherit the unused exemption. The technical term for this “unused” exemption is the “Deceased Spouse Unused Exemption” or “DSUE.” In the context of planning for New Jersey domiciliaries the low New Jersey exemption created challenges and the need to evaluate or employ complex options to maximize the benefits of the first spouse’s DSUE.

Wills and Revocable Trusts May have to be Updated

A common approach taken in wills (or revocable trusts when used as the primary dispositive

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document), is to incorporate a credit shelter trust and a marital disposition (either outright or in trust). The purpose of the credit shelter trust was generally to make assets available to the surviving spouse but to avoid them being included in the surviving spouse’s estate for estate tax purposes.

In New Jersey this was often addressed with a state exemption level credit shelter trust of $675,000, a “gap” trust funded with the difference between the federal exemption and the New Jersey exemption (currently $675,000). The excess above the federal exemption would be bequeathed to a QTIP or other marital deduction qualifying bequest. The estate, post-death, could then determine how to characterize the gap trust. For smaller estates some practitioners may have relied on outright bequests and the provision of a disclaimer credit shelter trust. While that type of dispositive scheme might appear not to require any modification, that conclusion may be too superficial of an analysis. With this backdrop, practitioners must evaluate what might need to be done to update documents for the recent legislative developments. Here are some thoughts:

What might need to be done to modify an existing will (or revocable trust) will depend on what provisions that document contains. Consider that the credit shelter trust and related planning could be structured in a number of ways:

Fund the credit shelter trust with the amount that will not create a federal or state estate tax. If the New Jersey estate tax exemption was $675,000 and the federal exemption $5 million, then $675,000 would be transferred to a credit shelter trust. But if the New Jersey exemption increases to $2 million then that amount, not $675,000, should pass without further need for change, into the credit shelter trust. In 2018 if the New Jersey estate tax is repealed the amount might increase to the federal exemption amount which is $5 million inflation adjusted - $5,450,000 in 2016. It seems that the 2017 threshold will rise to $5,490,000, a modest increase. A key consideration for many people is what they anticipated their will accomplishing when it was written. If the credit shelter trust included children or other heirs (especially from a prior marriage), the result might not be the intent for them to have so much value directed to a trust for their benefit. Others might have only used a trust to save state estate tax which would no longer be relevant. The key is that it is important to determine what the objectives were when the document was completed, what the client’s current objectives are now, and what the result of the provisions and new law may be.

Some old wills might fund the credit shelter trust with a specific dollar amount, e.g., $600,000 for very old wills, or perhaps $675,000 to fund the New Jersey lower exemption amount. In these cases, you might need to modify the will to reflect the client’s current intent. There may be no need or desire for a credit shelter trust under the new scenario (for smaller estates now desirous of the protections of a trust), or perhaps a higher amount might be warranted. These wills in particular should be updated. For smaller estates a disclaimer or other approach may be preferable.

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Other old wills might fund the credit shelter trust to the maximum amount that will not create a federal estate tax. Under current New Jersey law and through 2018 when the New Jersey estate tax is repealed, this type of formula could trigger a New Jersey estate tax which might not be intended or desirable. In these instances, it has been and continues to be imperative to revise the document immediately to avoid an unintended state estate tax. If the testator who signed the will does not have capacity to sign a will perhaps the title (ownership) of assets can be modified to avoid the tax, or a reformation proceeding may have to be brought in court to modify the document to reflect current law.

For smaller estates, the entire estate might be bequeathed outright to the surviving spouse and the surviving spouse might be given the right to disclaim (renounce) any portion of that bequest into a credit shelter trust. This might avoid any tax issues. This is because the surviving spouse can simply opt to retain all assets on the first spouse’s death and not trigger the transfer of any assets into a credit shelter trust. In this way whatever the New Jersey estate tax exemption may be the surviving spouse can control the tax consequences. While a disclaimer might provide ultimate flexibility, for many it is an overly simplistic and inadvisable plan as there is no protection afforded to the assets passing outright to a surviving spouse. With the incidence of elder financial abuse, divorce, lawsuits, etc. protecting the inheritance, not tax planning, could be of paramount importance. It is not only about taxes.

Some Wills or trusts use a Clayton QTIP approach in which assets are bequeathed to a marital or QTIP trust and the executor may elect which portion qualifies for the marital deduction and the remaining non-elected portion passes to a credit shelter trust. In some instances this might remain a viable technique, in others not.

For clients that are ill or of advanced age, a more complex approach might be desirable to provide flexibility not only for the implications of the New Jersey repeal but also to reflect the possible changes that might follow a Clinton victory (e.g., reduction of the gift exemption to $1 million and the estate exemption to $3.5 million).

There are many other variations, but certainly the safest approach is to review how each client’s documents were structured. With so many variations and ancillary considerations (how assets are owned, asset protection, divorce planning, and other concerns) relying on an old document even if you believe it was drafted to account for the repeal of the New Jersey estate tax is simply not prudent. The real challenge for practitioners will be to convince clients to spend the money on an update meeting. This will be particularly difficult for those clients who believe (correctly or not) that their estate is below the federal exemption.

Credit Shelter Trust Planning and the Impact of the NJ Estate Tax Repeal

Building flexibility into the client’s plan is essential. This is not only because the values of assets may fluctuate after the execution of the estate planning documents but also due to the fact that tax laws are now quite sensitive and highly subject to the political winds of change. Many plans have involved the use of a trust for the surviving spouse that can allow for the “sheltering” of assets from the potential taxation at the passing of the survivor. This

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trust, as noted briefly above, was often modified to address the New Jersey estate tax.

The following is a general discussion of credit shelter trust fundamentals practitioners are familiar with. This will set the foundation for a later discussion of the impact of the New Jersey repeal on credit shelter trust planning in New Jersey. The credit shelter trust (sometimes referred to as either a bypass trust, residuary trust, or family trust) has historically been utilized when considering a plan for a married couple, in order to preserve (before portability) the estate tax exemptions of each spouse. The credit shelter trust can generally:

Allow the survivor to be sole trustee (with a HEMS standard).

Grant the survivor the right to all income.

Grant the spouse the right to receive principal for health, maintenance and support in reasonable comfort (the so called “ascertainable standard”), or a discretionary standard with an independent trustee.

Grant the spouse a right to withdraw the greater of 5% or $5,000 (whichever is greater).

Grant a power to re-allocate funds in the trust among a “special” or “limited” class, called a limited power of appointment (“LPOA”).

Even with all of these powers being granted to the surviving spouse, the corpus of the credit trust should not be “included” in the taxable estate of the surviving spouse. This would hopefully generate an estate tax savings by “sheltering” the credit (or exemption amount) of the first spouse to pass away. In other words, if the exemption of one spouse is sheltered by one exemption, the survivor’s exemption is available to shelter additional assets from tax. The trust can be crafted with fewer powers and rights depending on the family situation. However, because the trust was not included in the estate of the survivor, the basis of the assets transferred would not be adjusted or stepped up. For many moderate wealth taxpayers domiciled in New Jersey, even if the increase in the federal estate tax exemption may have obviated worries about the federal estate tax, the continued risk of a New Jersey estate tax may have justified that planning. Once repeal is fully implemented in 2018, if there is no potential of a federal estate tax for the client, the absence of a New Jersey estate tax may assure no estate tax benefit from the application of a credit shelter trust, but serve to deny a basis step up.

Another approach to crafting a trust could be to provide that the surviving spouse is the sole beneficiary of the trust, that the survivor has the right to all income of the trust (in a manner that the requirements for a 'qualified income interest for life' are met). Under Code Section 1014(b)(10), a family can choose to place assets in a trust when the first spouse passes and, if an election is made to elect "Qualified Terminable Interest Property" ("QTIP") treatment under §2056(b)(7), the trust can receive "step up" in basis at the death of the surviving spouse. Thus, this plan could give the surviving spouse/surviving parent an option of

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determining whether or not it is better to utilize a credit shelter trust to remove assets from the survivor’s estate, or elect QTIP treatment and portability at the death of a predeceased spouse. More specifically, Code Section 1012 defines the “basis” of an individual’s asset for purposes or resale as cost.

Under Code Section 1014, the basis is “stepped-up” or adjusted to the fair market value at the time of a decedent’s passing.

In the event a married couple holds assets and has the option of placing assets in a trust in order to capture the estate tax exemption of both spouses, the basis would be adjusted or "stepped-up" to the fair market value on the date of death of the first or predeceasing spouse. However, the basis would not receive a second step-up to occur at the death of the surviving spouse. If there is substantial appreciation between the first death and the second death, that appreciation would not be subject to estate tax however, it would be subject to an income tax on liquidation of the underlying investments. Once the New Jersey estate tax is fully repealed the calculus for many taxpayers will change. The marginal aggregate federal/state estate tax rate will be lower and the relationship of the marginal estate tax rate to the capital gains rate will shrink. Thus, the benefit of basis step-up versus estate tax exclusion will change.

As a result of the opportunity to receive a second “step-up” in income tax basis, planners have recommended that clients forego the use of a credit shelter trust for the benefit of the surviving spouse/surviving parent because portability affords the family the right to receive the benefit of the estate tax exemption while simultaneously receiving an opportunity to receive a second adjustment or “step-up” in the income tax basis in all assets at the death of the surviving spouse/surviving parent.

Flexibility Planning

Incorporating this type of plan into a couple’s estate plan provides, at the time of the death of the first (or predeceasing) spouse, the executor with the option to determine, when filing an estate tax return, on whether or not to incorporate the benefits of Code Section 2056(b)(7) which would grant the estate a “marital deduction” over assets held in trust. In that event, the estate tax rule would treat the inherited assets as if they were owned by the surviving spouse. In that event, the DSUE can carry over to the surviving spouse. However, for income tax purposes the family would be afforded the opportunity to receive a step-up in income tax basis occurring at the second death.

By contrast, should the family choose to utilize the alternate approach whereby the credit shelter trust is funded and the assets are excluded from the estate of the surviving parent. In that case, no election to qualify under Code Section 2056(b)(7) for marital deduction would be made. Setting forth a plan which calls for the creation of a credit shelter (or family) trust in the Will, a planner can be assured that the decision can be left for a later date to determine whether or not the portability and second step-up approach is warranted or whether the

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credit shelter plan (with the removal of all appreciation from the estate of the surviving spouse) would constitute a better approach.

One of the difficulties with the possible use of portability for estates that will not be "taxable" under the federal law (because the combined estate is less the federal $5,450,000 exemption- the 2016 threshold) is that there are many assumptions that need to be considered to determine whether a family plan should shelter the estate tax exemption from tax or not. These include:

How long will the surviving spouse live?

How much will the assets appreciate?

To the extent assets appreciate, will they be sold to incur the income tax?

Will the family continue to reside in a state subjecting the estate of the surviving parent to tax?

What will the income tax rates be on any future sale?

Will the estate tax be reinstated at a state or federal level?

QTIP Election

Following the decoupling of the New Jersey estate tax in 2002, practitioners have grappled with the possible impact of Revenue Procedure Rev. Proc. 2001-38, 2001-24 IRB 1335, 2001-1 C.B. 1335, on New Jersey estate tax planning. Specifically, at issue in Rev. Proc 2001-38 was a situation where trust assets would be sheltered from estate tax by exemption. The Ruling held that the QTIP election would be ignored and the surviving spouse would not be subject to estate taxation on the trust corpus if no federal estate tax benefit will be achieved. Practitioners worried that if a New Jersey decedent funded a New Jersey bypass trust to $675,000 and a QTIP was used for the remaining estate to qualify for the state estate tax marital deduction, would that QTIP qualify since there was no reduction in federal estate tax? Under some interpretations of Rev. Proc. 2001-38 it was not certain that such a QTIP would qualify for the federal estate tax marital deduction, and hence for the New Jersey estate tax marital deduction. Once the New Jersey estate tax is repealed, this issue would be obviated. However, the concerns about funding a New Jersey state only QTIP have been obviated by a recent Rev. Proc.

On September 27, 2016, the IRS announced Rev. Proc. 2016-49, which essentially, reversed Rev. Proc 2001-38. In effect, this new rule indicates that when an estate is filing an estate tax return, the QTIP election will be respected even if the election to be made is not necessary in order to avoid federal estate taxes. Rev. Proc. 2016-49 provides a procedure by which the IRS will disregard the QTIP election and treat it as null and void. Under §4.02 of that ruling, the taxpayer must file a Supplemental Form 706 and notify of request to treat the prior QTIP election as null and void. Without that request to nullify the QTIP election, it

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would generally be respected. Moreover, the ruling indicates that where a portability election is made, the QTIP election will be respected. Thus, for existing New Jersey only QTIPs, and for New Jersey only QTIPs formed until 2018, the issue raised by some commentators has been obviated by Rev. Proc. 2016-49.

Disclaimer Trust Planning: More Likely in Many Situations

With the repeal of the New Jersey estate tax for many taxpayers, a disclaimer plan will become the default planning approach for moderate wealth taxpayers. Unfortunately, the default plan for most taxpayers below the federal exemption may be “I love you wills,” outright bequests with no trusts. The move to simplistic wills may well fuel a growth in clients using on-line legal services rather than attorneys, or general practice attorney rather than estate planning specialists. The result will likely be a significant decline in the use of trusts and the protective benefits they afford.

For clients of moderate wealth who use counsel, there will likely be a greater reliance on the use of a disclaimer trust. For example, if husband and wife have been married for a long time and the children are “common children” of the marriage, such that it could be anticipated that a surviving spouse would not be expected to disinherit the children of the predeceasing spouse, then a disclaimer trust may provide the greatest opportunity for flexibility. Disclaimer trusts, however, are ineffective in achieving non-tax planning objectives.

A disclaimer trust estate plan would devise the entire estate to the surviving spouse. If the inheritance is “disclaimed’ by the survivor, the will or revocable trust can direct the inheritance to a trust for the spouse as permitted by I.R.C. § 2518. By granting a surviving spouse this option, the surviving spouse can choose whether funding the trust with the estate is appropriate based upon a variety of circumstances at that time, such as (1) the size of the combined estates at the first death; (2) the applicable federal estate tax exemption; (3) the likelihood that the surviving spouse will reside in a state with a state estate tax.

While all of these uncertainties may remain at the death of the first spouse, this flexible plan is premised on the assumption that we may know more at that time than we did when the wills and estate plan were drafted. Without the New Jersey estate tax and with the potential of a high Federal estate tax exemption, this will be a plan that will retain its popularity. If the spouses plan to utilize a “disclaimer” trust option, it is still important to title the assets to divide the family estate equally between the husband and wife. While a one-half interest in real property can be disclaimed pursuant to both Treas. Reg. § 25.2518-2(c)(4)(ii) and N.J.S.A. 3B:9-2, other intangibles should be divided between the spouses.

Using this type of plan will provide for greater ease of administration if the spouses have a plan in mind as to how the disclaimer trust will operate at the death of either spouse. Some estate planners dislike the use of disclaimer trusts because they are concerned that a surviving spouse, in an emotional state, may be unwilling or emotionally unable to make the required evaluation of the need to disclaim in the short time permitted for a disclaimer. Others feel that if properly addressed in the planning phase, the surviving

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spouse will be able to carry through with this task as an entirely financial matter (not emotional). As a general rule, the disclaimer must be completed and filed (in the County Surrogate’s office) within nine months of death. For real estate, it must also be filed in the Recorder of Deeds. Note the New Jersey disclaimer statute does not require that the disclaimer be filed within nine months. The only limitation under New Jersey law is that the disclaimant cannot accept the property. N.J.S.A. 3B:9-9. For federal tax purposes, the disclaimer must be completed within nine months. I.R.C. § 2518.

If the disclaimer meets the requirements of Code Section 2518, it is a “qualified disclaimer” (a tax sensitive term). The transfer is not treated as a gift by the disclaimant for gift tax purposes and it is treated as a gift/bequest directly by the decedent as if the disclaimant had predeceased. The nine-month time frame is usually a sufficient period of time to deal with the emotional aspects of death of a loved one and make a rational financial choice — particularly if it has been considered earlier in the planning phase. Certainly, it is not something that must be considered shortly after the first spouse’s death. However, assuming the spouse does not retitle assets into his/her individual name (which tends to be a natural desire), there should be adequate time to meet, discuss the financial options and make an informed choice about whether or not to execute on the disclaimer trust plan.

This planning option provides substantial flexibility. Obviously, the couple must be comfortable that the surviving spouse will carry through with the testamentary desires of the predeceasing spouse. Thus, it may not be appropriate in the second marriage where there are alternate heirs (i.e., children of a previous marriage). If the spouses have planned to leave their entire estate to the survivor or the purpose of establishing a trust was simply related to the tax opportunities, then this type of plan may need reconsideration.

Another consideration may be whether the surviving spouse will need the entire balance of the funds received from the predeceasing spouse. There are two mechanisms to consider in connection with this plan. First, if the surviving spouse feels that he/she does not need the entire estate, the survivor can also, likewise, disclaim an interest in the disclaimer trust, either in whole or in part. Thus, for purposes of testamentary disposition, this will be treated as if the property passed directly from the predeceasing spouse to the alternate heirs (presumably children/grandchildren). An alternate plan would be to devise the disclaimer trust in a fashion which allows principal to be used for the benefit of the heirs in addition to the surviving spouse. This is explicitly permitted by Treas. Reg. 25.2518-2(e)(2), assuming that the power of distribution is limited by an ascertainable standard.

The challenge for many New Jersey practitioners post-repeal of the New Jersey estate tax is to convince clients with wealth levels under the federal exemption of the need for better planning. The threat of a New Jersey estate tax clearly was a driver pushing clients to estate planners. Absent that starting in 2018, practitioners will have to educate clients about a range of considerations that would justify the cost of professional planning. These might include:

With increased longevity the likelihood of remarriage following the death of a prior spouse will increase. The need for trusts on the first death to protect those

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assets is more important than most realize.

Elder financial abuse is burgeoning. The use of on-line document preparation services is unlikely to provide the independent guidance to address this significant risk.

If Hillary captures the White House, she may succeed in pushing through her tax increase agenda. A reduction of the gift exemption to $1 million could have a chilling effect on asset protection and other planning.

Life Insurance Trusts May Need to be Revisited

Some taxpayers may have life insurance trusts that were created to hold life insurance to pay an estate tax. Even if the increases in the federal estate tax exemption eliminated the federal estate tax, some taxpayers may have retained an insurance trust in place to fund the New Jersey estate tax. If the New Jersey estate tax is in fact repealed perhaps there is no longer an estate tax justification for the insurance trust, but for some estates a New Jersey inheritance tax may still support such a plan if the inheritance tax is not also repealed. While in many instances insurance trusts and life insurance serve a range of other purposes, if the elimination of the New Jersey estate tax eliminates the last relevant purpose, options could be explored for both the insurance coverage and the trust owning it.

Life insurance may have been purchased to pay an estate tax that might be eliminated but insurance may provide long term care benefits, an alternative asset class to provide ballast for other investments that are more risky, a fund to borrow in retirement, and more.

Durable Power of Attorney (and Revocable Trusts) Gift Provisions Might Warrant Reconsideration

If a taxpayer’s power of attorney has a gift provision and the sole purpose of that gift provision was to save estate tax, then the power of attorney (or revocable trust if that too had a gift provision) should be evaluated. If there is no other purpose for the gift provision, consideration should be given to revising the document to reduce or eliminate the gift provision. Given the incidence of elder financial abuse using a durable power of attorney, if there is no reason to retain a gift provision, it may be preferable to revise the document and eliminate it.

Title to Assets Should Be Revisited

Some taxpayers intentionally divided assets so that either spouse could have assets to fund a credit shelter trust no matter who died first. If this was done for taxpayers with estates under the federal estate tax exemption, it may not be feasible to again change the ownership of assets back to whatever would be preferable without regard to the estate tax. So for example, if a couple in New Jersey had a $5 million estate, they were well below the federal estate tax exemption. They may have divided assets to fund a bypass trust under each of their wills. Assume the wife was a physician and the husband a teacher. It might be

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preferable to have all assets in the husband’s name to minimize liability exposure in the wife’s name. The repeal of the New Jersey estate tax might warrant changing title to those assets back to only the husband’s name.

Example: A couple in New Jersey had a $5 million estate they were well below the federal estate tax exemption. They divided assets approximately equally in each spouse’s name to fund a bypass trust under each of their wills. Assume the wife was a physician and the husband a teacher. It might be preferable to have all assets in the husband’s name to minimize liability exposure in the wife’s name. If the New Jersey estate tax is in fact repealed perhaps assets can be changed back to only the husband’s name.

Example: A better but more complex approach might be to use some of the assets to fund an inter-vivos QTIP trust so there is protection and more control over disposition. If the inter-vivos QTIP is formed in a state that permits self-settled trusts or has express language permitting a bypass back to the grantor spouse, on the death of the first spouse the assets will return to the settlor spouse in a bypass trust, thus permitting both spouse’s to benefit from the assets while providing asset protection. The practical issue is that absent the threat of a federal or state estate tax will the couple undertake the planning? Will the possibility of a Democratic win of the White House and a harshening of the estate tax motivate the planning now? If not, will the couple revisit that planning depending on the outcome of the 2016 election?

The title to assets can be relevant to estate tax planning, and in particular to obtain an increase (step-up) in income tax basis on death (if the first to die holds the assets the income tax basis will be increased and the survivor can sell that asset without a capital gain). Assets might be retitled into the name of the spouse that is anticipated to die first, but not within one year (unless further planning is undertaken). Alternatively, a community property trust could be created in Alaska, South Dakota or Tennessee so that whichever New Jersey (a non-community property state) spouse dies first arguably all assets should qualify for an estate tax update. If the appreciation potential in the estate is large enough perhaps this might be advisable.

Be cautious about a myriad of ancillary issues before changing title to assets. What are the matrimonial implications to retitling assets? Even if there are arguably only limited legal implications because equitable distribution there might be a strategic impact? Should a post-nuptial agreement be created to address the retitling of assets?

Changing the title to a house might affect property taxes (e.g., senior citizen or veterans benefits), insurance coverage, and other matters.

Changing a legal document such as a will, without addressing title to assets, may accomplish nothing. Taxpayers need to understand that the elimination of the tax does not eliminate the need for planning and follow up. For professionals of all stripes this is going to be a hard sell: “I need to bill you to do work that may not save your heirs taxes.” The key to this pitch will be all advisers echoing the same mantra. But will all players on the team really cooperate? Will wealth managers really do the right thing and push clients back to

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their estate planners?

New Jersey Inheritance Tax Trap

Will the New Jersey inheritance tax also be repealed? It does not appear so. Perhaps the revenue loss from both the repeal of the estate and inheritance tax at one time was deemed too costly. This will remain a trap for the unwary. Taxpayers will likely assume that since the estate tax has been repealed, there remain no New Jersey death taxes until their estates are tagged with a costly New Jersey inheritance tax. For those taxpayers bequeathing assets to beneficiaries subject to inheritance tax, gifts prior to death, and/or retaining life insurance to pay inheritance tax may be worthwhile.

Perhaps durable powers of attorneys (and/or revocable trusts if those are the primary dispositive document) should be revised to permit or restrict advancement of testamentary gifts that might trigger a New Jersey inheritance tax. In New Jersey, inheritance tax is imposed on gifts within three years of death, unlike the federal rule upon which the New Jersey estate tax was based.

Personal Goals Become More Important

Estate planning should never be only about estate taxes. There are a myriad of important personal goals that should be considered. One dimensional planning rarely is effective. Plans that were implemented merely to avoid New Jersey estate tax for taxpayers with estates under the federal exemption should be revisited to assure that robust and broad based planning was addressed and not merely a tax fix that is no longer needed. Did the documentation and planning address personal goals and issues? Was later life planning addressed if relevant? What steps were taken to reduce the risks of elder financial abuse? Does the client have religious goals or personal financial objectives for heirs that were overlooked in the focus of planning on taxes?

Does New Jersey Repeal Matter to the Ultra Wealthy?

Yes. Many estate plans for wealthy persons domiciled in New Jersey might have funded three trusts: a New Jersey credit shelter trust up to $675,000, a gap trust with the difference between the federal estate tax exemption in the year of death, and a QTIP for the remaining estate. The issue was how the gap trust might be characterized for estate tax purposes. Once the New Jersey estate tax is fully repealed, there will be no detriment to fully funding a bypass trust to the federal estate tax exemption. Until that time the multiple trust approach might still make sense.

For some wealthy taxpayers, an outright bequest might have been provided to the surviving spouse. The surviving spouse may have, according to the plan, intended to receive all assets outright from the deceased spouse and then make a gift to a self-settled trust. In that way no New Jersey estate tax would be incurred and the full federal exemption for the first to die

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spouse could be used. While this plan still has an advantage in that the irrevocable trust using the exemption will be a grantor trust as to the surviving spouse, providing ongoing tax burn for his or her estate. However, the calculus of the advantages and risks of that plan will change substantially if the New Jersey estate tax is repealed. It may be preferable to have the will or revocable trust of the first to die spouse fully fund a credit shelter trust on death and avoid the risk of the surviving spouse not carrying through on the intended plan, creditors of the surviving spouse reaching the assets bequeathed outright, etc.

Language in wills and revocable trusts should be reviewed to assure that it accomplishes the planning goals during the phase out of the tax and following the repeal.

Should the Client “Repatriate?”

Many wealthy taxpayers established domicile in states without an estate tax, e.g., Florida. Some of these clients really moved and changed their nexus out of New Jersey. Other clients may maintain that they have moved but may not have really made sufficient changes. In a few cases taxpayers merely take a position that they were no longer domiciled in New Jersey to avoid the New Jersey estate tax. In the latter cases, and perhaps in the former, these taxpayers might wish to revisit their domicile decisions and status in light of the repeal. In such cases not only might all estate planning documents have to be updated to reflect a New Jersey domicile but a range of other decisions and steps might have to be modified as well.

Other Considerations Make Changes Complicated

There are a host of other considerations that should be factored into the analysis. Before documents, planning, insurance, asset title or other matters are changed consider:

Nothing in the tax world is certain. What changes today may change tomorrow. Planning should have been and should remain flexible. If current documents were done designed with flexibility in mind perhaps they should be revised on that basis alone

Will the New Jersey estate tax repeal actually take effect as indicated?

What will happen with the federal estate tax after the election? Will it be repealed or will instead the exemption be lowered significantly and other restrictive changes made?

Asset protection, elder financial abuse and other considerations may be relevant.

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Mobility is important to consider too. Where might the taxpayer move in the future?

Conclusion

If the New Jersey estate and inheritance tax are in fact repealed, it will be a welcome relief to those affected and might actually increase tax revenues to the State of New Jersey given how many taxpayers move out of the state (or say they do) to avoid the state’s estate tax. Planning will be significantly simplified for those with estates near or under the federal estate tax exemption. In light of this, everyone should review their existing estate planning documents, title to assets, life insurance coverage and anything else affected.

The disturbing part of the repeal is tax on the wealthiest are being reduced while sales and gas taxes that disproportionately weigh on those of more modest means, where the additional dollars involved can create a real hardship, have been increased.

The pros and cons of the estate tax repeal coupled with the other tax changes are debatable; the need to revisit and potentially revise estate planning documents in light of those changes is not.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Marty Shenkman

Rich Greenberg

Glenn Henkel

CITE AS: LISI Estate Planning Newsletter #2466 (October 19, 2016) at http://www.leimbergservices.com Copyright 2016 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

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BANK OF AMERICA, N.A.,

trustee, [Note 1] vs. COMMISSIONER OF

REVENUE.

474 Mass. 702

March 7, 2016 - July 11, 2016

Court Below: Appellate Tax Board

Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, & Hines, JJ.

Records And Briefs:

• (1) SJC-11995 01 Appellant Bank Of America Brief

• (2) SJC-11995 04 Appellee Commissioner Of Revenue Brief

• (3) SJC-11995 05 Amicus MA Bankers Association Brief

• (4) SJC-11995 06 Appellant Bank Of America Reply Brief

Oral Arguments

Trust, Taxation. Taxation, Trust, Income tax. Fiduciary. Domicil. Words,"Inhabitant.".

The Appellate Tax Board (board) correctly determined that the taxpayer bank, in its capacity as

corporate trustee of several inter vivos trusts, qualified as an"inhabitant" subject to the fiduciary

income tax pursuant to G. L. c. 62, § 10, despite not being domiciled in Massachusetts, where, in

light of the explicit directive in G. L. c. 62, § 14, to treat individual and corporate trustees the

same for purposes of the fiduciary tax, the requirement of § 10 (c) that at least one trustee of a

trust be an inhabitant of the Commonwealth provided a context in which the definition

of"inhabitant" could be expanded to include a corporate entity, and where the board properly

considered not only the bank's maintenance of offices in the Commonwealth and its engaging in

regular business activities for more than one-half of the tax year at issue, but also the

Commonwealth-centered activities conducted by the bank in its capacity as corporate trustee,

including activities materially centered on the subject trusts. [708-713]

This court did not reach on appeal a constitutional claim that had not been raised in proceedings

before the Appellate Tax Board. [713]

117

http://masscases.com/cases/sjc/474/474mass702.html#foot1

http://masscases.com/briefs/sjc/474/474mass702/SJC-11995_01_Appellant_Bank_Of_America_Brief.pdf

http://masscases.com/briefs/sjc/474/474mass702/SJC-11995_04_Appellee_Commissioner_Of_Revenue_Brief.pdf

http://masscases.com/briefs/sjc/474/474mass702/SJC-11995_05_Amicus_MA_Bankers_Association_Brief.pdf

http://masscases.com/briefs/sjc/474/474mass702/SJC-11995_06_Appellant_Bank_Of_America_Reply_Brief.pdf

http://www.suffolk.edu/sjc/archive/2016/SJC_11995.html

http://www.masscases.com/

APPEAL from a decision of the Appellate Tax Board.

The Supreme Judicial Court granted an application for direct appellate review.

Kevin P. Martin (Joshua M. Daniels with him) for the taxpayer.

Kirk G. Hanson, Assistant Attorney General, for Commissioner of Revenue.

Phoebe A. Papageorgiou, of the District of Columbia, & Brad S. Papalardo, for Massachusetts

Bankers Association & another, amici curiae, submitted a brief.

BOTSFORD, J. In this case, we consider whether Bank of America, N.A. (bank), in its capacity

as a corporate trustee of several inter vivos trusts, qualifies as an "inhabitant" and accordingly is

subject to the fiduciary income tax under G. L. c. 62, § 10, even

Page 703

though the bank is not domiciled in Massachusetts. Considering the bank's appeal from a

decision of the Appellate Tax Board (board) in which the board determined that the bank did

qualify as an inhabitant, we affirm the board's decision on the record of this case, but on

somewhat different grounds. [Note 2]

1. Background. [Note 3] The bank is a national banking association authorized to act as a

fiduciary. At all relevant times, the bank's commercial domicil was in North Carolina, with its

principal place of business in Charlotte, North Carolina.

This case concerns appeals by the bank from the denials, by the Commissioner of Revenue

(commissioner), of applications for abatement of fiduciary income taxes paid by thirty-four inter

vivos trusts. The taxes were paid by the bank in its capacity as trustee or co-trustee of each of the

thirty-four trusts; [Note 4] the taxes paid related to the tax year ended December 31, 2007 (tax

year at issue). In 2011, the bank took the position that these thirty-four and similar inter vivos

trusts of which the bank served as trustee or co-trustee did not qualify as "resident inter vivos

trusts," as described in 830 Code Mass. Regs. § 62.10.1(1) (b) (2016), [Note 5] and therefore

were not subject to fiduciary income tax under G. L. c. 62, § 10 (§ 10). Accordingly, the bank

filed with the commissioner 2,987 applications for abatement of the tax and refund of all taxes

paid in the tax year at issue; applications for abatement

Page 704

on behalf of the thirty-four trusts involved in the present appeal were included. After six months

passed without a decision from the commissioner, the bank withdrew its consent to extend the

time for the commissioner to act with regard to these thirty-four applications for abatement. As a

result, the thirty-four applications were deemed denied pursuant to G. L. c. 58A, § 6. [Note 6]

118






In November, 2011, the bank filed petitions with the board under G. L. c. 58A, § 7, appealing the

denial of the thirty-four abatement applications; the abatements sought totaled $2,287,707. The

parties chose four of the thirty-four trusts (subject trusts) to serve as representative trusts for the

purposes of the appeal, and agreed that the same dispositive question of law applied to the

remaining thirty trusts. The board issued its findings of fact and report on June 10, 2015, and

concluded that the bank, in its capacity as trustee, was an inhabitant of the Commonwealth

within the meaning of G. L. c. 62, §§ 1 (f) and 10 (c), during the tax year at issue and that the

subject trusts were resident inter vivos trusts subject to the fiduciary income tax under G. L. c.

62, § 10 (a). The bank filed a notice of appeal from the board's decision and this court granted

the bank's application for direct appellate review.

The agreed-to facts, which are set out in the board's decision, include the following. The four

representative trusts that were the subject of the board's decision are the R.K. Elliot Trust, the

Hovey Trust, the Gordon Trust, and the J.M. Elliot Trust. [Note 7] Each of these trusts is an inter

vivos trust created by an individual who was an inhabitant of the Commonwealth at the time of

the trust's creation, and each trust had become irrevocable prior to the tax year at issue. During

that year, none of the subject trusts had any Massachusetts source income that was taxable under

G. L. c. 62, § 5A, and no identified beneficiary to whom income was payable from these trusts

was an inhabitant of the Commonwealth. However, it is undisputed that income received in

relation to each of the subject trusts was "accumulated for unborn or unascertained persons, or

persons with uncertain interests" within the meaning of G. L. c. 62, § 10 (a).

Page 705

Throughout the tax year at issue, the bank sought out and entered into banking and other

commercial relationships, including making loans, with residents and with business entities in

the Commonwealth; conducted business in no fewer than 200 branch offices located in the

Commonwealth that were staffed by Commonwealth residents who were the bank's employees;

and qualified as a "financial institution" that was "engaged in business within the

Commonwealth" within the meaning of G. L. c. 63, §§ 1, 2, 2A. [Note 8], [Note 9]

Specifically with respect to trust activities relating to the subject trusts, the bank performed the

following activities in the Commonwealth during the tax year at issue: operated and staffed

offices for the purpose of fulfilling some of the bank's obligations as a trustee of those trusts;

maintained relationships with the trusts' beneficiaries, and decided when to make distributions to

the beneficiaries pursuant to the trust documents; administered the trusts' assets and retained

certain records relating to trust administration; and conducted research on issues relating to the

trusts and discussed such issues with the trusts' grantors, beneficiaries, and their representatives.

The bank also performed certain trust-related activities in the Commonwealth that related to trust

administration more generally, including consulting with clients and prospective clients about the

bank's trust services; discussing accounts with grantors and beneficiaries of other trusts for which

the bank served as trustee; reviewing proposed trust instruments with clients; and providing a

place for persons to execute trusts that named the bank as fiduciary. However, bank personnel

located outside the Commonwealth also performed trust-related activities in relation to the

subject trusts, and "policy and procedures related to administrative and investment components

of trusts generally were formulated by [bank] personnel located outside the

Commonwealth." [Note 10]

119





2. Discussion. a. Standard of review. "A decision by the board

Page 706

will not be modified or reversed if the decision 'is based on both substantial evidence and a

correct application of the law.'" Capital One Bank v. Commissioner of Revenue, 453 Mass. 1 , 8,

cert. denied, 557 U.S. 919 (2009), quoting Boston Professional Hockey Ass'n v. Commissioner

of Revenue, 443 Mass. 276 , 285 (2005). "Because the board is authorized to interpret and

administer the tax statutes, its decisions are entitled to deference. . . . Ultimately, however, the

interpretation of a statute is a matter for the courts" (citation omitted). Onex Communications

Corp. v. Commissioner of Revenue, 457 Mass. 419 , 424 (2010).

b. Relevant statutes. General Laws c. 62 generally concerns the taxation of income within the

Commonwealth. Section 10, which relates to trust income, provides in relevant part:

"The income received by trustees or other fiduciaries shall be taxed in the following manner:

"(a) The income received by trustees or other fiduciaries described in subsection (c) of this

section shall be subject to the taxes imposed by this chapter to the extent that the persons to

whom the same is payable, or for whose benefit it is accumulated, are inhabitants of the

commonwealth . . . . Income received by trustees or other fiduciaries described in subsection (c)

of this section which is accumulated for unborn or unascertained persons, or persons with

uncertain interests shall be taxed as if accumulated for the benefit of a known inhabitant of the

commonwealth.

". . .

"(c) The provisions of subsection[] (a) . . . of this section shall apply to . . . trustees under a trust

created by a person or persons, any one of whom was an inhabitant of the commonwealth at the

time of the creation of the trust or at any time during the year for which the income is computed,

or who died an inhabitant of the commonwealth, any one of which trustees or other fiduciaries is

an inhabitant of the commonwealth . . . ."

As these provisions indicate, the fiduciary income tax described in § 10 only applies to trust

income when the residency or inhabitance requirements for three distinct parties connected to the

trust are met. In particular, for the fiduciary income tax prescribed by § 10 (a) to be imposed, at

least one grantor or creator of the trust, at

Page 707

least one or more of the beneficiaries, and at least one trustee must be "inhabitants" of the

Commonwealth.

Section 1 of G. L. c. 62 contains definitions applicable to the chapter, including the term

"inhabitant." It provides in relevant part:

120

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"When used in this chapter the following words or terms shall, unless the context indicates

otherwise, have the following meanings: --

". . .

"(f) 'Resident' or 'inhabitant', (1) any natural person domiciled in the commonwealth, or (2) any

natural person who is not domiciled in the commonwealth but who maintains a permanent place

of abode in the commonwealth and spends in the aggregate more than [183] days of the taxable

year in the commonwealth, including days spent partially in and partially out of the

commonwealth. . . . The word 'non-resident' shall mean any natural person who is not a resident

or inhabitant."

G. L. c. 62, § 1 (f) (§ 1 [f]).

By its terms, the definition of "inhabitant" in § 1 (f) refers solely to a "natural person," a term

that does not include a corporation, such as the bank. This leads to the third relevant statute, G.

L. c. 62, § 14 (§ 14), which states in pertinent part:

"Corporations acting as trustee or in any other fiduciary capacity shall, with respect to the

income received by them in that capacity, be subject to this chapter in the same manner and

under the same conditions as individual inhabitants of the commonwealth acting in similar

capacities . . . ."

c. Board's decision. Before the board, the bank and the commissioner defined the "sole issue

presented" in the bank's appeal to be whether the bank was an "inhabitant" of the Commonwealth

within the meaning of §§ 1 (f), 10, and 14. [Note 11] Recognizing the interplay among these

three statutes, the board considered whether,

Page 708

and if so, in what manner, the definition of the term in § 1 (f) should be interpreted to include a

corporation. It first determined that in light of § 14's explicit directive that corporate trustees be

treated the same as individual trustees in relation to fiduciary income tax, the definition of

"inhabitant" in § 1 (f) should be read to apply to corporate trustees, and, turning to the terms of

the definition, the board focused specifically on the terms of § 1 (f) (2). [Note 12] Under § 1 (f)

(2), a natural person who is a nondomiciliary qualifies as an inhabitant if he or she "maintains a

permanent place of abode in the Commonwealth" and spends more than 183 days per year in the

Commonwealth. To apply this definition to a corporation, the board considered the meaning of

"permanent place of abode," a phrase not statutorily defined. Based on dictionary definitions, the

board ultimately determined that "a corporation will qualify as an inhabitant of the

Commonwealth within the meaning of §§ 1 (f) and 10 (c) if it maintains a permanent place in the

Commonwealth at which it abides, i.e., where it continues to be and is stable in some state or

constant in some relationship for the requisite number of days of a taxable year." [Note 13] The

board then applied this rule to the underlying facts, and concluded that the bank satisfied the

criteria to be an "inhabitant" during the tax year at issue through its presence and activities in

Massachusetts during that year.

121




d. Bank's claims of error. i. "Inhabitant" requirement as applied to a corporate trustee. The bank

argues that because the definition of "inhabitant" under § 1 (f) is specific only to "natural

person[s]," it manifestly does not include corporate trustees, and that the traditional criterion for

imposing the fiduciary income tax on corporations -- that the corporation was domiciled in the

Commonwealth -- has not been met because the bank, and U.S. Trust, had their commercial

domicils in States other than Massachusetts; at the very least, the bank contends, § 1 (f) is

ambiguous

Page 709

and the taxpayer trusts should receive the benefit of any such ambiguity. The bank further argues

that § 14 does not require the application of § 1 (f) (2) to corporations. In the bank's view, these

reasons, alone or in combination, compel the conclusion that the fiduciary income tax does not

apply to the subject trusts because the inhabitance requirement for the trustee under § 10 (c) is

not satisfied. We disagree.

The Legislature amended the definition of "inhabitant" in 1995 to add § 1 (f) (2) specifically to

include a class of individuals who are not Massachusetts domiciliaries, namely, individuals

domiciled outside the Commonwealth who maintain a "permanent place of abode" and spend

more than 183 days in Massachusetts. See St. 1995, c. 38, § 65. Under § 14, corporate trustees

are to be treated "in the same manner and under the same conditions as individual inhabitants."

Keeping in mind that "[t]he words of a statute must be construed in association with the general

statutory plan," Commissioner of Revenue v. Wells Yachts South, Inc., 406 Mass. 661 , 664

(1990), the board's interpretation of the definition of "inhabitant" in § 1 (f) (2) as applicable to a

corporate trustee was a reasonable one. See generally Attorney Gen. v. Commissioner of

Ins., 450 Mass. 311 , 319 (2008) (substantial deference given to reasonable interpretation of

statute by agency charged with administrative enforcement). This is particularly true in view of

the specific instruction in G. L. c. 62, § 1, that when used in the chapter, the words defined in § 1

are to have the meanings set forth in that section "unless the context dictates otherwise." In light

of § 14's explicit directive to treat individual and corporate trustees the same for purposes of the

fiduciary income tax, we agree with the commissioner that the requirement of § 10 (c) -- that at

least one trustee of a trust be "an inhabitant of the commonwealth" -- provides a context in which

the definition of "inhabitant" cannot be limited to a "natural person," but rather must be

expanded to include a corporate entity. [Note 14] Cf. Springall v. Commissioner of Revenue, 391

Mass. 23 , 25 n.2 (1984) ("Surely,

Page 710

the Legislature did not intend to treat a trust differently for the purposes of G. L. c. 62, § 9,

depending on whether a fiduciary was a natural person or a corporation"). To read § 14 as not

imposing this requirement on corporations would be essentially to deprive the section of

meaning, an undesirable result. See, e.g., Volin v. Board of Pub. Accountancy, 422 Mass. 175 ,

179 (1996) ("We do not interpret a statute so as to render it or any portion of it meaningless"

[quotation and citation omitted]). We therefore reject the bank's argument that, in connection

with its activities as a trustee of the subject trusts, it cannot be subject to the fiduciary income tax

imposed under § 10 solely because it is not domiciled in Massachusetts.

122







ii. The bank's presence and activities in the Commonwealth. The bank further argues that, even if

§ 1 (f) (2) applies to corporations, the board erred by creating and applying a "presence and

activities test" to determine whether the bank met the criteria set forth in § 1 (f) (2). [Note 15] In

the bank's view, the test treats corporate trustees less favorably than individual trustees, in

violation of § 14's mandate that they be treated "in the same manner." Specifically, the bank

asserts that in relation to individual trustees, the test under § 1 (f) (2) is narrow, requiring such

trustees to have a substantial personal nexus to Massachusetts, whereas the same is not required

of corporate trustees. Thus, the argument goes, an individual trustee who is not a Massachusetts

domiciliary must spend more than half the tax year in the Commonwealth to qualify as an

inhabitant, making it unlikely that he or she would be deemed an inhabitant or resident of more

than two States; but a corporate trustee, however -- at least under the board's presence and

activities test -- could be treated as an inhabitant of the

Page 711

Commonwealth for purposes of the fiduciary income tax under § 10 if the trustee maintains a

single office in Massachusetts for more than one-half year, regardless of whether the corporation

conducts any trust administration activities here. The bank suggests a more narrow test for a

corporate trustee, such as one that turns on whether there is a predominant corporate presence in

Massachusetts, which might be measured by the location of employees, or the location of assets,

or the source of corporate revenue. In the alternative, the bank argues that we should adopt the

type of test that the bank suggests the commissioner previously suggested to the board: that

corporate trustee inhabitance and, in turn, fiduciary income tax liability should be focused on

whether the trustee's administration of the particular trusts at issue takes place within

Massachusetts. The bank suggests that, under such a standard, it is unclear whether the bank

would be subject to the fiduciary income tax in relation to the subject trusts because, as the board

found, some of the bank's trust administration activities were conducted outside the

Commonwealth.

We do not share the bank's view that for the purpose of assessing the inhabitance of a corporate

trustee, the board has created a formal "presence and activities" test that focuses on the

corporation's general business presence in the Commonwealth. Rather, we understand the board

to have evaluated the specific, agreed-upon facts presented and to have reached its conclusion

that the bank qualified as an inhabitant of the Commonwealth based on those facts -- facts that

included that, in terms of Massachusetts-based activities, the bank both conducted general

banking transactions, maintaining over 200 branch offices staffed by bank employees, and

performed work as a corporate trustee of the particular trusts at issue here. With respect to the

latter, the board found that the bank:

"operated and staffed offices to fulfill some of their obligations as trustees of the [subject] Trusts;

maintained relationships with the beneficiaries of the [subject] Trusts and . . . decided when to

make distributions of trust assets to beneficiaries; administered the assets of the [subject] Trusts;

consulted with clients and prospective clients [of other trusts] about [the bank's] trust services; . .

. provided places for execution of [other] trusts which named [the bank or U.S. Trust] as

fiduciary; and researched and discussed issues involving

Page 712

123


the [subject] Trusts and discussed such issues with grantors, beneficiaries and/or their

representatives."

The bank points to the language of § 14 providing that a corporate trustee will "be subject to [the

fiduciary income tax provisions of G. L. c. 62] in the same manner and under the same

conditions as individual inhabitants of the commonwealth acting in similar capacities"

(emphasis added). We agree with the bank that the quoted language from § 14 requires a focus

on the actions within the Commonwealth of a corporation acting as a corporate trustee, including

specifically acting as trustee of the trust or trusts potentially subject to fiduciary income tax

liability, and not just on the corporation's general business activities. Put more generally, we

interpret the three interrelated statutes that apply in this case, §§ 1 (f) (2), 10, and 14, to mean

that a corporate trustee will qualify as an "inhabitant" of the Commonwealth within the meaning

and for the purposes of these statutes if it: (1) maintains an established place of business in the

Commonwealth at which it abides, i.e., where it conducts its business in the aggregate for more

than 183 days of a taxable year; and (2) conducts trust administration activities within the

Commonwealth that include, in particular, material trust activities relating specifically to the

trust or trusts whose tax liability is at issue.

We conclude that the board's decision in the present case is consistent with this interpretation of

statutory requirements. It concluded in effect that for a corporate trustee such as the bank to be

deemed an inhabitant under § 1 (f) (2), there must be proof that the corporation has an

established presence in the Commonwealth through, e.g., maintaining a permanent office or

offices in Massachusetts and engaging in regular business activities here, for more than one-half

of the tax year at issue. Such a presence corresponds to the presence of an individual inhabitant

at a permanent place of abode for more than 183 days in a year. Certainly the agreed-upon facts

establish that the bank met this requirement. But as the portion of the board's decision quoted

supra shows, the board did not stop with the bank's general corporate activities within the

Commonwealth. Rather, the board considered the Commonwealth-centered activities conducted

by the bank in its capacity as corporate trustee, including activities that were centered on the

subject trusts. And we agree with the board that the bank's activities relating to administration of

the subject trusts demonstrate the bank's material and specific trust-

Page 713

related nexus to Massachusetts for more than 183 days of the tax year at issue. Accordingly, the

board did not err in ruling that the bank was subject to the fiduciary income tax imposed by §

10. [Note 16]

iii. Dormant commerce clause. Finally, the bank argues that the board's decision, and in

particular its interpretation of § 1 (f) (2) as applying to the bank, "raises serious questions" under

the dormant commerce clause of the United States Constitution. See art. I, § 8, cl. 3, of the

United States Constitution. [Note 17] The bank did not raise a constitutional claim before the

board, and to the extent it seeks to do so here, we consider the claim to be waived. [Note 18] See

G. L. c. 58A, § 13 ("The court shall not consider any issue of law which does not appear to have

been raised in the proceedings before the board"). See also Minchin v. Commissioner of

Revenue, 393 Mass. 1004 , 1005 (1984),quoting New Bedford Gas & Edison Light Co. v.

Assessors of Dartmouth, 368 Mass. 745 , 752 (1975) ("To raise a constitutional question on

124






appeal to this court from the board, the taxpayer must present the question to the board and, in so

doing, make a proper record for appeal. Otherwise, the taxpayer waives the right to press the

constitutional argument"). [Note 19]

Page 714

3. Conclusion. The decision of the Appellate Tax Board is affirmed.

So ordered.

FOOTNOTES

[Note 1] Of thirty-four trusts.

[Note 2] We acknowledge the amicus brief submitted by the Massachusetts Bankers Association

and American Bankers Association in support of the bank.

[Note 3] The background facts are undisputed. This case was submitted to the Appellate Tax

Board (board) on the parties' statement of agreed facts and sixty-four exhibits; in its decision, the

board made findings based on the statement of agreed facts.

[Note 4] Effective February 22, 2008, Bank of America, N.A. (bank), and United States Trust

Company National Association (U.S. Trust) were merged; the bank was the surviving entity.

Like the bank, U.S. Trust was a national banking association organized under Federal law and

authorized by the Federal Comptroller of Currency to act as a fiduciary. Its commercial domicil

was in New York, with its principal place of business located in New York, New York. During

2007, U.S. Trust was serving as the trustee or co-trustee of eleven of the thirty-four trusts

involved in this appeal, but after its merger with the bank in February, 2008, the bank replaced

U.S. Trust as trustee and filed all the applications for abatement relating to the tax year ending

December 31, 2007 (tax year at issue), that are the focus of this appeal. Hereafter, unless

otherwise indicated, the term "the bank" refers to the bank and U.S. Trust, collectively.

[Note 5] Title 830 Code Mass. Regs. § 62.10.1 (2016) defines inter vivos, or "living," trusts and

distinguishes "resident inter vivos trusts" from "non-resident inter vivos trusts" for purposes of

determining the amount of fiduciary income subject to tax.

[Note 6] The remaining applications for abatement were still pending before the Commissioner

of Revenue (commissioner) as of the time the board issued its decision.

[Note 7] During the tax year at issue, the bank was the sole trustee of the R.K. Elliot Trust and

co-trustee of the Hovey Trust; U.S. Trust was the sole trustee of the Gordon Trust and co-trustee

of the J.M. Elliot Trust.

125


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[Note 8] General Laws c. 63, §§ 1, 2, and 2A, relate to taxation of banks and other financial

institutions engaged in business in the Commonwealth.

[Note 9] The facts stated in this paragraph relate specifically to the bank, but the parties agree

that during the tax year at issue, U.S. Trust conducted banking business in the Commonwealth

and, like the bank, qualified as a "financial institution" that was "engaged in business within the

Commonwealth" within the meaning of G. L. c. 63, §§ 1, 2, 2A.

[Note 10] The facts stated in this paragraph apply specifically to the bank, but the parties have

agreed that U.S. Trust engaged in similar trust-related activities in the Commonwealth during the

tax year at issue.

[Note 11] The bank and the commissioner agreed that the subject trusts were created by

individuals who were "inhabitants" of the Commonwealth at the time each created the trust, see

G. L. c. 62, § 10 (c); the parties also agreed that income received by the trustees of each of these

trusts during the tax year at issue was "accumulated for unborn or unascertained persons or

persons with uncertain interests," and therefore was taxable "as if accumulated for the benefit of

a known inhabitant," see § 10 (a). Accordingly, whether the bank was required to pay fiduciary

income tax pursuant to G. L. c. 62, § 10, on behalf of the trusts in question turns on whether the

bank itself qualifies as an "inhabitant."

[Note 12] The board recognized that G. L. c. 62, § 1 (f) (1), with its requirement of domicil in the

Commonwealth, could not be applied to the bank, given the bank's commercial domicil in North

Carolina (and New York, for U.S. Trust).

[Note 13] Before turning to dictionary definitions, the board looked to a definition of "permanent

place of abode" provided in the commissioner's Technical Information Release 95-7 (Jan. 10,

1996), 2 Official MassTax Guide, at PWS-82 (Thomson Reuters 2016) (release). The board

found the release not to be relevant because it was clear that the release did not attempt to define

"permanent place of abode" as it applied to corporations.

[Note 14] Insofar as the bank asserts that, in light of the orientation of G. L. c. 62, § 1 (f) (2),

toward individuals, there is no reason to interpret that portion of G. L. c. 62, § 1 (f) (§ 1 [f]), as

applying to corporations, it is significant that when the Legislature amended § 1 (f) in 1995 to

add § 1 (f) (2), it did not amend G. L. c. 62, § 14 (§ 14), in any respect. As the commissioner

points out, the directive in § 14 that for purposes of the fiduciary income tax, corporate trustees

are responsible "in the same manner" as individual inhabitants "acting in similar capacities" has

been in effect since 1916. See St. 1916, c. 269, § 9. The Legislature is presumed to have been

aware that in broadening the definition of "inhabitant" in 1995 by adding § 1 (f) (2), the

expanded definition would also apply to corporate trustees through § 14. See, e.g., Boston Water

& Sewer Comm'n v. Metropolitan Dist. Comm'n, 408 Mass. 572 , 578 (1990) ("the Legislature is

presumed to understand and intend all consequences of its acts" [quotation and citation

omitted]).

[Note 15] In ruling that the bank qualified as an inhabitant of the Commonwealth during the tax

year at issue, the board pointed to the bank's "numerous and substantial activities" in the

126










Commonwealth during the tax year at issue, referencing the parties' agreed-upon facts about (1)

the general commercial activities conducted by the bank in the Commonwealth, (2) the bank's

Commonwealth-centered activities relating specifically to the four appellant trusts, and (3) the

bank's activities in the Commonwealth relating to trust administration and development of trust

administration business more generally. The bank refers to the board's reference to all these

activities as the board's "presence and activities test."

[Note 16] The bank argues further that the board's presence and activities test violates

fundamental principles applicable to the interpretation of Massachusetts statutes, including that

the test puts a premium on corporate structure, discourages companies from establishing or

acquiring offices in Massachusetts, and places an unreasonable administrative burden on national

banks. There is no evidence in the record to support these assertions.

[Note 17] The bank states specifically in its reply brief that it "does not claim that [§ 1 (f) (2)]

violates the [d]ormant [c]ommerce [c]lause either facially or as applied here." Rather, it makes

the argument to persuade us "to adopt a reading of [§ 1 (f) (2)] that avoids constitutional doubts

across the sweep of [the section's] reasonably foreseeable applications."

[Note 18] The bank did not raise any argument under the dormant commerce clause before the

board and the board made no rulings with regard to the dormant commerce clause as applied to

the facts on record before it. Indeed, the bank specifically stated in its reply brief to the board

that it "did not argue the specter of multistate taxation as a basis for relief" and that "there is no

constitutional issue raised in this matter." The bank's argument below -- that, if other States were

to follow Massachusetts's lead in taxing fiduciary income on the basis of a corporation's

residence in those States, it could lead to "potential constitutional implications" -- was

insufficient to raise a particularized claim of error warranting review by this court under the

dormant commerce clause.

[Note 19] Although this case does not require us to consider a dormant commerce clause

challenge to § 1 (f) (2) or the related statutory provisions governing the fiduciary income tax, it

bears pointing out that (1) under G. L. c. 62, § 6 (a), an inter vivos trust subject to the fiduciary

income tax in Massachusetts would be entitled to a credit for any taxes paid with respect to that

income to another State; and (2) for such a trust to be subject to the fiduciary income tax here,

not only must the corporate trustee be an inhabitant of the Commonwealth, but so must the

creator of the trust as well as at least one beneficiary. See G. L. c. 62, § 10 (a), (c).

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SEVEN YEARS OF PORTABILITY:

WHAT HAVE WE LEARNED, WHAT ARE WE STILL LEARNING, AND

WHERE ARE WE GOING?

By: Bruce E. Mantell, Esq., LLM, CPA

I. PORTABILITY AFTER SEVEN YEARS: A NEW JERSEY PRACTITIONER’S PRACTICAL

PERSPECTIVE AND MUSINGS

A. Is the Rule of Thumb to Make a Portability Election?

1. Is there a downside to making a Portability Election? Every surviving spouse in a situation where

there is Deceased Spouse Unused Exemption (DSUE) should consider making a Portability Election

2. Even if there is little probability that the DSUE will be utilized by the surviving spouse, there is still a chance that the survivor spouse will have a windfall (lottery) or marry a wealthy second spouse whose family would welcome the opportunity of being able to reduce their federal estate tax

B. Why Not Make a Portability Election?

1. In New Jersey, almost every estate that is required to file a Form IT-Estate (New Jersey Estate

Tax) can make the Portability Election at very little extra cost (professional fees) because Form 706 (U.S. Estate Tax Return) is already being prepared as part of the Form IT-Estate (New Jersey Estate Tax Return) filing (except when using the Simplified Method which should have limited application)

2. In those states (about 2/3) where there is no estate tax, there is a more significant extra cost to preparing and filing a Form 706 to make a Portability Election. Of course, with the New Jersey repeal of the state estate tax effective January 1, 2018, NJ will flip to the 2/3 category and it will become more problematic to convince executors to make the Portability Election by filing Form 706

3. But even in New Jersey there may be real or practical reasons for not making a Portability

Election

a. If the survivor spouse is very old with virtually no chance of remarriage there is little reason to make the Portability Election. And if the old surviving spouse plays the lottery and wins, it is almost a certainty that his or her family members will be partners (or owners) of the winning ticket

b. Another reason for not making a Portability Election is if there is little probability that the DSUE will be beneficial and there are a plethora of gift tax returns that have been filed and would need to be attached to the Form 706 even though the Form 706 is filed only to make the Portability Election. If gifts of interests in entities had been made with significant discounts applied and if some of the gift tax returns are for open years, or if there were a number of years in which no Forms 709 were filed because only annual

129

exclusion gifts were made based upon aggressive valuation methodology, there may be an unnecessary risk of disclosure that can be avoided by not making the Portability Election and filing Form 706

C. What Should an Attorney Do If the Executor (Administrator) Decides Not to Make the Portability

Election?

1. In each and every estate of a predeceased spouse where a Portability Election is not made, counsel should have a letter in the file that counsel has advised the Executor (Administrator) of the advantages of making a Portability Election and the Executor has, nevertheless, decided not to make the election. Preferably, the Executor will sign the letter. See copy of example of draft letter at Exhibit A

2. Having the letter in file could someday protect counsel from future malpractice claims by unhappy heirs who inherit less because federal estate taxes are greater since the DSUE is not available to them

D. Estate Tax Closing Letter for Portability is Same as the Estate Tax Closing Letter for I.R.C. Section 6018

Form 706 Filing

1. The Estate Tax Closing Letter issued by Internal Revenue Service in the case of a Portability Election is no different from an I.R.C. Section 6018 Form 706 filing. (See attached Exhibit B)

2. The statute of limitation on a Form 706 filed solely to make a Portability Election does not begin to run until a Form 709 is filed by the surviving spouse in which DSUE is utilized or Form 706 is filed by the surviving spouse in which DSUE is utilized

3. A close reading of the Estate Tax Closing Letter issued by the IRS with respect to a Portability

Election on a Form 706 only filed to make the election makes no sense and does not respond to the nature of the Form 706 filing. The IRS has not restructured the Estate Tax Closing Letter to respond specifically to the Portability Election only Form 706 submission

E. Late Portability Elections.

Initially, IRS issued Rev. Proc. 2014-18, allowing late Portability Elections. Rev. Proc. 2014-18 covered elections for deaths between January 1, 2011 through December 31, 2013 if an election is made by December 31, 2014. Today, if a Form 706 is required to be filed pursuant to I.R.C. Section 6018, and a Portability Election is not made by the extended due date of the Form 706, there is no relief. However, if a Form 706 is not required to be filed and the estate fails to make a timely Portability Election, the IRS has generally been issuing favorable rulings to allow a late portability election. Reg. Secs. 301-9100-1 and 301-9101-3 require the Executor to file an Affidavit stating (i) the facts and circumstances stating why the Portability Election was not filed timely, (ii) that the taxpayer acted reasonably and in good faith and (iii) the relief will not prejudice the IRS. Prejudicing the IRS means that making the late election puts the taxpayer in a better position than it would be if the taxpayer had originally made the timely election. The IRS fee of requesting the ruling is $9,800. Since the DSUE could be $5,490,000, the potential estate tax savings advantage easily justifies the $9,800 IRS fee plus professional costs in light of the 40% federal estate tax.

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F. Is Executor Under a Fiduciary Obligation to Make a Portability Election?

It is not unusual for children to have a strained relationship with the second spouse of a parent. If a child is named Executor of the parent’s estate, must the Executor request whether the second spouse wants a portability election to be made? If Executor refuses to make the Portability Election is the Executor subjecting himself, herself or itself to a potential breach of fiduciary duty? If the Executor, however repugnant, decides to make the portability election, is the surviving spouse responsible for reimbursing the estate for the cost of making the Portability Election on behalf of the Executor? (See the decision of the Supreme Court of Oklahoma In the Matter of the Estate of Anne S. Vose (1/17/2017) at Exhibit C)

G. Premarital Agreements and other Estate Planning Issues

1. The parties to a second marriage should consider Portability when negotiating a Premarital

Agreement. See example of language in Premarital Agreement at Exhibit D

2. The parties should also consider an independent Executor who will decide what is in the best interest of the estate, as there may be inherent competing interests between the families of the spouses in a second or multiple marriage situations. As stated above, does the Executor or Administrator have a fiduciary duty to make the Portability Election if requested by the surviving spouse?

3. For some individuals, the Portability Election should also be referenced in the estate planning

documents. A provision directing the Executor to elect portability of any unused exemption is often prudent

H. Importance of Gifting in Second Marriage When One or Both Spouses Enter Second Marriage with

DSUE

1. DSUE can be utilized during one’s lifetime and reported on Form 709 Gift Tax Return (See Exhibit E), or it can be utilized at death and reported on Form 706 Estate Tax Return (See Exhibit F)

2. Only the last DSUE is portable. If the surviving spouse remarries and the second spouse dies, the surviving spouse can only use the DSUE of the second deceased spouse. It is prudent, therefore, for the surviving spouse to consider using the first deceased spouse’s DSUE by making lifetime gifts while the first deceased spouse is still the surviving spouse’s last deceased spouse (second spouse hasn’t died)

3. Although at the death of the surviving spouse there is only one DSUE available, a couple in a

second (or multiple marriage situation) may each have DSUE from prior marriages and can use both DSUE’s to effectuate a large gifting program. For example, if both spouses enter the marriage with their entire exemption amount and full DSUE, gifts can be made in the amount of $21,960,000 (4 x $5,490,000) without incurring a gift tax (assuming the gift is made in 2017 and the DSUE was created in 2017). This is very important issue for persons entering a second marriage with assets and DSUE to discuss and negotiate

I. Incentive to Marry

1. Many older men and women live together for years and do not marry. The reasons they do not

marry are emotional, psychological, pressure from issue, or economic. Portability can change

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that thinking. It may now make economic sense for these couples to marry for tax reasons that include joint income tax returns, the increased estate, gift and generation-skipping exemption, and portability. In these scenarios, the Premarital Agreement and estate planning documents need to be coordinated

2. And it is not unusual for the wealthier new spouse to pay an amount to the family of the less wealthy spouse for the use of the additional gift or death tax exemption. Counsel may serve as advisor, structure the arrangement, and prepare the estate planning documents, but each party should have separate counsel to negotiate and prepare the Premarital Agreement

J. The Tax Clause in Wills and Revocable Trusts

1. In multiple marriages, the tax clause in Wills and Trusts is an even more important provision

since it not only directs how federal and state estate taxes are to be paid, but how the Portability Exemption is to be allocated

2. For example, assume Husband comes into the second marriage with $5,450,000 of death exemption and $5,450,000 of DSUE. Assume Husband’s predeceased spouse has created a Marital Trust for the Husband of $10,000,000. The children of the first marriage of the Husband are the remaindermen. Assume that the Husband wishes to leave a portion of his estate to his second wife, her children and other relatives of his. Assume the Husband wants all of his death exemption and DSUE to be used to offset the federal estate tax imposed against the Marital Trust created by the first spouse. This can be accomplished only with an artfully drafted tax clause. This will not be a residuary tax clause or an appointment tax clause. It is something different

3. The concepts of the tax clause should also be memorialized in a Premarital Agreement to

eliminate or minimize any ambiguity or confusion at the death of the decedent

K. Match.Com Posting. Widow, Age 60, 5’4”, 120 ponds, blond hair, blue eyes, excellent health, enjoys golf, tennis, running, fine dining, travel and watching ESPN. Large DSUE. Consideration for utilization negotiable

L. How Will Repeal of the Federal Estate Tax Impact Portability? More likely than not, a repeal of the federal estate tax will make portability irrelevant. However, until the federal estate tax is repealed, or otherwise modified, it would be shortsighted to ignore the potential benefits of portability. Deciding that a Portability Election is unnecessary based upon anticipated legislation is no excuse when counsel faces a damage claim in the future. Counsel must continue to act prudently in his or her decision-making during a time of uncertainty

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MANTELL, PRINCE & REYNOLDS, P.C. COUNSELLORS AT LAW

MOUNTAIN HEIGHTS CENTER

AT BERKELEY HEIGHTS

430 MOUNTAIN AVENUE, SUITE 113

MURRAY HILL, NEW JERSEY 07974

BRUCE E. MANTELL* 908-464-5900

GARY A. PRINCE, JR. FACSIMILE 908-464-5901

BRIAN D. REYNOLDS *

JOHN R. HAGGERTY

LORI A. SFERRINO E-MAIL [email protected] www.mantell-prince.com __________

GREGORY J. COFFEY

RICHARD J. DEWLAND

TANIA V. SOTELO *

OF COUNSEL

* ALSO ADMITTED IN NEW YORK

ALSO ADMITTED IN FLORIDA

Re: Estate of _______________________________

Dear __________________:

This is to confirm that you, as Executrix of the above captioned Estate, have decided not

to make a Portability Election.

You acknowledge that based upon numerous discussions that we have had you

understand what a Portability Election is and how it could benefit you and your family during

your lifetime and/or your estate and your family at the time of your death.

We ask that you sign this letter in the appropriate place where indicated below.

Very truly yours,

Bruce E. Mantell

CONFIRMED & ACKNOWLDGED:

_________________________________

, Executrix

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mzumsteg

Typewritten Text

EXHIBIT A

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In the matter of Estate of Vose :: 2017 :: Oklahoma Supreme Court Decision

http://law.justica.com/cases/oklahoma/supreme-court/2017/115424.html

EXHIBIT C

In the matter of Estate of Vose

Justia Opinion Summary

The administrator of a decedent's estate appealed an interlocutory district court order

compelling the administrator to file a federal estate tax return for the decedent's estate and

elect portability of the Deceased Spousal Unused Exclusion Amount pursuant to 26 U.S.C.A.

2010. The surviving spouse sought the order, and benefits from the portability election. The

administrator argued the district court erred on several grounds: lack of jurisdiction; issues

with federal preemption; the surviving spouse's lack of standing; and that the order was

contrary to an antenuptial agreement entered into between the surviving spouse and the

decedent. After review, the Oklahoma Supreme Court found no reversible error and

affirmed.

IN THE MATTER OF THE ESTATE OF VOSE

2017 OK 3

Case Number: 115424

Decided: 01/17/2017

THE SUPREME COURT OF THE STATE OF OKLAHOMA

NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION. UNTIL

RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.

In the Matter of the Estate of Anne S. Vose, Deceased.

C.A. Vose, Jr., Appellee,

v.

Robert E. Lee, III, Personal Representative of the Estate of Anne S. Vose, Deceased,

Appellant.

ON APPEAL FROM THE DISTRICT COURT OF OKLAHOMA COUNTY

HONORABLE RICHARD W. KIRBY

ASSOCIATE DISTRICT JUDGE

¶0 The administrator of a decedent's estate appeals an interlocutory order of the district court

compelling the administrator to file a federal estate tax return for the decedent's estate and

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http://daily.justia.com/

elect portability of the Deceased Spousal Unused Exclusion Amount pursuant to 26 U.S.C.A.

§ 2010. The surviving spouse sought the order, and benefits from the portability election.

The administrator asserts the district court erred on several grounds, arguing lack of

jurisdiction, issues with federal preemption, the surviving spouse's lack of standing, and that

the order is contrary to an antenuptial agreement entered into between the surviving spouse

and the decedent. On consideration of the matter, this Court finds no reversible error and

affirms.

ORDER OF THE DISTRICT COURT IS AFFIRMED; CAUSE REMANDED

Rebecca Farris, Oklahoma City, Oklahoma, for Appellant.

Andrew W. Lester, Spencer Fane LLP, Edmond, Oklahoma, for Appellee.

COMBS, C.J.:

¶1 The essential question before this Court is whether the district court erred by ordering the

administrator of a decedent's estate to timely prepare and file a federal estate tax return for

purposes of electing portability of the decedent's Deceased Spousal Unused Exclusion

Amount (DSUE), pursuant to 26 U.S.C.A. § 2010, for the benefit of the decedent's surviving

spouse. We hold that it did not.

I.

FACTS AND PROCEDURAL HISTORY

¶2 This cause arises from a dispute concerning the estate of Anne S. Vose (Decedent).

Decedent died intestate on January 22, 2016. Appellee C.A. Vose, Jr. (Vose) is her surviving

spouse, having married Decedent on June 3, 2006. On May 24, 2006, and prior to their

marriage, Vose and Decedent entered into an antenuptial agreement that is relevant to this

cause. Appellant Robert E. Lee, III (Lee) is the current administrator of the estate, and also

Decedent's son from a prior marriage.

¶3 On January 25, 2016, Lee sought admission to probate of Decedent's will from 1995 and,

in accordance with the will, appointment of himself and his sister as co-administrators of

Decedent's estate. On January 29, 2016, Vose filed his own petition, alleging that Decedent

died intestate, asserting a prior right over all Letters of Administration, and seeking to

become sole administrator of Decedent's estate.

¶4 Lee eventually withdrew his petition, according to him because of representations from

Vose concerning the revocation of Decedent's 1995 will. He also claims that at that time he

had yet to see the antenuptial agreement between Vose and Decedent. The court held a

hearing on Vose's petition on February 23, 2016, where the antenuptial agreement was

mentioned but not presented. Vose was appointed administrator of Decedent's estate and

letters were signed. After the antenuptial agreement was produced and Vose's waiver of the

right to be appointed administrator of Decedent's estate was made manifest, an agreed order

was entered appointing Lee as the administrator of Decedent's estate.

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¶5 Lee has filed several applications concerning this matter with the district court. Some

have been granted, but many have been stayed pending a conflict of interest hearing

concerning Vose's counsel. Part of the way through the proceedings, three attorneys from

McAfee & Taft entered appearances for Vose, and Vose's previous counsel withdrew. Lee

objects to Vose's new counsel.

¶6 On August 10, 2016, Vose filed his Application to Compel Administrator to Timely

Prepare and File a Federal Estate Tax Return for Purposes of Irrevocably Electing Portability

of Decedent's Deceased Spousal Unused Exclusion Amount (DSUE Application). The DSUE

Application is the primary matter at issue in the order Lee appeals. At a hearing held on

August 24, 2016, the district court decided to stay all pending issues in the cause until the

alleged conflict of interest issue could be resolved, but stated it would allow the DSUE

Application to be heard as scheduled on September 9, 2016, so long as it was presented

through special counsel.

¶7 On November 8, 2016, the district court entered its order effectively granting Vose's

DSUE application. The district court, non-exhaustively: 1) denied Vose's request for

appointment of a special administrator for purposes of filing an estate tax return for

Decedent; 2) ordered Lee to provide Vose with a list of the records necessary to prepare the

estate tax return and ordered Vose to provide the records; 3) ordered Vose to produce to Lee

a detailed inventory of the personal property of Decedent in his possession and make it

available for pickup; 4) ordered, if a DSUE is available, that the administrator shall timely

file an estate tax return electing portability of the DSUE and allow Vose 60 days to review

the return and documentation prior to filing; and 5) ordered Vose to pay for the filing of the

return if a DSUE is available.

¶8 Lee appealed, filing an Amended Petition in Error (with the district court's order attached)

with this Court on November 9, 2016. Vose moved to dismiss the appeal on October 31,

2016, and this Court denied the motion on December 12, 2016. Lee filed a Motion to Retain

Appeal and Place on Fast Track Docket on November 23, 2016, and the Court granted the

motion and ordered accelerated briefing. The cause was assigned to this office on December

16, 2016.

¶9 Vose raises several points of error on appeal, including: 1) the district court lacked subject

matter jurisdiction; 2) its order concerning the DSUE is preempted by federal law; 3) the trial

court failed to properly consider the antenuptial agreement and therefore erroneously

determined Vose had standing; 4) the district court's order violates the terms of the

antenuptial agreement.1

II.

STANDARD OF REVIEW

¶10 Probate proceedings are of equitable cognizance. In re Estate of Carlson, 2016 OK 6,

¶11, 367 P.3d 486; In re Estate of Holcomb, 2002 OK 90, ¶8, 63 P.3d 9; In re Estate of

Sneed, 1998 OK 8, ¶8, 953 P.2d 1111. While an appellate court will examine and weigh the

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record of proof, it must abide by the law's presumption that the district court's decision is

legally correct and cannot be disturbed unless found to be clearly contrary to the weight of

the evidence or to some governing principle of law. In re Estate of Bleeker, 2007 OK 68,

¶12, 168 P.3d 774; Sneed, 1998 OK 8, ¶8; In re Estate of Maheras, 1995 OK 40, ¶7, 897 P.2d

268. Whenever the law and facts so warrant, an equity decree may be affirmed if it is

sustainable on any rational theory and the ultimate conclusion reached below is legally

correct. Harrell v. Samson Resources Co., 1998 OK 69, ¶31, 980 P.2d 99; Bankoff v. Bd. of

Adjustment of Wagoner County, 1994 OK 58, ¶17, 875 P.2d 1138; In re Estate of Bartlett,

1984 OK 9, ¶4, 680 P.2d 369.

III.

THE DECEASED SPOUSAL UNUSED EXCLUSION AMOUNT AND PORTABILITY

¶11 With the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job

Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296 (2010), a concept known

as portability was introduced into the United States Tax Code. The mechanism was made

permanent by the American Taxpayer Relief Act of 2012, Pub. L. No. 112-240, 126 Stat.

2313 (2013). In the event a first-to-die spouse has not fully used the estate tax exclusion,

portability allows for the unused portion to be transferred to the surviving spouse. Details

concerning the mechanics are provided in 26 U.S.C.A. § 2010.2 The unused exclusion

amount that may be transferred to the surviving spouse is called the Deceased Spousal

Unused Exclusion Amount (DSUE). 26 U.S.C.A. § 2010(c)(4). However, in order for a

surviving spouse to make use of the DSUE, an election must be made by the executor of the

deceased spouse's estate, who must also file an estate tax return. Specifically, 26 U.S.C.A. §

2010(c)(5)(A) provides:

(A) Election required.--A deceased spousal unused exclusion amount may not be taken into

account by a surviving spouse under paragraph (2) unless the executor of the estate of the

deceased spouse files an estate tax return on which such amount is computed and makes an

election on such return that such amount may be so taken into account. Such election, once

made, shall be irrevocable. No election may be made under this subparagraph if such return

is filed after the time prescribed by law (including extensions) for filing such return.

¶12 The Internal Revenue Service has promulgated rules3 concerning portability that further

clarify the election process and who may make the election. Specifically, 26 C.F.R. §

20.2010-2 provides in pertinent part:

(6) Persons permitted to make the election--(i) Appointed executor. An executor or

administrator of the estate of a decedent survived by a spouse that is appointed, qualified,

and acting within the United States, within the meaning of section 2203 (an appointed

executor), may timely file the estate tax return on behalf of the estate of the decedent and, in

so doing, elect portability of the decedent's DSUE amount. An appointed executor also may

elect not to have portability apply pursuant to paragraph (a)(3) of this section.

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(ii) Non-appointed executor. If there is no appointed executor, any person in actual or

constructive possession of any property of the decedent (a non-appointed executor) may

timely file the estate tax return on behalf of the estate of the decedent and, in so doing, elect

portability of the decedent's DSUE amount, or, by complying with paragraph (a)(3) of this

section, may elect not to have portability apply. A portability election made by a non-

appointed executor when there is no appointed executor for that decedent's estate can be

superseded by a subsequent contrary election made by an appointed executor of that same

decedent's estate on an estate tax return filed on or before the due date of the return,

including extensions actually granted. An election to allow portability made by a non-

appointed executor cannot be superseded by a contrary election to have portability not apply

made by another non-appointed executor of that same decedent's estate (unless such other

non-appointed executor is the successor of the non-appointed executor who made the

election). See § 20.6018-2 for additional rules relating to persons permitted to file the estate

tax return.

¶13 In its Summary of Comments and Explanation of Revisions, the IRS further clarified

why only an executor, and not a surviving spouse who is not an executor (such as Vose in

this cause) may make the DSUE portability election. Portability of a Deceased Spousal

Unused Exclusion Amount, 80 Fed. Reg. 34,279-01, 34,281 (June 16, 2015). Specifically,

the IRS explained:

3. Persons Permitted to Make the Election

Several commenters requested that the final regulations allow a surviving spouse who is not

an executor as defined in section 2203 of the Code to file an estate tax return and make the

portability election in several different circumstances. A few of the circumstances described

include those in which the spouse is given the right to file the estate tax return in a prenuptial

or marital agreement, or the spouse has petitioned the appropriate local court for the spouse's

appointment as an executor solely for the limited purpose of filing the estate tax return and

the executor does not make the portability election. The Treasury Department and the IRS

recognize the possibility that an executor may exercise the executor's discretion to not make

the portability election, thus causing the estate to forfeit the opportunity to elect portability,

but note that section 2010(c)(5) of the Code permits only the executor of the decedent's estate

to file the estate tax return and make the portability election. The 2012 temporary regulations

address the circumstances in which an appointed executor or a non-appointed executor may

file the estate tax return and decide whether or not to elect portability. The Treasury

Department and the IRS believe that any consideration of what, if any, state law action might

bring the surviving spouse within the definition of executor under section 2203 is outside of

the scope of this regulation. Accordingly, the final regulations adopt the applicable rules in

the 2012 temporary regulations without change.

Id.

¶14 Lee asserts that he is the appointed executor within the meaning of the relevant federal

law.4 Accordingly, Lee argues on appeal that, pursuant to 26 U.S.C.A. § 2010 and the

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applicable regulations, the decision to elect portability of the DSUE is discretionary and

entirely his to make. He further argues that the district court therefore had no subject matter

jurisdiction over the matter, and that its order compelling him to make the election is directly

contrary to federal law and any state law grounds on which it might be based are defeated by

the preemption doctrine.

IV.

THE DISTRICT COURT PROPERLY EXERCISED AUTHORITY AND

SUBJECT MATTER JURISDICTION, UNAFFECTED BY THE

PREEMPTION DOCTRINE

A.The district court possesses statutory authority over matters related to probate.

¶15 To begin, authority5 in probate matters is conferred upon the district courts of Oklahoma

by 58 O.S. 2011 § 1.6 The district court sitting in probate has the power to order and regulate

all distribution of property or estates of deceased persons. Title 58 O.S. 2011 § 1(A)(7). The

district court sitting in probate also has the power to cause estate taxes to be equitably

apportioned and collected. Title 58 O.S. 2011 § 1(B). Finally, the district court sitting in

probate has authority to make all such orders as may be necessary to exercise the powers

conferred upon it, 58 O.S. 2011 § 1(A)(10), and further authority to determine rights as to

estate property as to all persons and entities. 58 O.S. 2011 § 1(C). Given the statutory

authority granted to the district court sitting in probate, it possesses authority to determine

the applicability of federal estate tax provisions to Decedent's estate and determine what

interest, if any, Vose may have in the DSUE. Lee does not dispute this on appeal, but rather

argues: 1) the district court is deprived of jurisdiction in this matter by virtue of the

preemption doctrine; and 2) Vose is not an heir and has no interest in the estate (an hence no

standing) pursuant to the antenuptial agreement he entered into with Decedent prior to their

marriage.

B.The preemption doctrine does not bar the district court's exercise of

authority and jurisdiction in this matter.

¶16 The preemption doctrine arises from the Supremacy Clause of the United States

Constitution. U.S. Const. art. VI, cl. 2.7 Though he does not explicitly state it, Lee's

combined argument concerning preemption and lack of subject matter jurisdiction implies he

is relying on the concept of complete preemption, which converts what would ordinarily be

state law claims into federal claims. See Devon Energy Production Co., L.P. v. Mosaic

Potash Carlsbad, Inc., 693 F.3d 1195, 1204-1205 (10th Cir. 2012). When a federal statute

completely pre-empts a state-law cause of action, a claim which comes within the scope of

that cause of action, even if pleaded in terms of state law, is in reality based on federal law.

Beneficial Nat. Bank v. Anderson, 539 U.S. 1, 2, 123 S. Ct. 2058, 2059, 156 L. Ed. 2d 1

(2003).

¶17 In Reeds v. Walker, this Court noted the link between complete preemption and the

potential loss of subject matter jurisdiction:

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Although the complete preemption doctrine is ordinarily invoked to support removal of an

action to federal court, we see no reason why it cannot be invoked in a state-court appellate

proceeding to analyze federal question jurisdiction, which, if exclusive, would divest the

state courts of subject matter jurisdiction.

2006 OK 43, ¶15 n.34, 157 P.3d 43 (internal citations omitted).

However, complete preemption is a rare doctrine. Devon Energy Production Co., L.P., 693

F.3d at 1204; Cmty. State Bank v. Strong, 651 F.3d 1241, 1260 n. 16 (11th Cir. 2011).8 The

Tenth Circuit explained:

"[w]e read the term ["complete preemption"] not as a crude measure of the breadth of the

preemption (in the ordinary sense) of a state law by a federal law, but rather as a description

of the specific situation in which a federal law not only preempts a state law to some degree

but also substitutes a federal cause of action for the state cause of action, thereby manifesting

Congress's intent to permit removal."

Devon Energy Production Co., L.P., 693 F.3d at 1205 (quoting Schmeling v. NORDAM, 97

F.3d 1336, 1342 (10th Cir. 1996)).

In other words, the federal statute must so pervasively regulate its respective area that it

leaves no room for state-law claims. Devon Energy Production Co., L.P., 693 F.3d at 1205.

¶18 Vose's claims concerning the DSUE are rooted in Oklahoma law concerning the

fiduciary obligations owed by estate administrators to potential beneficiaries of the estate.

There is no indication in the federal law provisions concerning the DSUE that the Congress

intended to leave no room for state law claims relating to the duties of the estate

administrator, even if those duties involve a federal matter such as the election of the DSUE.

Indeed, the IRS itself acknowledged that the question of what state law actions might bring a

surviving spouse within the definition of executor pursuant to 26 U.S.C.A. § 2203 are outside

the scope of its regulations, implicitly acknowledging the interplay between state laws

concerning probate and estate distribution and the federal estate tax provisions. The complete

preemption doctrine is inapplicable here and does not deprive the district court of subject

matter jurisdiction in this cause.

¶19 Absent complete preemption, the question is whether the district court's order violates

any other aspect of the preemption doctrine. This Court has previously stated the ways in

which preemption might come into play:

Generally, preemption is a matter of Congressional intent that occurs under four instances:

(1) express statutory language; (2) a pervasive regulatory scheme that infers by its presence

that Congress felt the federal regulation did not need supplemental state law provisions; (3)

an actual conflict between state and federal laws making it physically impossible to comply

with both; or (4) where the objectives and purpose of Congress are thwarted by state law.

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Todd v. Frank's Tong Service, Inc., 1989 OK 121, ¶5, 784 P.2d 47; Missouri-Kansas-Texas

R. Co. v. State, 1985 OK 108, ¶41, 712 P.2d 40.

The Supreme Court of the United States effectively summarized the doctrine in Arizona v.

U.S., where it stated:

… state laws are preempted when they conflict with federal law. Crosby, supra, at 372, 120

S. Ct. 2288. This includes cases where "compliance with both federal and state regulations is

a physical impossibility," Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-

143, 83 S. Ct. 1210, 10 L. Ed. 2d 248 (1963), and those instances where the challenged state

law "stands as an obstacle to the accomplishment and execution of the full purposes and

objectives of Congress," Hines, 312 U.S., at 67, 61 S. Ct. 399; see also Crosby, supra, at 373,

120 S. Ct. 2288 ("What is a sufficient obstacle is a matter of judgment, to be informed by

examining the federal statute as a whole and identifying its purpose and intended effects"). In

preemption analysis, courts should assume that "the historic police powers of the States" are

not superseded "unless that was the clear and manifest purpose of Congress." Rice, supra, at

230, 67 S. Ct. 1146; see Wyeth v. Levine, 555 U.S. 555, 565, 129 S. Ct. 1187, 173 L. Ed. 2d

51 (2009).

___ U.S. ___, 132 S. Ct. 2492, 2501, 183 L. Ed. 2d 351 (2012).

¶20 Lee asserts there is a direct conflict between the district court's order compelling him to

file an estate tax return for Decedent and elect portability of the DSUE for use by Vose, and

the terms of 26 U.S.C.A. § 2010, which grants him discretion as to whether or not he will do

so. It is this discretion that poses the problem.

¶21 However, 26 U.S.C.A § 2010 grants the administrator a choice, and the statute as a

whole is silent as to the effect state laws might have on how the administrator must make that

choice. Here, the district court ordered Vose to elect portability in response to arguments that

his fiduciary obligations as an estate administrator under Oklahoma law compel him to do so.

The result, an election of portability, does not directly conflict with 26 U.S.C.A § 2010,

which allows such an election. Lee makes no argument that: 1) there is an explicit

preemption clause in the Internal Revenue Code in this instance; 2) the regulatory scheme is

so pervasive it leaves no room for state law provisions; and 3) it is somehow physically

impossible to comply with both laws, for the district court's order compels him to take an

action allowed by federal law. By asserting deprivation of a choice granted by 26 U.S.C.A §

2010, he implicates the fourth factor set out by this Court, that the district court's order

thwarts the objective and purpose of Congress. Todd v. Frank's Tong Service, Inc., 1989 OK

121, ¶5. See Arizona v. U.S, 132 S. Ct. 2492, 2501

¶22 The fact that state law may restrict a choice granted by federal law does not necessarily

implicate the preemption doctrine by thwarting the objective and purpose of the law. In

Williamson v. Mazda Motor of America, Inc., the Supreme Court of the United States

determined that even though a state tort judgment might restrict manufacture choice

concerning seat belt installation allowed by federal law, the judgment was not an obstacle to

142





the accomplishment of the full purposes and objectives of federal law because maintaining

manufacturer choice was not a significant regulatory objective. 562 U.S. 323, 336, 131 S. Ct.

1131, 1139, 179 L. Ed. 2d 75 (2011). Particularly persuasive is Justice Sotomayor's

concurring opinion, where she notes:

In other words, the mere fact that an agency regulation allows manufacturers a choice

between options is insufficient to justify implied pre-emption; courts should only find pre-

emption where evidence exists that an agency has a regulatory objective--e.g., obtaining a

mix of passive restraint mechanisms, as in Geier--whose achievement depends on

manufacturers having a choice between options.

Williamson, 562 U.S. at 338 (Sotomayor, J., concurring).

¶23 Though the facts are different, the logic is applicable here. Absent an expressed

Congressional purpose served by the DSUE election choice, the fact that the choice may be

restricted on state law grounds does not implicate preemption. An examination of the

relevant provisions does not reveal such a purpose. In fact, the IRS leaves open the

possibility that a state court could appoint the surviving spouse as the administrator for the

limited purpose of making the election, thereby depriving the primary administrator of the

ability to make the election, either to comply with an antenuptial agreement or on some other

grounds. See Portability of a Deceased Spousal Unused Exclusion Amount, 80 Fed. Reg.

34,279-01, 34,281 (June 16, 2015). It is the conclusion of this Court that the district court's

order compelling Lee to file an estate tax return and elect portability is within the district

court's subject matter jurisdiction and is not preempted by federal law.

V.

THE DISTRICT COURT DID NOT ERR BY ORDERING LEE TO

FILE A FEDERAL ESTATE TAX RETURN AND ELECT

PORTABILITY OF THE DSUE

¶24 Lee asserts Vose lacked standing to press DSUE Application before the district court

because he is not an heir and can have no interest in Decedent's estate pursuant to the

antenuptial agreement he entered into with Decedent prior to their marriage. Lee further

argues that the district court's order violates the antenuptial agreement.

A. Vose has standing to assert his interest in the DSUE, independent of any

other interest he may have, unless his interest in the DSUE is barred by

the antenuptial agreement.

¶25 Lee asserts Vose waived his right to a distributive share under Paragraph 6.1(H) of the

antenuptial agreement9, and thus is not an heir of Decedent and without standing to press his

DSUE application in the district court. Standing in a probate proceeding generally requires a

pecuniary interest in the estate of the deceased. See 58 O.S. 2011 § 29 (interested persons

may contest will); 58 O.S. 2011 § 129 (interested persons may contest petition for letters of

143

administration); Murg v. Barnsdall Nursing Home, 2005 OK 73, ¶20, 123 P.3d 21;

Mayweather v. Wallace, 1945 OK 148, ¶¶16-18, 159 P.2d 529.

¶26 However, Vose's status as an heir and his potential right to an intestate share under 84

O.S. § 213(B), is not the subject of this appeal. Title 26 U.S.C.A. § 2010 grants Vose a

potential interest in a part of Decedent's estate under the control of Lee as the administrator.

Vose may have a pecuniary interest as the surviving spouse in the portability of the DSUE,

independent of his ability to take as an heir. The portability election would result in an

increase to Vose's own applicable exclusion amount pursuant to 26 U.S.C.A. § 2010(c)(2). If

reliance is not placed on any specific statute authorizing invocation of the judicial process,

the question of standing depends upon whether the party has alleged a personal stake in the

outcome. Ind. School Dist. No. 9 of Tulsa County v. Glass, 1982 OK 2, ¶8, 639 P.2d 1233.

Vose has an obvious interest in the portability of the DSUE. The determinative question,

then, is not whether the antenuptial agreement between Vose and Decedent bars him from

being a legal heir, but whether the agreement bars him from claiming any interest in the

portability of the DSUE.

B. Vose's interest in the DSUE is not barred by the antenuptial agreement he entered into

with Decedent.

¶27 Antenuptial agreements are contracts. Title 84 O.S. 2011 § 44; Freeman v. Freeman,

1977 OK 110, ¶¶1-2, 565 P.2d 365. Antenuptial agreements can be used to waive rights to

property or in other ways alter the rights related to marriage, statutory or otherwise. See In re

Cobb's Estate, 1956 OK 299, 305 P.2d 1028.

¶28 However, extant applicable law is a part of every contract in this state as if it were

expressly cited or its terms incorporated in the contract. Public Service Co. of Okla. v. State

ex rel. Okla. Corp. Com'n, 2005 OK 47, ¶54, 115 P.3d 861; Welty v. Martinaire of

Oklahoma, Inc., 1994 OK 10, ¶11, 867 P.2d 1273; East Central Okla. Elec. COOP v. Public

Serv., 1970 OK 80, ¶9, 469 P.2d 662. An intent to modify applicable law by contract is not

effective unless the power is expressly exercised. Public Service Co. of Okla., 2005 OK 47,

¶54; Dickason v. Dickason, 1980 OK 24, ¶10, 607 P.2d 674. A contractual adjustment of

rights contrary to law must be clearly expressed in the agreement if applicable law is not to

be applied. Public Service Co. of Okla., 2005 OK 47, ¶54; Heiman v. Atlantic Richfield Co.,

1995 OK 19, ¶12 n.5, 891 P.2d 1252.

¶29 Further, in Faulkenberry v. Kansas City Southern Ry. Co., this Court considered the

principles concerning waiver of rights under federal law, and the conclusion reached by the

Court is relevant to this cause:

No one can be bound by a waiver of one's rights unless it was made with full knowledge of

the rights intended to be waived. The fact that one knows his rights and intends to waive

them must plainly appear. An indispensable ingredient of effective waiver is a freely

exercised will to relinquish a known right.

144











1979 OK 142, ¶6, 602 P.2d 203 (footnotes omitted). One must have actual or constructive

knowledge of rights to waive them. Guinn v. Church of Christ Collinsville, 1989 OK 8, ¶29

n.42, 775 P.2d 766; Faulkenberry, 1979 OK 142, ¶6.

¶30 Given the above principles, the antenuptial agreement does not bar Vose's interest in the

DSUE. The portable DSUE is not simple property acquired by one party over the course of

the marriage according to existing laws in effect when the agreement was made. It is an

interest created by the federal tax code that was an impossibility at the time the antenuptial

agreement between Vose and Decedent was created. The antenuptial agreement was entered

into on May 24, 2006, and portability of the DSUE became an option under the federal tax

code for the first time with the passage of the Tax Relief, Unemployment Insurance

Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296

(2010). Vose and Decedent clearly intended a comprehensive waiver of their marital rights

under the law as it existed at the time, and included reference to specific statutory provisions

where necessary. However, the agreement is silent as to portability because the change in law

was unforeseeable to the parties when the contract was made. Accordingly, the district court

was correct in implicitly determining that the antenuptial agreement did not bar Vose from

asserting an interest in portability of the DSUE.

C. Given Lee's fiduciary obligations as the estate administrator of

Decedent under Oklahoma law, the district court did not err by

ordering Lee to file an estate tax return and elect portability of the

DSUE.

¶31 A administrator is responsible for the faithful administration of the estate's property,

Wilson v. Kane, 1993 OK 65, ¶10, 852 P.2d 717, and has a duty to preserve the estate. Murg

v. Barnsdale Nursing Home, 2005 OK 73, ¶18, 123 P.3d 21. The estate administrator has a

general duty to take charge of all the effects and personal assets belonging to the decedent

and to preserve the same from damage, waste, and injury. In re Estate of Bartlett, 1984 OK 9,

¶17, 680 P.2d 369. An administrator of an estate occupies a fiduciary relationship toward all

parties having an interest in the estate.10 Further, although probate is governed by statutory

procedure, substantive law in aid of probate's legal mission of capturing and distributing a

deceased person's estate continues to be governed by common-law developments. In re

Estate of Bleeker, 2007 OK 68, ¶13, 168 P.3d 774.11

¶32 Lee argues that since the DSUE is valuable only to Vose, while at the same time being

an estate asset under Lee's complete control, he should be allowed to demand consideration

from Vose in exchange for making the election. Vose further argues that pursuant to 26

U.S.C.A. § 2010(c)(5), electing portability of the DSUE will extend the audit window for

Decedent's estate considerably. While 26 U.S.C.A. § 2010 requires the administrator to make

the election to allow portability of the DSUE, the only person with an interest in and ability

to use the DSUE, if it exists, is the surviving spouse. If the election is not made through the

timely filing of an estate tax return, then it is lost. 26 U.S.C.A. § 2010(c)(5)(A). Vose has

also agreed to pay any costs associated with preparing the necessary return.

145







¶33 The district court, after hearing expert testimony and considering the evidence, evidently

determined that any risk to the estate was outweighed by Lee's fiduciary obligation to

preserve the assets of the estate and safeguard Vose's interest in the DSUE. We agree, and

determine the district court did not err by requiring Lee to file a federal estate tax return and

elect portability of the DSUE. The district court's order was not contrary to the clear weight

of the evidence or applicable governing law, and is therefore affirmed. Because of the time

sensitive nature of this matter, any potential Petition for Rehearing is to be filed no later than

Friday, January 27.

ORDER OF THE DISTRICT COURT IS AFFIRMED; CAUSE

REMANDED.

COMBS, C.J., GURICH, V.C.J., KAUGER, WATT, WINCHESTER, EDMONDSON,

COLBERT, and REIF, JJ., concur.

FOOTNOTES

1 Lee raised other issues in his Petition in Error. However, pursuant to Oklahoma Supreme

Court Rule 1.11, 12 O.S. Supp. 2013, Ch. 15, App. 1, issues raised in the Petition in Error

but omitted from the Brief in Chief may be deemed waived. Argument without supporting

authority will not be considered. State v. Price, 2012 OK 51, ¶1 n.1, 280 P.3d 943; Fent v.

Contingency Review Bd., 2007 OK 27, ¶22 n.58, 163 P.3d 512; Okla. City Urban Renewal

Auth. V. City of Okla. City, 2005 OK 2, ¶7 n.9, 110 P.3d 550.

2 26 U.S.C.A. § 2010 provides:

§ 2010. Unified credit against estate tax

(a) General rule.--A credit of the applicable credit amount shall be allowed to the estate of

every decedent against the tax imposed by section 2001.

(b) Adjustment to credit for certain gifts made before 1977. --The amount of the credit

allowable under subsection (a) shall be reduced by an amount equal to 20 percent of the

aggregate amount allowed as a specific exemption under section 2521 (as in effect before its

repeal by the Tax Reform Act of 1976) with respect to gifts made by the decedent after

September 8, 1976.

(c) Applicable credit amount.--

(1) In general.--For purposes of this section, the applicable credit amount is the amount of

the tentative tax which would be determined under section 2001(c) if the amount with respect

to which such tentative tax is to be computed were equal to the applicable exclusion amount.

(2) Applicable exclusion amount.--For purposes of this subsection, the applicable exclusion

amount is the sum of--

146




(A) the basic exclusion amount, and

(B) in the case of a surviving spouse, the deceased spousal unused exclusion amount.

(3) Basic exclusion amount.--

(A) In general.--For purposes of this subsection, the basic exclusion amount is $5,000,000.

(B) Inflation adjustment.--In the case of any decedent dying in a calendar year after 2011, the

dollar amount in subparagraph (A) shall be increased by an amount equal to--

(i) such dollar amount, multiplied by

(ii) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by

substituting "calendar year 2010" for "calendar year 1992" in subparagraph (B) thereof.

If any amount as adjusted under the preceding sentence is not a multiple of $10,000, such

amount shall be rounded to the nearest multiple of $10,000.

(4) Deceased spousal unused exclusion amount.--For purposes of this subsection, with

respect to a surviving spouse of a deceased spouse dying after December 31, 2010, the term

"deceased spousal unused exclusion amount" means the lesser of--

(A) the basic exclusion amount, or

(B) the excess of--

(i) the applicable exclusion amount of the last such deceased spouse of such surviving

spouse, over

(ii) the amount with respect to which the tentative tax is determined under section 2001(b)(1)

on the estate of such deceased spouse.

(5) Special rules.--

(A) Election required.--A deceased spousal unused exclusion amount may not be taken into

account by a surviving spouse under paragraph (2) unless the executor of the estate of the

deceased spouse files an estate tax return on which such amount is computed and makes an

election on such return that such amount may be so taken into account. Such election, once

made, shall be irrevocable. No election may be made under this subparagraph if such return

is filed after the time prescribed by law (including extensions) for filing such return.

(B) Examination of prior returns after expiration of period of limitations with respect to

deceased spousal unused exclusion amount.--Notwithstanding any period of limitation in

section 6501, after the time has expired under section 6501 within which a tax may be

147

assessed under chapter 11 or 12 with respect to a deceased spousal unused exclusion amount,

the Secretary may examine a return of the deceased spouse to make determinations with

respect to such amount for purposes of carrying out this subsection.

(6) Regulations.--The Secretary shall prescribe such regulations as may be necessary or

appropriate to carry out this subsection.

(d) Limitation based on amount of tax.--The amount of the credit allowed by subsection (a)

shall not exceed the amount of the tax imposed by section 2001.

3 26 U.S.C.A. § 2010(c)(6) provides:

(6) Regulations.--The Secretary shall prescribe such regulations as may be necessary or

appropriate to carry out this subsection.

4 26 U.S.C.A. § 2203 defines the term "executor" in connection with the federal estate tax

provisions, and provides:

The term "executor" wherever it is used in this title in connection with the estate tax imposed

by this chapter means the executor or administrator of the decedent, or, if there is no executor

or administrator appointed, qualified, and acting within the United States, then any person in

actual or constructive possession of any property of the decedent.

It is not disputed that Lee, as the court-appointed administrator of Decedent's estate, meets

this definition.

5 This Court noted the distinction between the district court's unlimited jurisdiction and its

authority in probate matters in Estate of Sheen v. Epperson, where we stated:

Although, under the 1967 constitutional amendment a district judge now has unlimited

"jurisdiction" to hear probate matters, the "authority" of the district judge remains limited by

the statutory restrictions set forth in the probate statutes until such time as the legislature

amends them.

1995 OK 86, ¶1, 909 P.2d 62 (Order Approving Court of Appeals Opinion for Publication as

Amended).

6 Title 58 O.S. 2011 § 1 provides:

A. The district court has probate jurisdiction, and the judge thereof power, which must be

exercised in the cases and in the manner prescribed by statute:

1. To open and receive proof of last wills and testaments, and to admit them to proof and to

revoke the probate thereof, and to allow and record foreign wills;

148


2. To grant letters testamentary, of administration and of guardianship, and to revoke the

same;

3. To appoint appraisers of estates of deceased persons and of minors and incapacitated

persons;

4. To compel personal representatives and guardians to render accounts;

5. To order the sale of property of estates, or belonging to minors or to incapacitated persons;

6. To order the payments of debts from estates or guardianships;

7. To order and regulate all distribution of property or estates of deceased persons;

8. To compel the attendance of witnesses and the production of title deeds, papers, and other

property of an estate, or of a minor, or incapacitated persons;

9. To exercise all the powers conferred by this chapter or by other law;

10. To make such orders as may be necessary to the exercise of the powers conferred upon it;

and

11. To appoint and remove guardians for infants, and for persons insane or who are

otherwise incapacitated persons; to compel payment and delivery by them of money or

property belonging to their wards, to control their conduct and settle their accounts.

B. The district court which has jurisdiction and venue of the administration of any estate is

granted jurisdiction and venue to cause Oklahoma and federal estate taxes to be equitably

apportioned and collected.

C. The district court which has jurisdiction and venue of the administration of any estate is

granted unlimited concurrent jurisdiction and venue to hear and determine:

1. In whom the title to any property is vested, whether the property is real, personal, tangible,

intangible, or any combination thereof;

2. Rights with respect to such property as to all persons and entities;

3. Whether or not such property is subject to the jurisdiction of the court in the decedent's

estate; and

4. Issues relating to trusts or issues involving a guardian or ward that may arise.

149

D. For proceedings under subsection C of this section, service of notice and process shall be

required as in other cases and the provisions of the Oklahoma Pleading Code, Section 2001

et seq. of Title 12 of the Oklahoma Statutes, shall be followed.

7 U.S. Const. art. VI, cl. 2 provides:

This Constitution, and the Laws of the United States which shall be made in Pursuance

thereof; and all Treaties made, or which shall be made, under the Authority of the United

States, shall be the supreme Law of the Land; and the Judges in every State shall be bound

thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

8 In Devon Energy Production Co., L.P., the Tenth Circuit noted:

… the Supreme Court has recognized complete preemption in only three areas: § 301 of the

Labor Management Relations Act of 1947 ("LMRA"), § 502 of the Employee Retirement

Income Security Act of 1974 ("ERISA"), and actions for usury against national banks under

*1205 the National Bank Act. See Hansen, 641 F.3d at 1221; see also Avco Corp. v. Aero

Lodge No. 735, Int'l Ass'n of Machinists & Aerospace Workers, 390 U.S. 557, 560-61, 88 S.

Ct. 1235, 20 L. Ed. 2d 126 (1968) (LMRA); Taylor, 481 U.S. at 62-63, 107 S. Ct. 1542

(ERISA), and Anderson, 539 U.S. at 3-4, 123 S. Ct. 2058 (National Bank Act).

693 F.3d at 1204-1205.

9 The Antenuptial Agreement provides in pertinent part:

6.1 Waiver: Except as otherwise specifically provided in this Agreement, Vose and

[Decedent] mutually waive, discharge, and release each other to the fullest extent lawfully

possible from any and all claims and rights, actual, inchoate, vested, or contingent, in law or

equity, which he or she may aquire in or to the separate property, income, assets and

liabilities of the other by reason of their marriage, under the laws of any state or the United

States, including but not limited to:

H. The right to a distributive share in the estate of the other should he or she die intestate

pursuant to Title 84 Okla. Stat., §213, or otherwise.

10 The duty owed by an administrator to those interested in an estate originates in trust law.

Cameron v. White, 1927 OK 293, ¶41, 262 P. 664. See 34 C.J.S. Executors and

Administrators § 213; 31 Am. Jur. 2d Executors and Administrators § 368.

11 In In re Estate of Bleeker, this Court determined that even though the statutes were silent

on the ability of beneficiaries to bring actions on behalf of an estate, nothing in the statutes

expressly prohibited a court from granting a beneficiary leave to bring an action on behalf of

the estate when there are special circumstances that take the case out of the general rule.

2007 OK 68, ¶14.

150


ARTICLE 6

EXHIBIT D

ALLOCATION OF DECEASED SPOUSE'S UNUSED EXCLUSION AMOUNT

(a) Each party shall provide in his or her Will that if a Termination of marriage event

has not occurred prior to his or her death, the Executor shall f:tle a federal estate tax return or

any other document which is necessary (collectively referred to as a "Return") to elect the use

by the surviving spouse of the deceased party's Deceased Spousal Unused Exclusion Amount

as such term is defined in Section 2010(c)(4) of the Code, to the greatest extent permitted

unde1the Code. The surviving spouse shall have no obligation to make any payment to the

deceased spouse's estate or to any beneficiary of the estate for the Executor to make this

election nor shall any equitable adjustment be made with respect to the dispositions under the

Will because the Executor has made this election.

(b) In the event, however, that the Executor is required to file a Return only as a

result of the application of this Article 6 and if there is no state estate or inheritance tax; return

independently due which would require the collection of substantially the same information as

needed for the preparation of the Return then the surviving spouse (or his or her estate) shall

bear all costs associated with the preparation of the Return. Furthermore, in the event a state

estate or inheritance tax return is required to be filed solely as a result of the filing of a Return

under this Article 6, then the surviving spouse (or his or her estate) shall bear all costs

associated with the preparation of such state estate or inheritance tax return. In the event a

federal or state estate or inheritance tax audit is conducted as the result of filing a Return or a

state estate or inheritance tax return solely as a result of the application of this Article 6, then

the surviving spouse (or his or her estate) shall bear all costs associated with such audit

(c) Within six (6) months of the death of the deceased party, the Executor shall

provide the surviving spouse, the surviving spouse's guardian if he or she is not competent, or

151

the personal representative of the surviving spouse's estate, as the case may be, with written

notification delivered by certified mail, return receipt requested, that the filing of the Return

and any state estate or inheritance tax return, if applicable, is required only as a result of the

application, of this Article 6 and that the surviving spouse (or his or her estate) shall be required

to bear the costs set forth in (b) above. The surviving spouse (or his or her guardian or personal

representative) shall, within sixty (60) days of the receipt of such notice, notify the Executor in

writing delivered by certified mail, return receipt requested, that the surviving spouse (or his or

her estate) does not wish the Executor to file the Return and state estate or inheritance tax

returns, if applicable. In the event timely notice of the surviving spouse’s (or his or her estate's)

election not to enforce the terms of this Article 6 is not received, then the Executor shall prepare

the Return and any applicable state estate or inheritance tax returns. If the surviving spouse (or

his or her estate) indicates his or her desire not to enforce the terms of this Article 6 subsequent

to the 60 day period discussed above, then the surviving spouse (or his or her estate) shall bear

all costs incurred by the Executor for the, preparation of the Return and any applicable state

estate or inheritance tax returns as a result of the surviving spouse's failure to provide timely

notice.

152

▲

Form 709

Department of the Treasury Internal Revenue Service

United States Gift (and Generation-Skipping Transfer) Tax Return ▶ Information about Form 709 and its separate instructions is at www.irs.gov/form709.

(For gifts made during calendar year 2016)

▶ See instructions.

OMB No. 1545-0020

2016

Part

1—

Gen

era

l In

form

ati

on

1 Donor’s first name and middle initial 2 Donor’s last name 3 Donor’s social security number

4 Address (number, street, and apartment number) 5 Legal residence (domicile)

6 City or town, state or province, country, and ZIP or foreign postal code 7 Citizenship (see instructions)

8 If the donor died during the year, check here ▶ and enter date of death , .

9 If you extended the time to file this Form 709, check here ▶

10 Enter the total number of donees listed on Schedule A. Count each person only once ▶

Yes No

11a Have you (the donor) previously filed a Form 709 (or 709-A) for any other year? If "No," skip line 11b . . . . . . .

b Has your address changed since you last filed Form 709 (or 709-A)? . . . . . . . . . . . . . . . .

12 Gifts by husband or wife to third parties. Do you consent to have the gifts (including generation-skipping transfers) made

by you and by your spouse to third parties during the calendar year considered as made one-half by each of you? (see

instructions.) (If the answer is “Yes,” the following information must be furnished and your spouse must sign the consent

shown below. If the answer is “No,” skip lines 13–18.) . . . . . . . . . . . . . . . . . . . .

13 Name of consenting spouse 14 SSN 15 Were you married to one another during the entire calendar year? (see instructions) . . . . . . . . . . . . 16 If 15 is “No,” check whether married divorced or widowed/deceased, and give date (see instructions) ▶ 17 Will a gift tax return for this year be filed by your spouse? (If “Yes,” mail both returns in the same envelope.) . . . . . 18 Consent of Spouse. I consent to have the gifts (and generation-skipping transfers) made by me and by my spouse to third parties during the calendar year

considered as made one-half by each of us. We are both aware of the joint and several liability for tax created by the execution of this consent. Consenting spouse’s signature ▶ Date ▶

19 Have you applied a DSUE amount received from a predeceased spouse to a gift or gifts reported on this or a previous Form

709? If “Yes,” complete Schedule C . . . . . . . . . . . . . . . . . . . . . . . . . .

Part

2—

Tax C

om

pu

tati

on

1 Enter the amount from Schedule A, Part 4, line 11 . . . . . . . . . . . . . . .

2 Enter the amount from Schedule B, line 3 . . . . . . . . . . . . . . . . .

3 Total taxable gifts. Add lines 1 and 2 . . . . . . . . . . . . . . . . . . .

4 Tax computed on amount on line 3 (see Table for Computing Gift Tax in instructions) . . . .

5 Tax computed on amount on line 2 (see Table for Computing Gift Tax in instructions) . . . .

6 Balance. Subtract line 5 from line 4 . . . . . . . . . . . . . . . . . . .

7 Applicable credit amount. If donor has DSUE amount from predeceased spouse(s), enter amount

from Schedule C, line 4; otherwise, see instructions . . . . . . . . . . . . . .

8 Enter the applicable credit against tax allowable for all prior periods (from Sch. B, line 1, col. C) .

9 Balance. Subtract line 8 from line 7. Do not enter less than zero . . . . . . . . . . .

10 Enter 20% (.20) of the amount allowed as a specific exemption for gifts made after September 8,

1976, and before January 1, 1977 (see instructions) . . . . . . . . . . . . . .

11 Balance. Subtract line 10 from line 9. Do not enter less than zero . . . . . . . . . .

12 Applicable credit. Enter the smaller of line 6 or line 11 . . . . . . . . . . . . . .

13 Credit for foreign gift taxes (see instructions) . . . . . . . . . . . . . . . .

14 Total credits. Add lines 12 and 13 . . . . . . . . . . . . . . . . . . . .

15 Balance. Subtract line 14 from line 6. Do not enter less than zero . . . . . . . . . .

16 Generation-skipping transfer taxes (from Schedule D, Part 3, col. H, Total) . . . . . . . .

17 Total tax. Add lines 15 and 16 . . . . . . . . . . . . . . . . . . . . .

18 Gift and generation-skipping transfer taxes prepaid with extension of time to file . . . . . .

19 If line 18 is less than line 17, enter balance due (see instructions) . . . . . . . . . .

20 If line 18 is greater than line 17, enter amount to be refunded . . . . . . . . . . .

1 2 3 4 5 6

7

8 9

10

11 12 13 14

Att

ac

h c

he

ck

or

mo

ney

ord

er

he

re.

15 16 17 18 19 20

Sign Here

Under penalties of perjury, I declare that I have examined this return, including any accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than donor) is based on all information of which preparer has any knowledge.

May the IRS discuss this return with the preparer shown below (see instructions)? Yes No

Signature of donor Date

Paid

Preparer

Use Only

Print/Type preparer’s name Preparer’s signature Date

Check if

self-employed

PTIN

Firm’s name ▶ Firm’s EIN ▶

Firm’s address ▶ Phone no.

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see the instructions for this form. Cat. No. 16783M Form 709 (2016)

153

http://www.irs.gov/form709

mzumsteg

Typewritten Text

mzumsteg

Typewritten Text

EXHIBIT E

Page 4 Form 709 (2016)

SCHEDULE C Deceased Spousal Unused Exclusion (DSUE) Amount

Provide the following information to determine the DSUE amount and applicable credit received from prior spouses. Complete Schedule A

before beginning Schedule C. A

Name of Deceased Spouse (dates of death after

December 31, 2010 only)

B Date of Death

C Portability Election Made?

D

If “Yes,” DSUE Amount Received

from Spouse

E

DSUE Amount Applied by Donor to Lifetime Gifts (list current and

prior gifts)

F

Date of Gift(s) (enter as mm/dd/yy for

Part 1 and as yyyy for Part 2)

Yes No

Part 1—DSUE RECEIVED FROM LAST DECEASED SPOUSE

Part 2—DSUE RECEIVED FROM PREDECEASED SPOUSE(S)

TOTAL (for all DSUE amounts applied from column E for Part 1 and Part 2) 1 Donor’s basic exclusion amount (see instructions) . . . . . . . . . . . . . . . . .

2 Total from column E, Parts 1 and 2 . . . . . . . . . . . . . . . . . . . . . .

3 Add lines 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 Applicable credit on amount in line 3 (See Table for Computing Gift Tax in the instructions). Enter here and

on line 7, Part 2—Tax Computation . . . . . . . . . . . . . . . . . . . . .

1 2 3

4

SCHEDULE D Computation of Generation-Skipping Transfer Tax

Note: Inter vivos direct skips that are completely excluded by the GST exemption must still be fully reported (including value and

exemptions claimed) on Schedule D.

Part 1—Generation-Skipping Transfers A

Item No. (from

Schedule A, Part

2, col. A)

B

Value (from Schedule A,

Part 2, col. H)

C

Nontaxable

Portion of Transfer

D

Net Transfer (subtract

col. C from col. B)

Gifts made by spouse (for gift splitting only)

(If more space is needed, attach additional statements.) Form 709 (2016)

154

▲▲

▲▲

Part

2—

Ta

x C

om

pu

tati

on

P

art

1—

Deced

en

t an

d E

xecu

tor

Form 706 (Rev. August 2013)

Department of the Treasury

Internal Revenue Service

United States Estate (and Generation-Skipping Transfer) Tax Return

▶ Estate of a citizen or resident of the United States (see instructions). To be filed for decedents dying after December 31, 2012.

▶ Information about Form 706 and its separate instructions is at www.irs.gov/form706.

OMB No. 1545-0015

1a Decedent’s first name and middle initial (and maiden name, if any) 1b Decedent’s last name 2 Decedent’s social security no.

3a City, town, or post office; county; state or province; country; and ZIP or 3b Year domicile established 4 Date of birth 5 Date of death

foreign postal code.

6a Name of executor (see instructions)

6b Executor’s address (number and street including apartment or suite no.; city, town,

or post office; state or province; country; and ZIP or foreign postal code) and

phone no.

6c Executor’s social security number (see instructions)

Phone no.

6d If there are multiple executors, check here and attach a list showing the names, addresses, telephone numbers, and SSNs of the additional executors.

7a Name and location of court where will was probated or estate administered 7b Case number

8 If decedent died testate, check here ▶ and attach a certified copy of the will. 9 If you extended the time to file this Form 706, check here ▶

10 If Schedule R-1 is attached, check here ▶ 11 If you are estimating the value of assets included in the gross estate on line 1 pursuant to the special rule of Reg. section 20.2010-2T(a) (7)(ii), check here ▶

1 Total gross estate less exclusion (from Part 5—Recapitulation, item 13) . . . . . . . . . . 1

2 Tentative total allowable deductions (from Part 5—Recapitulation, item 24) . . . . . . . . . 2

3a Tentative taxable estate (subtract line 2 from line 1) . . . . . . . . . . . . . . . . 3a

b State death tax deduction . . . . . . . . . . . . . . . . . . . . . . . 3b

c Taxable estate (subtract line 3b from line 3a) . . . . . . . . . . . . . . . . . . 3c

4 Adjusted taxable gifts (see instructions) . . . . . . . . . . . . . . . . . . . 4

5 Add lines 3c and 4 . . . . . . . . . . . . . . . . . . . . . . . . . 5

6 Tentative tax on the amount on line 5 from Table A in the instructions . . . . . . . . . . 6

7 Total gift tax paid or payable (see instructions) . . . . . . . . . . . . . . . . . 7

8 Gross estate tax (subtract line 7 from line 6) . . . . . . . . . . . . . . . . . . 8

9a Basic exclusion amount . . . . . . . . . . . . . . . 9a

9b Deceased spousal unused exclusion (DSUE) amount from predeceased spouse(s), if

any (from Section D, Part 6—Portability of Deceased Spousal Unused Exclusion). . 9b

9c Applicable exclusion amount (add lines 9a and 9b) . . . . . . . 9c

9d Applicable credit amount (tentative tax on the amount in 9c from Table A

in the instructions) . . . . . . . . . . . . . . . . 9d

10 Adjustment to applicable credit amount (May not exceed $6,000. See

instructions.) . . . . . . . . . . . . . . . . . . 10

11 Allowable applicable credit amount (subtract line 10 from line 9d) . . . . . . . . . . . 11

12 Subtract line 11 from line 8 (but do not enter less than zero) . . . . . . . . . . . . . 12

13 Credit for foreign death taxes (from Schedule P). (Attach Form(s) 706-CE.) 13

14 Credit for tax on prior transfers (from Schedule Q) . . . . . . . 14

15 Total credits (add lines 13 and 14) . . . . . . . . . . . . . . . . . . . . . 15

16 Net estate tax (subtract line 15 from line 12) . . . . . . . . . . . . . . . . . . 16

17 Generation-skipping transfer (GST) taxes payable (from Schedule R, Part 2, line 10) . . . . . . 17

18 Total transfer taxes (add lines 16 and 17) . . . . . . . . . . . . . . . . . . . 18

19 Prior payments (explain in an attached statement) . . . . . . . . . . . . . . . . 19

20 Balance due (or overpayment) (subtract line 19 from line 18) . . . . . . . . . . . . . 20

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer other than the executor is based on all information of which preparer has any knowledge.

Sign

Here

Signature of executor Date

Signature of executor Date

Paid

Preparer

Use Only

Print/Type preparer’s name Preparer’s signature Date

Check if

self-employed

PTIN

Firm’s name ▶ Firm's EIN ▶ Firm’s address ▶ Phone no.

For Privacy Act and Paperwork Reduction Act Notice, see instructions. Cat. No. 20548R Form 706 (Rev. 8-2013)

155

http://www.irs.gov/form706

mzumsteg

Typewritten Text

EXHIBIT F

1 2 3 4 5 6 7 8 9

10

Estate of:

Decedent’s social security number

Part 6—Portability of Deceased Spousal Unused Exclusion (DSUE)

Portability Election

A decedent with a surviving spouse elects portability of the deceased spousal unused exclusion (DSUE) amount, if any, by completing and timely-filing

this return. No further action is required to elect portability of the DSUE amount to allow the surviving spouse to use the decedent's DSUE amount.

Section A. Opting Out of Portability The estate of a decedent with a surviving spouse may opt out of electing portability of the DSUE amount. Check here and do not complete Sections B

and C of Part 6 only if the estate opts NOT to elect portability of the DSUE amount.

Section B. QDOT Are any assets of the estate being transferred to a qualified domestic trust (QDOT)? . . . . . . . . . . . . . . . . .

Yes No

If “Yes,” the DSUE amount portable to a surviving spouse (calculated in Section C, below) is preliminary and shall be redetermined at the time of the

final distribution or other taxable event imposing estate tax under section 2056A. See instructions for more details.

Section C. DSUE Amount Portable to the Surviving Spouse (To be completed by the estate of a decedent making a portability election.)

Complete the following calculation to determine the DSUE amount that can be transferred to the surviving spouse.

1 Enter the amount from line 9c, Part 2—Tax Computation . . . . . . . . . . . . . . . 2 Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Enter the value of the cumulative lifetime gifts on which tax was paid or payable (see instructions) . . . 4 Add lines 1 and 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Enter amount from line 10, Part 2—Tax Computation . . . . . . . . . . . . . . . . 6 Divide amount on line 5 by 40% (0.40) (do not enter less than zero) . . . . . . . . . . . . 7 Subtract line 6 from line 4 . . . . . . . . . . . . . . . . . . . . . . . . 8 Enter the amount from line 5, Part 2– Tax Computation . . . . . . . . . . . . . . . . 9 Subtract line 8 from line 7 (do not enter less than zero) . . . . . . . . . . . . . . . .

10 DSUE amount portable to surviving spouse (Enter lesser of line 9 or line 9a, Part 2 – Tax Computation) . .

Section D. DSUE Amount Received from Predeceased Spouse(s) (To be completed by the estate of a deceased surviving spouse with DSUE amount from predeceased spouse(s))

Provide the following information to determine the DSUE amount received from deceased spouses.

A

Name of Deceased Spouse

(dates of death after

December 31, 2010, only)

B

Date of Death (enter as mm/dd/yy)

C

Portability

Election

Made?

D

If “Yes,” DSUE

Amount Received

from Spouse

E

DSUE Amount

Applied by

Decedent to

Lifetime Gifts

F

Year of Form 709

Reporting Use of DSUE

Amount Listed in col E

G Remaining

DSUE Amount, if

any (subtract col.

E from col. D)

Yes No Part 1 — DSUE RECEIVED FROM LAST DECEASED SPOUSE

Part 2 — DSUE RECEIVED FROM OTHER PREDECEASED SPOUSE(S) AND USED BY DECEDENT

Total (for all DSUE amounts from predeceased spouse(s) applied) . . . . Add the amount from Part 1, column D and the total from Part 2, column E. Enter the result on line 9b, Part 2—Tax

Computation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ▶

Page 4

156

THE SHIFT FROM TAX AVOIDANCE

TO ASSET PROTECTION IN ESTATE PLANNING

John J. Miesowitz, Esq.

157

The premise of this paper is that the goals of estate planning documents have

shifted dramatically over my more than 35 years of practice. Tax avoidance once

reigned supreme. With a $600,000 Federal Estate Tax credit, many estates were subject

ot the Federal Estate and tax avoidance techniques such as QPRTs and GRATs were used

for the masses. Today, only the extremely affluent clients are concerned with avoiding

death taxes. The emphasis has switched to protecting assets from creditors. The basic

structure of a Will has changed and in many cases has been simplified.

I. ESTATE PLANNING TECHNIQUES THAT PROVIDE ASSET

PROTECTION

A. Structure and Terms of Testamentary Trust:

1. 100% QTIP.

2. Disclaimer Will.

3. Income - Mandatory versus discretionary.

4. Principal:

a. Discretionary invasion.

b. Five and five power.

c. Ascertainable standard.

d. Spendthrift provision - to make interest non-assignable.

e. No mandatory payouts - i.e., 1/3 at 25, 1/3 at 30, balance at 35.

f. Trustee can grant beneficiary general power of appointment to

159

avoid generation-skipping tax.

B. Dynasty Trust for Issue Provides Protection Against:

1. Taxes. 2. Spendthrift nature of beneficiary. 3. Divorce. 4. Bankruptcy. 5. Predators. 6. Creditors. C. Supplemental Needs Trust - A Discretionary Trust for the

Benefit of a Person with Severe and Chronic or Persistent Disability:

1. Protects trust fund from claims of governmental units charged with providing benefits to beneficiaries.

2. Preserves beneficiary’s entitlement to governmental assistance. 3. Trustee generally precluded from distributing trust assets in such a

way as to supplant or diminish government benefits may be receiving.

4. Generally created for beneficiary already receiving governmental

assistance. D. Qualified Personal Residence Trust:

1. A standard estate planning technique used to leverage the grantor’s estate tax exemption by transferring residence or vacation property into a trust. Provides a valid reason to transfer residence property

160

other than a transfer to avoid creditors. 2. Give spouse right to rent property at the end of term for added

creditor protection. 3. Have children’s interest remain in trust at end of term. 4. Avoids bankruptcy. 5. If State has limited homestead exemption, does it extend to QPRT? E. Educational Trust versus UTMA Account: 1. UTMA account must pay out by 21. 2. If parent is custodian, UTMA account of minor will be included in

parent’s estate if parent dies. 3. Trust can hold property until beneficiary reaches appropriate age of

maturity, allowing assets to appreciate. 4. Trust can generation-skip. 5. Trust can allow investment in 529 Plan. 6. Allows for professional financial management. F. Limited Partnership: 1. A Limited Partnership is a type of partnership comprised of one or

more general partners who manage the business and one or more limited partners who are basically investors who take no part in running the business.

2. A Family Limited Partnership is a common estate planning tool used

to transfer wealth. The Limited Partnership units can be gifted at a discounted value because of their lack of control and lack of marketability.

161

3. A Limited Partnership also can provide protection from creditors, because the creditor of a limited partner cannot attach the assets of the partnership to satisfy the debt of the limited partner.

4. Pursuant to N.J.S.A. 42:2A-48, a judgment creditor of a partner may

apply to a court of competent jurisdiction, which may charge the partnership interest with the unsatisfied amount of the judgment. The judgment creditor has only the rights of an assignee of the partnership interest.

5. Pursuant to N.J.S.A. 42:2A-49, an assignee who has become a

limited partner is subject to the restrictions and liabilities of a limited partner under the Partnership Agreement and the statute. An assignee who becomes a limited partner also is liable for the obligations of the assignor.

6. The general partners of a Limited Partnership control distribution to

partners and can choose not to make distributions. Since the income of a partnership flows through to the partners, an assignee of a partner can be held liable for taxes on partnership income even though no distributions are made. This would result in “phantom income” and this makes the Limited Partnership an effective asset protection tool.

7. The general partner of the Limited Partnership will often be a

Limited Liability Company. 8. The “business purpose” necessary in an estate planning context will

also help in the asset protection context to help prevent piercing of the partnership veil - see, Estate of Harrison v. Comm. 52 T.C.M. 1306 (1987) - partnership was created as a means of providing necessary and proper management of decedent’s properties.

9. Partnership Agreement should: a. Allow general partners to withhold making distributions. b. Prevent limited partners from transferring their interests

without permission of general partners. c. Prevent dissolution upon death of general partner.

162

d. Prevent limited partner from entitlement to return of capital

prior to dissolution. e. Require consent of all partners to liquidate. f. Transactions between partners should be at arms length. II. DOMESTIC ASSET PROTECTION TRUSTS

A. 17 States Have Enacted Legislation Providers

Spendthrift Protection to Self-Settled Discretionary Trusts: 1. Alaska 9. West Virginia 2. Delaware 10. Mississippi 3. Colorado 11. Hawaii 4. Missouri 12. Ohio 5. Nevada 13. Oklahoma 6. Rhode Island 14. Tennessee 7. South Dakota 15. Utah 8. Michigan 16. Wyoming 17. New Hampshire B. Delaware: 1. Purpose is to allow settlors to reduce their estate tax by excluding

creditors’ claims against self-settled trusts. 2. Applies to qualified dispositions made after July 1, 1997.

163

3. “Qualified Disposition” is disposition to: a. Delaware Trustee - resident individual or banking institution

authorized to act as trustee in Delaware. b. Who maintains or arranges for custody of some or all of assets

in Delaware and maintains records and prepares tax returns in Delaware.

4. Trust must be irrevocable, but may allow: a. Settlor to retain power to veto distributions. b. Settlor to retain special power of appointment. c. Settlor may be discretionary beneficiary of income and/or

principal in sole discretion of independent trustee (a trustee who is neither related nor subordinate).

5. Transfer cannot have been intended to defraud creditors. Creditor

existing at the time of transfer to trust has four years from transfer (or one year after reasonable discovery) to commence action.

6. Exempt creditors: a. Alimony, child support. b. Death, personal injury or property damage that occurs prior to

transfer. 7. Domicile of settlor in Delaware not necessary. III. TIPS FOR ENSURING MAXIMUM TRUST PROTECTION A. Express spendthrift provision. B. Multiple discretionary beneficiaries. C. At least one independent trustee.

164

D. Total discretion in trustees to make distributions. E. Power of trustee to make distributions on behalf of beneficiary. F. Trust to remain in perpetuity. G. Termination of beneficiaries’ interest upon occurrence of specific event

(supplemental needs trust). H. Limited powers of appointment given to beneficiary. I. Trustee power to withhold mandatory distributions. J. Power of trustee to change situs of trust.

165

Beware the NJ Trust Buster Statute regarding Special Needs Trusts©Mark R. Friedman, Esq., 2017

Part 1: What is a Special Needs Trust?

• If a person is disabled within the meaning of the Social Security definition...

• unable to engage in substantial gainful activity due to a medical impairmentexpected to last longer than a year or result in death

• ...they may be eligible for valuable public disability benefits

• Medicare - health insurance

• Social Security Disability (SSD) - cash benefit

• Medicaid - low-cost health insurance

• Supplemental Security Income (SSI) - cash benefit

• and more

• Each program has its own eligibility requirements

• SSD and Medicare are based on work history (like Social Security retirement)

• SSI and most Medicaid programs are based on finances

• To qualify for SSI and Medicaid, must meet financial eligibility tests

• SSI for an individual - must have less than $2,000 in assets (generally), and verylimited income

• Medicaid - for many programs, must have less than $2,000 in assets and limitedincome

• works differently for Medicaid under the Affordable Care Act, so rest ofthis presentation will address non-ACA Medicaid, since many people withdisabilities qualify under those programs

• and for some state disability benefits, you must qualify for non-ACAMedicaid

• For people born with disabilities (or develop them early in life), Medicaid and SSI areoften a vital lifeline...

167

• If an individual will never be able to work, then income and health insuranceprovided by SSI and Medicaid is very important

• might mean being able to get healthcare, or not; being able to get housing,or not; etc.

• If you're helping such a person's parents craft an estate plan, the last thing you wouldwant to do is disqualify them from Medicaid and SSI

• must have less than $2,000 (generally) to qualify

• an inheritance of any significance will disqualify

• likewise, a recovery or settlement in a lawsuit (incl. personal injury) will alsodisqualify

• Instead, assets to benefit a person with disabilities can be held in a special needs trust(SNT)

• assets managed by trustee and used to benefit person with disabilities (beneficiaryof trust)

• pure discretionary trust - distributions are at sole discretion of trustee, noobligation to make distributions

• beneficiary has no legal ability to oblige trust or demand distributions

• ...but can ask the trustee, who presumably will cooperate with beneficiaryif reasonable

• If SNT is drafted and administered correctly, assets held in SNT are notconsidered available for SSI / Medicaid and do not disqualify

• money can be set aside and used to benefit person with disabilities longterm, while they keep eligibility for Medicaid, SSI and other importantbenefits

• Two types of SNT's - first-party, and third-party

• Third-party SNT

• Grantor is someone other than beneficiary - trust assets come from someone otherthan person with disabilities

• Typically used for estate planning / inheritance - parents or other family memberswrite will that leaves share for child with disabilities to be held in third-party SNT

• Third-party SNT has few restrictions, but cannot accept money belonging /payable to beneficiary

• First-party SNT

• Grantor is beneficiary - trust assets come from person with disabilities

• Typically used for lawsuits or worker's comp, where settlement or recovery ispayable to person with disabilities

• Also used where person with disabilities already has a large sum of money - e.g.,if family member's estate plan isn't set up correctly and leaves inheritance directly

• First-party SNT has more restrictions than third-party

• Must comply with 42 U.S.C. 1396p(d)

• sometimes called d4A trust, because many first-party SNT's aredrafted to comply with 42 U.S.C. 1396p(d)(4)(A)

168

• Reporting requirements to NJ

• Distributions must be for sole benefit of beneficiary

• Can only establish SNT before age 65

• Rules about how SNT is established

• Critically, first-party SNT must repay Medicaid when beneficiary dies -no repayment requirement for third-party SNT

• Important not to mix up first and third-party SNT

• Putting first-party money in third-party SNT may invalidate SNT

• Putting third-party money in first-party SNT makes third-party moneysubject to first-party rules, including Medicaid repayment

• Bottom line: Assets that would disqualify someone from disability benefits shouldinstead be held in SNT

Part 2: NJ's Trust Buster Statute and How it Affects SNT's

Why does an SNT work?

• Medicaid and SSI generally have a $2,000 resource limit, meaning applicants must haveless than $2,000 to qualify

• not true for every Medicaid program, especially Affordable Care Act Medicaid,but true for program under which (in my experience) most people with disabilitiesqualify

• Not every asset is a resource

• For an asset to count as a resource, it must be available to the beneficiary, meaning thebeneficiary can access it and use it to pay for food or shelter

• For assets held in trust, question is whether those assets are available to the beneficiary

• If trust beneficiary has a right to demand payment from a trustee, then assets areconsidered available to the extent beneficiary has that right

• For example, if trust says that all income shall be payable to beneficiary, then all trustincome is considered available to beneficiary, regardless of whether beneficiary actuallytakes the income

• If trust calls for $250 per month payments to beneficiary, then beneficiary has $250 inincome

• If trust says that payments shall be made for beneficiary’s health, education, maintenanceand support, then arguably, the amount needed to provide for beneficiary’s health,education maintenance and support is available to beneficiary for Medicaid and SSIpurposes

• But if a trust is purely discretionary, where beneficiary has no right to demand paymentfrom trust or obligate the trust, then it’s not considered available

169

• Trustee has sole discretion whether to distribute trust, beneficiary has no say, so there isno guarantee that trust is available to pay for food or shelter for beneficiary

• That’s why a SNT works: Distributions are at the sole discretion of trustee, so a trust isnot considered available to beneficiary for SSI and Medicaid

• Some nuance: A first-party trust, where the beneficiary is putting his own money into atrust, is subject to different rules

• NJ Medicaid rules say that a self-settled trust is either available, or subject to Medicaidgift penalties, unless it complies with special needs trust rules

• repaying Medicaid when the beneficiary dies, established before beneficiary isage 65, etc.

• Bottom line is, SNT distributions should be at sole discretion of trustee, with no standardfor mandatory distributions

NJ’s Trust Buster statute

• To add one more element of complication here...

• NJ has a statute that would seem to invalidate SNT’s

• N.J.S.A. 30:4D-6(f)

• not to be confused with 6f, a different provision pertaining to immigrants

30:4D-6 subsection f:

...

(2)In addition, any provision in a contract of insurance, health benefits plan, or other health carecoverage document, will, trust, agreement, court order, or other instrument which reduces orexcludes coverage or payment for health care-related goods and services to or for an individualbecause of that individual's actual or potential eligibility for or receipt of Medicaid benefits shallbe null and void, and no payments shall be made under this act as a result of any such provision.

(3)Notwithstanding any provision of law to the contrary, the provisions of paragraph (2) of thissubsection shall not apply to a trust agreement that is established pursuant to 42 U.S.C.s.1396p(d)(4)(A) or (C) to supplement and augment assistance provided by government entitiesto a person who is disabled as defined in section 1614(a)(3) of the federal Social Security Act(42 U.S.C. s.1382c (a)(3)).

• Section 3, which my colleague Larry Friedman drafted, is very helpful: It exempts(d)(4)(A) first-party special needs trusts from the trust-buster statute

170

• But Section 2 seems pretty devastating at first glance. It says that, where a provision in atrust, will or other instrument reduces payment because of an individual’s eligibility forMedicaid, that provision shall be null and avoid and Medicaid won’t make any paymentsas a result of that provision

• Sometimes we see trusts that were drafted by people who aren’t familiar with this statute,or are based on forms written before this statute existed, or are based on other states thatdon’t have this law

• And those trusts will say something to this effect: “The Trustee shall not make anydistribution that would reduce or cause the beneficiary to lose eligibility for PublicBenefits, including Medicaid”

• The bad news is, this language flagrantly violates the NJ trust buster statute, and wouldbe struck down if Medicaid challenged it during the trust review process

• So unless there is a saving grace elsewhere in this hypothetical trust, you couldn’t use itas a special needs trust, and the person would lose their benefits unless you could reformthe trust, but you may not be able to do that, etc.

• The good news: It’s easy to avoid making this mistake, and draft around the trust busterstatute

Kirsch v. DMAHS

• The trust buster statute was heavily watered down by an opinion of the Superior Court ofNew Jersey, Appellate Division, from 1998, which was unpublished: Kirsch v. Divisionof Medical Assistance and Health Services (DMAHS, the state Medicaid agency)

• Kirsch involved a woman who left a large inheritance in a trust for her sister under herwill

• The trust said: “I direct my trustee . . . to distribute to my sister as much of the income asmy Trustee in her sole discretion sees fit, with the specific direction and restriction thatthe income be used to supplement any Medicare, Medicaid or other governmental benefitto which my sister may be entitled, and I further direct that if any distribution from thetrust would disqualify my sister from receiving any of the aforementioned benefits, myTrustee shall not make such distribution.” (emphasis added)

• Medicaid contended that this provision violated the trust buster statute, and therefore noMedicaid payments should be made until the trust was spent down

171

• The Court found in a per curiam decision that the provision of the trust that I’veunderlined above (instructing the trustee not to make distributions that would disqualifythe beneficiary from Medicaid) did violate the trust buster statute. However under thestatute, the remedy was for that provision to be held null and void, and for the rest of thetrust to remain in effect.

• The rest of the trust says that distributions are within the sole discretion of the trustee. Since this is a third-party trust, and distributions are at the sole discretion of the trusteewith no mandatory distributions to the beneficiary, the trust was not considered anavailable resource and the beneficiary was able to get Medicaid.

• The result of this decision: the trust-buster statute is pretty narrow, and if one provisionviolates it, the rest of the trust can still be valid and other provisions can still accomplishyour goal.

• In our special needs trusts at FriedmanLaw, we often include a provision to this effect: Ifthe existence of a Trustee discretion would disqualify the beneficiary from PublicBenefits, the Trustee shall not have that discretion.

• We don’t think this violates the trust buster statute, because it doesn’t directly callfor payments to cease if those payments could instead be made by Medicaid

• But even if this provision does violate the statute, it’s ok if it gets struck down,because in the rest of the trust we would include provisions saying thatdistributions are at the sole and absolute discretion of the Trustee, the Trustee hasno obligation to fund support, etc.

• Where this gets tricky is instruments that aren’t meant to be special needs trusts, but thatinclude provisions that address disability benefits... e.g., a will that leaves inheritance forgrandchild in trust

• in that situation, it would be wise to prepare for possibility that grandchild willturn out disabled, in which case payments should be held back so grandchild canget benefits

• if you say, “payments shall not be made where doing so would make grandchildineligible for Medicaid,” that would violate trust buster statute and be invalid

• but if the standard is whether grandchild is disabled within meaning of SocialSecurity Act, or where someone needs long term care under Social Security Act,it’s much less likely to violate trust buster statute

Take-away: Beware the trust-buster statute

• Trust-buster statute is fairly easy to avoid, if you know to avoid it (a lot of lawyers don’t)

• Generic SNT forms may not comply with trust buster statute; SNT’s should be custom-drafted

172

1

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

A-4520-97T5

HELEN KIRSCH,

Petitioner-Appellant,

vs.

DIVISION OF MEDICAL ASSISTANCE

and HEALTH SERVICES and the

MONMOUTH COUNTY BOARD OF

SOCIAL SERVICES,

Respondents-Respondents.

_________________________________________________________

Submitted March 8, 1999 - Decided JUL 22, 1999

Before Judges Havey, Skillman and Lesemann.

On appeal from New Jersey Department of

Human Services, Division of Medical

Assistance and Health Services.

James P. Sullivan, III, attorney for appellant

(Mr. Sullivan, of counsel and on the brief).

Peter Verniero, Attorney General, attorney for

respondent Division of Medical Assistance

and Health Services (Mary C. Jacobson, Assistant

Attorney General, of counsel; Mary F. Rubinstein,

Deputy Attorney General, on the brief).

PER CURIAM

173

2

Petitioner Helen Kirsch, who is seventy-seven years old and lives in a nursing home, appeals from a decision of the

Director of the Division of Medical Assistance and Health Services (the Division), 1 which found her ineligible for medicaid

benefits until the income from a trust of which she was a beneficiary had been fully paid to her each year. Although the case

seems at first to implicate complex state and federal medicaid eligibility provisions, in its final analysis the result turns on

relatively simple principles of trust interpretation and administration. There is little if any disagreement between the

petitioner and the Director concerning the statutory or regulatory eligibility requirements.

The trust in question was created under the will of petitioner’s sister, Ann Geer, who died in 1990. The trust has a

corpus of approximately $730,000 and produces annual income of approximately $40,000. The will provision establishing

the trust reads as follows:

I leave my First Fidelity Investment Management account

to my beloved sister, HELEN KIRSCH [petitioner], to be held

IN TRUST by my Trustee hereinafter named. I direct my

Trustee to invest, reinvest and to keep same invested and to

distribute to my sister as much of the income as my Trustee

in her [sic] sole discretion sees fit, with the specific direction

and restriction that the income be used to supplement any

medicare, medicaid or other governmental benefit to which

my sister may be entitled, and I further direct that if any

distribution from the trust would disqualify my sister from

receiving any of the aforementioned benefits, my Trustee

shall not make such distribution.

1

The Monmouth County Board of Social Services did not file a brief.

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3

The will named Ann Geer’s son, Robert Geer, as trustee as well as executor of the will. It also provided that on Helen Kirsch’s

death, the corpus of the trust would be distributed to Ann Geer’s husband (since deceased) and her three children, including the

trustee, Robert Geer.

When an application for medicaid benefits was submitted on behalf of Helen Kirsch, it was rejected by Monmouth

County officials on the grounds that her available resources made her ineligible for medicaid. That decision was appealed to

the Division where it was referred to an administrative law judge (ALJ). A hearing was held before the ALJ, who then

rendered a decision in favor of petitioner.

The ALJ quoted the will language that created the trust. He also cited and quoted from N.J.A.C. 10:71-4(b), which

provides that,

for the purpose of this program (medicaid) a resource

shall be defined as any real or personal property which

is owned by the applicant (or by those persons whose

resources are deemed available to him/her, as described

in N.J.A.C. 10:71-4.6) and which could be converted to

cash to be used for his/her support and maintenance.

The ALJ also referred to N.J.A.C. 10:71-4.1©), which provides that “in order to be considered in the determination of eligibility, a

resources must be ‘available.’” he noted further that, “[w]hen the person has the right, authority or power to liquidate real or

personal property, or his or her share of it, the resource shall be considered available to that individual,” citing N.J.A.C.

10:71-4.1(c)1. The ALJ went on, however, to note that a resource is “classified as excluded” if it is “not accessible to an

individual through no fault of his or her own,” citing N.J.A.C. 10:71-4.4(b)6. “Examples of such resources,” the ALJ said,

“include ‘irrevocable trust funds’ and ‘property in probate,’” citing N.J.A.C. 10:71-4.4(b)6. When a resource is “classified as

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4

excludeable [it[ shall not be considered . . . . in the determination of eligibility for participation in the Medicaid . . . . Program.”

N.J.A.C. 10:71-4.4(a).

The ALJ concluded that under the terms of the will which established the trust, the trust income could only be used “at

the sole discretion of the trustee . . . to supplement any medicare, medicaid or other governmental benefit” to which Ms. Kirsch

might be entitled. If not so used, it was to be “reinvested” in the trust corpus. The ALJ reasoned that if the beneficiary is

denied medicaid eligibility, the trustee “is not permitted to pay any of the income on behalf of [Helen Kirsch] because such

payment would not be a ‘supplement’ to Medicaid payments. He concluded, therefore, that “unless [Helen Kirsch] is

receiving government benefits, no income may be distributed” under the trust.2 And, he concluded, under applicable law,

including a recent decision by the Director of the Division in McKenna v. Division of Med. Assistance and Health Serv., 97

N.J.A.R. 2D (DMA) 42, 45, it was clear that “the corpus of a testamentary trust . . . [that is, a trust not established from the

beneficiary’s own assets and over which the beneficiary does not exercise control] cannot be considered available to an

applicant for the purpose of determining Medicaid eligibility.”

When the ALJ’s decision was referred to the Director of the Division, the Director’s decision began by approving and

affirming the decision of the ALJ, that Helen Kirsch was “eligible for the medicaid program.” Her conclusion in that regard

was:

The irrevocable trust of [Ann Geer] is an excludeable

resource under N.J.A.C. 10:71-4.4(b)6 that should

not be counted toward [Helen Kirsch’s] financial

2

The ALJ also rejected an argument by the respondent that “upon the income from the trust being retained by the

trustee and not distributed,” it became “a resource on the first day of the next month.” The ALJ pointed out that under the

terms of the will, any such undistributed income was required to be reinvested into the corpus.

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5

eligibility for medicaid. This trust should be be

counted as a resource because it was a testamentary

trust established under Ann Geer’s will, the trust was

not funded with any assets of [Helen Kirsch], a trustee

other than [Helen Kirsch] has the sole and absolute

discretion to disburse the Trust funds, [Helen Kirsch]

cannot compel distribution of corpus or income, and

[Helen Kirsch] is not a beneficiary of any of the funds

when the Trust is terminated.

However, the Director then turned to an issue which was, apparently, not raised before the ALJ: the significance of N.J.S.A.

30:4D-6(f). That section reads as follows:

[A]ny provision in a contract of insurance, health benefits

plan or other health care coverage document, will, trust

agreement, court order or other instrument which reduces

or excludes coverage or payment for health care-related

goods and services to or for an individual because of that

individual’s actual or potential eligibility for or receipt

of Medicaid benefits shall be null and void, and no

payment shall be made under this act as a result of any

such provision.

The Director said that an issue concerning that statute was “raised by the wording of the second article” of the will “which in

pertinent part” (as the Director set it out), provides:

“I direct my trustee . . . to distribute to my sister as

much of the income as my Trustee in her sole discretion

sees fit, with the specific direction and restriction that

the income be used to supplement any Medicare,

Medicaid or other governmental benefit to which my

sister may be entitled, and I further direct that if any

distribution from the trust would disqualify my sister

from receiving any of the aforementioned benefits, my

Trustee shall not make such distribution.

(Emphasis added by the Director.)

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6

The Director then said that,

Based upon this statute, I find and conclude that

although the Petitioner is Medicaid eligible, no payments

may be made by the medicaid program for covered

services that she may receive until such time as these

third party benefits are exhausted.

She continued:

I do not agree with the conclusion in the Initial Decision

[of the ALJ] that unless [Helen Kirsch] is receiving

government benefits, no income may be distributed.

Instead, I interpret the second article of the will to mean

that the trust income must be used to pay for [Helen

Kirsch’s] health care expenses even if medicare,

medicaid or other governmental benefits do not pay any

expenses. That interpretation is supported by the testimony

of the trustee that the trust income was used to pay [Helen

Kirsch’s] nursing facility expenses after [her] application

for medicaid benefits was denied.

We share the Director’s disagreement with the ALJ’s conclusion that if Helen Kirsch is not receiving medicaid benefits,

then no payments may be made to her under the trust. However, we do not understand, or does the Director explain, why

her rejection of that conclusion by the ALJ leads her to an equally extreme conclusion – that “the trust income must be used to

pay for” Helen Kirsch’s health care expenses “even if medicare, medicaid or other governmental benefits do not pay any

expenses.” We do not understand why the Director apparently rejected (without discussing) what we find to be a much more

rational and reasonable conclusion: That the trustee remains free, but not required, to exercise the discretion given him by the

will, to apply trust income for Helen Kirsch’s benefit, to supplement any other benefits she may receive. That is, we share the

Director’s conclusion that, by reason of N.J.S.A. 30:4D-6(f), the provision underlined by the Director in paragraph second of the

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7

will is “null and void.” That language does, we believe, constitute a provision “which reduces or excludes” (or might reduce

or exclude) payments because of “eligibility for or receipt of medicaid benefits.” Thus, pursuant to the statutory directive , the

provision “shall be null and void.”

However, we do not believe that reasoning also applies to the remaining provisions in Article Two. We see no

statutory violation in the language which gives the trustee “sole discretion” to distribute trust income to Helen Kirsch in order

“to supplement” any governmental benefits she may receive. That language does not direct any reduction or exclusion of

payments because of their actual or potential negative effect on medicaid benefits.3

Nor does the Director’s decision seem to attack, or purport to invalidate, the discretionary portion of Article Two

which grants authority to the trustee to supplement governmental benefits. Although the brief submitted here on behalf of

the respondent suggests – without specifically saying – that the discretionary provisions in Article Two of the will may also run

afoul of N.J.S.A. 30:4D-6(f), that does not seem to have been the conclusion reached or the decision rendered by the Director.

The Director’s statement with its underlining of only the last clause of Article Two (the last twenty-nine words of the provision)

seems to refer only to that underlined provision and not to the earlier language. Nor, as we noted above, do we see any basis

for a broader invalidation.

3

The invalidation of one part of a will or trust does not affect the validity of the other parts. In In re Lattouf’s Will, 87

N.J. Super. 137, 142 (App. Div. 1965), this court invoked the doctrine of partial invalidity in setting aside only part of a will

affected by undue influence. See also In re Probate of Alleged Will of Landsman, 319 N.J. Super. 252, 217 (App. Div. 1999) in

which this court similarly ruled that only a portion of a will affected by undue influence should be severed.

Further, even were we to assume the invalidity of all the provisions of Article Two that refer to medicaid or other

governmental benefits, including the provision that directs use of the income to supplement such benefits, it would not follow

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8

(as respondent’s brief argues) that the trustee would then be required to pay Helen Kirsch all of the income of the trust as it was

earned. Rather, if we were to assume such a broad invalidation, what would then be left of Article Two would be a provision

directing the trustee “to invest, reinvest and keep same invested and to distribute to my sister as much of the income as my

trustee in his sole discretion sees fit.” Under that provision, Helen Kirsch would have no more right to demand payment of

income than she has now. Since respondent has acknowledged that without such a right to demand payment, the trust

income would not be deemed “owned” by Helen Kirsch, and thus would not constitute a disqualifying asset, that same

conclusion would apply even were we to assume invalidation of all medicaid references in Article Two.

In short, under no hypothesis of which we can conceive, would the trust here be turned into one whereby the trustee

is required to pay all trust income to Helen Kirsch. Since respondent acknowledges that only under such a scenario would

the trust and its income be deemed assets attributable to Helen Kirsch (and thus disqualify her from medicaid benefits), the

results reach by the Director must be rejected.

Although our discussion above assumed, hypothetically, the possible invalidation of those provisions of Article Two

which provide that the income of the trust may be used to supplement governmental benefits, in fact we find no reason to

invalidate that provision. It does not run afoul of N.J.S.A. 30:40d-6(F). Thus, with the modification noted, the trustee

retains the discretion granted him by the will. The discretionary income benefits do not disqualify Helen Kirsch from

receiving medicaid benefits and accordingly, the decision of the Director is reversed.

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NEW JERSEY INHERITANCE TAX

Martin D. Hauptman, Esq.

OVER VIEW

Federal Estate tax exclusion in 2017 is $5,490,000;

New Jersey Estate tax exclusion in 2017 is $2,000,000

New Jersey Estate tax 2018?

NEW JERSEY INHERITANCE TAX

Class based

Class A Beneficiaries include spouses, civil union partners, domestic

partners, parents, grandparents and descendants (including those legally

adopted), who are all exempt from New Jersey Inheritance Tax. Includes step

children not step grandchildren

Class C Beneficiaries, which include siblings, spouses or widow (widower)

of a child of a descendant and the civil union partner or surviving civil union

partner of a child of the descendant, receive an exemption equal to the first

$25,000.00 of inheritance. Transfers in excess of $25,000.00 are taxed at 11 to

16%.

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Class D Beneficiaries, which include all other beneficiaries, receive an

exemption equal to the first $500.00. Transfers in excess of $500.00 are taxed at

15 to 16%.

Life insurance payable to a named beneficiary is exempt from New Jersey

Inheritance tax

Includable for New Jersey Estate Tax

New Jersey Inheritance Tax includes any transfers made within three (3)

years of death without full and adequate consideration in excess of

$500.00. Transfers are subject to a rebuttable presumption.

Estate of Mary Van Riper vs. Director, Division of Taxation decided February 23,

2017

Facts:

1. Mr. and Mrs. Van Riper established an irrevocable trust in

2007. The marital home was transferred to the trust for $1.00. The express

purpose of the trust was to “provide a residence” for “the lifetime” of the

transferors.

2. The trust provided that each transferor could live out their

respective lives in the marital home. Three (3) months later the husband

died and six (6) years later in 2013, the wife died.

3. Upon the death of both transferors, the trust provided the

marital home would go to their niece. Under New Jersey Law, a niece is

considered a class D beneficiary subjecting the estate to a 15-16% tax

(N.J.S.A. 54:34-2(d)).

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The 1995 amendment codifying N.J.S.A. 54:34-1.1 provides that some

transfers intended to take effect at or after death are exempt if a complete

disposition occurs more than three (3) years prior to death. The question is

“Was the structure outlined a transfer created six (6) years prior to death

thus satisfying the exemption?”

The actual trust provides that the trust is not a qualified personal

residence trust within the meaning of Internal Revenue Code Section 2702.

The estate filed a transfer inheritance tax return excluding the home

valued at $935,000.00.

The estate makes the argument that the transfers are exempt

because the trust was created more than three (3) years prior to the death

of the decedent.

In the Estate of Ann Boyd Lichtenstein v. William Kingsley, Acting Director

of the Division of Taxation, 52 N.J.553-1968: The Court held:

“whether particular transfer is, in substance,

substitute for testamentary disposition depends on

subjective state of mind of transferor at time of

transfer, and this is a question of fact as to which

taxpayer bears burden of persuasion, to be

determined through reconstruction of that state of

mind as best one can through objective indicia, always

having in mind that taxation is a practical matter and

never losing sight of common understanding and

experience.”

“among relevant factors to be considered in

determining whether transfers made in

contemplation of death within meaning of Inheritance

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Transfer Tax Statute are: age and health of donor at

the time of making gifts, interval between transfer

and death, existence of desire to evade inheritance

taxes, whether or not inter-vivos transfer was part of

testamentary plan; past history of substantial gifts by

donor; whether or not gift was made to natural

objects of donor’s bounty; and existence of an

emergency situation which may have prompted gift.”

The estate alleges that the transferors relinquished all power and

control more than three (3) years prior to transferring the home to an

irrevocable trust which provides that the transferors could remain in the

home until death. The position under 54:34-1(c) provides for three (3)

tests:

1. There must be a transfer of property by deed, grant, bargain, sale

or gift.

2. The transferor is entitled to some income, right, interest or power

in the property transferred and

3. The transferor must three (3) years prior to death execute an

irrevocable and complete disposition of all reserved income,

rights, interest and powers in and over the property transferred.

The estate argues in the alternative that only half the interest in the

home is taxable. The trust was created in 2007. With the creation of the

trust, there were three (3) interests:

1. the remainder interest which the niece received at or after the

death of both husband and wife,

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2. the life interest of husband and

3. the life interest of wife.

Husband passed in 2007 and his interest extinguished. Wife passed

in 2013 and her interest extinguished. Thus, per the express terms of the

trust, the niece did not take the property until after the death of the

husband and at the death of the wife. The court concluded that the

transfer of the marital home, which was placed in a trust, is subject to New

Jersey inheritance tax.

Contrast this case to Andrew Gray vs. Director, Division of Taxation,

28 N.J. Tax 28 (2014).

Facts:

1. Decedent created two (2) irrevocable trusts, the first was a

qualified personal residence trust and the second was a grantor

retained unitrust. Each trust had a fixed six (6) year term which

expired during the life of the decedent.

2. In the spring of 2004, Bernice Jochman consulted with her

attorney for estate planning purposes. She was then age 85 and

her estate was estimated to be in excess of 4,000,000.00.

Decedent’s attorney recommended establishing revocable trusts

to minimize State and Federal tax burdens. The decedent set up

the two (2) trusts at a time when she had a life expectancy

actuarially in excess of six (6) years. The grantor retained unitrust

was funded with $1,000,000.00. The trust provided that the

decedent was to receive annual payments equal to six (6%)

percent on the Fair Market Value of the corpus throughout the six

(6) year term. Upon expiration of the trust period, the corpus and

accrued income was to be distributed in accordance with the trust

document to decedent’s siblings’ children. Simultaneously, the

decedent created a qualified personal residence trust to which

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she transferred her residence. Subsequent to the expiration of

the trust, the grantor was given an option to rent the property

from the trustee at Fair Market Value for period not exceeding

fifteen (15) years.

3. The decedent died August of 2011 which was exactly eleven (11)

months after the trusts expired.

4. The Court states that pursuant to N.J.S.A. 54:34-1(c) “no such

transfer made prior to such three (3) year period shall be deemed

or held to have been made in contemplation of death”. The Court

then further stated that “it is undisputed that the trusts were

established exactly six (6) years and eleven (11) months prior to

decedent’s death in 2011 and the Court recognizes those trusts

were irrevocable in nature by their terms. In light of the statutory

provisions, the Court finds the Director’s decision to include these

irrevocable trusts in decedent’s estate was plainly unreasonable.

Let’s examine the gift in contemplation of death provisions which are

rebuttable.

Facts:

1. man transfers home to woman on February 14, 2012

2. Accountant files gift tax return for 12/31/2012 to reflect gift

3. man and woman are married on June 23, 2013

4. man dies December 19, 2013

Not married at the time of gift but married at the time of death

Is the gift a taxable gift for inheritance tax purposes?

If it is deemed a gift, tax due approximately $81,000.

Options: 1. don’t pay the tax wait for a final determination

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Drawback State charges interest at the rate of 10% per year.

2. Pay the tax stop the interest meter

Drawback may have to go to Tax Court to obtain the refund.

In McGregor etal v. Martin, State Tax Commissioner, 126 N.J.L. 492(1941)

“the phrase “in contemplation of death” is not to be

considered in relation to the universal expectation

that everyone knows that it is appointed that some

time he will die. As our Federal Supreme Court said in

the case of United States v. Wells, 283 U.S. 102,

51S.Ct. 446, 451, 75 L.Ed. 867, “it must be a particular

concern giving rise to a definite motive. The provision

is not confined to gifts causa mortis which are made in

anticipation of impending death, irrevocable and are

defeated if the donor survives the apprehended

peril.”

“If the transfer is made within two (2) years of death,

the gift is deemed to have been made in

contemplation of death in the absence of proof to the

contrary. This presumption, however, is by the

statute itself, a rebuttable one.”

McManus v. Margetts, 6 N.J. Super.122 (1950) The court looks to the

motive to determine if there is a gift in contemplation of death.

“The intent of the donor being the determining factor,

it is essential to explore the circumstances of each

case so that it may determine what dominant

controlling or impelling influence motivated the donor

in making the transfers. Barillet v. Kelly, 131 N.J.L.

187

140, 35 A.2D 457(Sup. Ct. 1944) Schneider v. Zinc

inquiry into the state of mind of the decedent as

evidenced by his actions and the facts and

circumstances surrounding the transfers in question,

convinces this court that they were not substitutes

and makeshifts purposely employed to effectuate in

essence a testamentary disposition.”

COMPROMISE TAX

When the tax on a transfer of property cannot be definitely determined

until the occurrence of contingencies, the tax liability may be immediately

adjusted by the payment of a compromise tax. The compromise tax is the

amount of tax that the Branch will accept in satisfaction of a tax liability which,

if not settled in this manner, will be held in abeyance for an indefinite period.

The compromise tax is determined after a consideration of the tax that may

become due upon the occurrence of various contingencies, the present value

of the tax, and the probability of the various contingencies occurring.

The settlement of tax on the contingent portion of an estate (that portion

subject to the occurrence of contingencies before the tax may be definitely

determined) prior to the occurrence of the contingencies is advantageous to

both the Branch and the estate representatives.

The Branch prefers an immediate, fair and equitable settlement of the

tax. In most cases it eliminates the need to maintain active files for an indefinite

period, it eliminates the necessity of making multiple assessments of tax in the

same estate, and it provides for the immediate receipt of tax revenue. The

representatives of estates usually prefer the immediate settlement of the

transfer inheritance tax liability because it results in a more expeditious

completion of the inheritance tax proceeding and because it eliminates the

requirement that a bond be filed in twice the highest amount of tax that may

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become due until the contingencies have occurred and the resulting tax liability

has been satisfied.

A compromise tax on the contingent portion of an estate may be

computed by the estate representative and reported on the inheritance tax

return. When a compromise tax is reported on the return, a rider should be

attached setting forth the computations and basis for the amount of

compromise tax reported. If, upon review of the computations by the Branch, it

is determined that the compromise tax is acceptable, and, if none of the

contingencies have occurred prior to the completion of the assessment of tax

by the Branch, the assessment will be completed on the basis of the amount of

compromise tax reported on the return.

If the compromise tax reported on the inheritance tax return is not

acceptable, or, if the representative of an estate does not wish to compute a

compromise tax for the Branch's review, the Branch will propose a compromise

tax on the contingent portion of the estate. If the compromise tax proposed by

the Branch is both accepted by the executor, administrator, trustee, or other

proper representative of the estate and paid prior to the occurrence of the

contingencies, payment of the compromise tax will result in a final adjustment

of the tax on the contingent portion of the estate. In most cases the tax on the

contingent portion of an estate is settled by the payment of a compromise tax.

Procedure for Computing the Compromise Tax

The following steps are necessary in the computation of a compromise tax:

1) Determine the value, for inheritance tax purposes, of the contingent

portion of the estate. The contingent portion is that portion of the estate

upon which the tax cannot be definitely determined until the occurrence

of contingencies. The contingent portion of the estate is reported on line

8 of the recital page of the inheritance tax return.

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2) Determine the amount of contingent tax (tax on the contingent portion of

an estate) that will become due upon the occurrence of the various

contingencies. In some cases the tax will not vary and there will be only

one possible contingent tax; however, in most cases there will be several

possible contingent taxes that may result from the occurrence of various

contingencies. When several contingent tax possibilities exist, the

computation of the compromise tax should be based upon a minimum of

three possible contingent taxes. The three possible contingent taxes

which should be considered are the contingent tax that will become due

upon the occurrence of the most probable contingencies, the highest

possible contingent tax, and the lowest possible contingent tax (may be

zero if the occurrence of the contingencies could result in no contingent

tax liability). If, however, a large amount of contingent tax is involved, a

sufficient number of contingent tax possibilities should be considered in

order to provide a basis for the proper determination of the compromise

tax.

3) Determine the present value of each of the possible contingent taxes

calculated in step 2. It is necessary to determine the value, in present

dollars, of the contingent tax that will become due upon the occurrence

of the various contingencies. Therefore, for each possible contingent tax,

it must be estimated when the contingencies will occur. The period of

time that will pass between the immediate settlement of the potential

tax liability by the payment of a compromise tax and the payment of a

contingent tax upon the occurrence of contingencies is used for the

purpose of determining the present values of the contingent taxes. The

present value of the contingent tax is then determined by multiplying the

contingent tax by the factor for this period of time from a table for the

present value of $1.00 at an interest rate of 6% compounded annually.

4) Determine the probability of the various contingencies and resulting

contingent taxes occurring. This step involves the assignment of a relative

190

probability of occurrence to each of the contingent taxes computed in

step 2.

5) Determine the compromise tax. After a review of the relative

probabilities of the various contingent taxes, the next step is to

determine the compromise tax. Since this step is based on judgment,

there is no set procedure or specific formula used exclusively in the

computation of the compromise tax. Three possible methods of

completing the computation of the compromise tax are set forth below:

a) Start with the present value of the most probable contingent tax

and then adjust this value upward or downward on the basis of the

present values of the other contingent tax possibilities. For example,

if the most probable contingent tax is much lower than most of the

other less probable contingent taxes, the present value of the

contingent tax with the highest probability of occurrence would be

adjusted upward to allow for the possibility of the higher contingent

taxes;

b) A second method is the assignment of weights to the contingent tax

possibilities on the basis of their relative probability of occurrence.

For example, if three contingent taxes were computed in step 2, the

most probable might be assigned a weight of 3, the highest possible

contingent tax, which is the second most probable contingent tax,

might be assigned a weight of 2 and the lowest possible contingent

tax, also the tax with the lowest probability of occurrence, might be

assigned a weight of 1. Then the present value of the most probable

contingent tax would be multiplied by 3, the present value of the

highest possible contingent tax would be multiplied by 2 and the

present value of the lowest contingent tax would be multiplied by 1.

The compromise tax is then determined by adding the products and

dividing the result by 6;

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c) A third method is to assign a percentage of probability to each

contingent tax determined in step 2 and, also to the probability, if

one exists, that the occurrence of contingencies may result in no

contingent tax liability. The total of the percentages assigned would

equal 100%. The assigned percentages would then be multiplied by

the present value of each contingent tax determined in step 3. The

compromise tax is then determined by adding the products.

OTHER TAX CONSIDERATIONS

1. Basis of property. When property is received by gift, the asset carries the

donor’s basis in the asset. If property is acquired at death, property is

stepped up to Fair Market Value.

There is significant differences in the tax rates to make planning much more

complex. As an example, if we assume mom has a house with a Fair Market

Value of $650,000.00 and a basis of $250,000.00 and wants to leave the

house to her niece, a class D beneficiary. The tax ramifications are as

follows:

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a) In the event the house is includible in the estate, the tax payable on the

house would be $97,500.00, fifteen (15%) percent of $650,000.00.

b) If the house is transferred during lifetime with the $250,000.00 basis

and is sold immediately after death for $650,000.00, there is a

$400,000.00 gain. The Federal tax rate on capital gains today is twenty

(20%) percent results in an $80,000.00 tax. The New Jersey income tax

on that gain is approximately $24,000.00, thereby resulting in a total tax

of $104,000.00 in income taxes versus a $97,500.00 estate tax.

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NOT FOR PUBLICATION WITHOUT APPROVAL OF

THE TAX COURT COMMITTEE ON OPINIONS

Corrected 3/13/2017 - Pgs. 2, 4, 19 - citations corrected

Corrected 3/23/2017 - Pgs. 13, 19 - citations corrected

ESTATE OF MARY VAN RIPER TAX COURT OF NEW JERSEY

DOCKET NO: 008198-2016

vs.

Plaintiff,

DIRECTOR, DIVISION OF

TAXATION,

Defendant.

Approved for Publication

In the New Jersey

Tax Court Reports

Decided: February 23, 2017

James J. Curry for plaintiff.

Heather Lynn Anderson for defendant

(Christopher S. Perrino, Attorney General

of New Jersey, attorney).

CIMINO, J.T.C.

I. Introduction and Factual Findings

Under the New Jersey Transfer Inheritance Tax, a tax is

imposed for the transfer of property in three general categories.

First, there is a tax for the transfer of property by will.

N.J.S.A. 54:34-l(a), (b). Second, there is tax on any transfer of

property by operation of law if the decedent does not have a will.

Id. This is referred to as an intestate transfer. Third, there

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-2-

is a tax on a transfer of property by way of deed, grant, bargain,

sale or gift made either: 1) in contemplation of death, or 2)

intended to take effect at or after death. N.J.S.A. 54:34-1(c).

The third type of transfer described above is meant to reach

certain transfers made during one's lifetime in lieu of a transfer

by will or by operation of law under the intestacy laws. In re

Estate of Lichtenstein, 52 N.J. 553, 575 (1968) This type of

lifetime transfer is commonly referred to as an inter vivos

transfer. Many times, inter vivos transfers are effectuated

through a trust.

In this case, the husband and wife transferors, Mr. and Ms.

Van Riper, established an irrevocable trust in 2007. The marital

home was transferred to the trust for one dollar. The express

purpose of the trust was to provide a residence" for the

lifetime" of the transferors. Pl.'s Stmt. of Material Facts, Ex.

A. The trust provided that each transferor could live out their

respective lives in the marital home.1 Id. Three months later,

1 Although the home was not sold, technically the Trust documents

provided that the Trustee could sell the home. Generally, [a]ny

funds realized as a result of the sale shall be utilized to provide

shelter and housing for the [transferors]." Id. at 2, ¶ Fourth.

Specifically, [i]n the event that the premises are sold, the

Trustee shall utilize the proceeds of any such sale for the

following purposes: (A) A residence shall be established for the

[transferors]. [Transferor wife] may require custodial care. In

the event that that can be provided for in a residential setting,

then the proceeds of the sale shall be utilized in order to acquire

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husband died and six years later, in 2013, the wife died. Upon

the death of both transferors, the trust provided that the marital

home would go to their niece. Under New Jersey law, a niece is

considered a Class D beneficiary subjecting the transfer to a 15-

16% tax. N.J.S.A. 54:34-2(d).z

At issue here is a seldom discussed 1955 provision which

limits the taxation of at or after death transfers. See L. 1955,

_s:. 135, § 1 (codified at N.J.S.A. 54:34-1.1). The 1955 provision

provides that some transfers intended to take effect at or after

death are exempt if a complete disposition occurs more than three

years prior to death. Id. The question here is whether the

structure of the transfer created six years prior to death here

the premises. Any funds remaining shall be utilized to pay the

carrying charges on behalf of [transferor wife]. Any surplus funds

shall then be utilized for the carrying charges for any such

residence, including taxes, insurance and utilities. (B) Any

remaining funds shall be held in trust for the benefit of the

[transferors] herein. The Trustee may, in his sole and absolute

discretion, pay either the interest or principal or both for the

benefit of the [transferors]. (C) Upon the death of the

[transferors], any funds remaining in this Trust together with the

proceeds of any substitute residence purchased for the

[transferors], shall be distributed by the Trustee to [niece].

" Id. Thus, the trust would still "provide a residence" for

"the lifetime" of the transferors in accordance with the express

purpose of the trust.

'The tax is 15% up to $700,000 and 16% above $700,000.

-3-

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satisfies the 1955 exception, thus placing the transfer outside

the reach of the at or after death provision.

This matter comes before this court on cross-motions for

summary judgment. Our Supreme Court has indicated that summary

judgment provides a prompt, business-like and appropriate method

of disposing of litigation in which material facts are not in

dispute. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520,

530 (1994). Additionally, cross motions for summary judgment

demonstrate to the court the ripeness of the matter for

adjudication. Spring Creek Holding Co. v. Shinnihon U.S.A. Co.,

399 N.J. Super. 158, 177 (App. Div. 2008).

The estate filed transfer inheritance tax returns excluding

the home. After review, the Division included the transfer of the

home to the niece as a transfer subject to the tax. The estate

paid the additional tax based upon the home's value of $935,000

and filed the instant appeal. The estate now seeks a refund of

the tax paid. The court has jurisdiction over this appeal pursuant

of N.J.S.A. 54:33-2.

II. History and Purpose of the “At or After Death” Provision.

New Jersey imposed an inheritance tax starting in 1892. L.

1892, c. 122. The law taxed the property of the decedent

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transferred at death whether by will, intestate law or otherwise.

The tax specifically included a transfer of assets "made or

intended to take effect in possession or enjoyment after the death

of the [decedent] R Id. at § 1. In 1906, the law was amended to

tax the transfer of the property of the decedent instead of the

property itself. L. 1906, c. 228.

The current legislation has its roots in the 1909 iteration

of this legislation. L. 1909, c. 228. The 1909 version of the

law also provided that a transfer intended to take effect, in

possession or enjoyment, at or after death is subject to the tax.

Id. at § 1.

The modern provisions of the law at issue here are now

codified at N.J.S.A. 54:34-1. In particular, the law now provides

that a "transfer of property, real or personal” or "any interest

therein or income therefrom, in trust or otherwise” "intended to

take effect in possession or enjoyment at or after such death” is

taxable.3, 4 Id. This provision applies to the real or tangible

personal property situated within the state and intangible

3 Also included are transfers "in contemplation of death of the

transferor.” Id. The "contemplation of death” and "at or after

death” provisions are two separate and independent bases for

taxation. In re Estate of Lichtenstein, supra, 52 N.J. at 560.

4 The transfer also must be in excess of $500. N.J.S.A. 54:34-

1.

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personal property wherever situated of residents, and the in-state

real or tangible personal property of non-residents. Id.

As discussed, the "at or after death" proviso has been a

mainstay of New Jersey law since the institution of an inheritance

tax in 1892. In fact, "[t]he 'at or after death' provision is a

common feature of inheritance tax statutes." In re Estate of

Lingle, 72 N.J. 87, 93 (1976). The purpose of the provision is to

close avenues of tax avoidance. Id. at 94. The provision is

quite broad.” Id.

In interpreting the transfer inheritance tax, the courts are

to look "to the substance rather than the form of the scheme,

such as reciprocal trusts and agreements, annuities and the

like." In re Estate of Lichtenstein, supra, 52 N.J. at 577. To

that end, "highly technical concepts of property law have no proper

place in the very practical field of taxation." Id. at 581.

III. N.J.S.A. 54:34-1.1 Exemption

Despite the broad reach of section N.J.S.A. 54:34-1, the

estate here argues that the specific statutory language found in

N.J.S.A. 54:34-1.1 (section 1.1) adopted in 1955 exempts the

transfer from taxation since the trust was created more than three

years prior to the death of the decedent.

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In particular, section 1.1 provides:

A transfer of property by deed, grant,

bargain, sale or gift wherein the transferor

is entitled to some income, right, interest or

power, either expressly or by operation of

law, shall not be deemed a transfer intended

to take effect at or after transferor's death

if the transferor, more than 3 years prior to

death, shall have executed an irrevocable and

complete disposition of all reserved income,

rights, interests and powers in and over the

property transferred.

[Id.]

There are a scarcity of decisions explicitly dealing with

section 1.1. Of the reported decisions, the Supreme Court has

mentioned section 1.1 twice and the tax court once.

In In re Estate of Lichtenstein, supra, the Supreme Court

only mentions section 1.1 in passing. Id. at 585. The Court had

to decide whether the "at or after death" provision applied to

transfers in which a transferor granted a life estate to another

based upon the life of an individual other than the transferor.

Id. at 562. Since the transfer was neither at nor after the death

of the transferor, nor did the transferor hold any "strings," the

transfer was determined to not be taxable. Id. at 578.

In In re Estate of Lambert, 63 N.J. 448 (1972) the

Supreme Court considered a transferor who held an annuity which

paid him for life. Id. at 450. The annuity was purchased in

conjunction with a life insurance policy. The life insurance

policy would not

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have been issued but for the purchase of the annuity. Id.

Generally, life insurance policy proceeds payable to named

beneficiaries other than the decedent's estate, the executor or

the administrator are exempt from taxation. See N.J.S.A. 54:34-

4 (f). However, the exception does not apply if the policy is an

integrated asset with an annuity. See Tilney v. Kingsley, 43 N.J.

289, 298 (1964)0 Some years after purchasing the annuities and

long before his death, Lambert irrevocably assigned the annuity

proceeds to charity. In re Estate of Lambert, supra, 63 N.J. at

451. Upon Lambert's death, the Division wanted to tax the life

insurance proceeds as a transfer at or after death. Id. The Court

specifically reviewed section 1.1 and its statutory history and

determined that even though the transfer was at or after death,

the transferor completely and irrevocably disposed of the annuity

to charity more than three years prior to death in accordance with

section 1.1. Id. at 459. The Court held that "by reason of the

1955 act, transfers, as to which either the transferor retained no

interest at inception or, if he did, completely and irrevocably

disposed of the same more than three years before death, are not

subject to transfer inheritance tax as a transfer 'intended to

take effect in possession or enjoyment at or after' the death of

the transferor." Id.

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In Gray v. Director, Div. of Taxation, 28 N.J. Tax 28 (Tax

2014), a transferor's home and other assets were transferred to

trusts in which the decedent held an income interest for a period

of six years. Almost seven years after the creation of the trusts,

the transferor died. The transfer did not occur at or after death,

but one year prior to death. Id. at 40-48. This court looked to

section 1.1 in reaching the decision.

However, none of the decisions have squarely dealt with the

applicability of section 1.1 to real property transferred more

than three years prior to death, in which the transferor has the

right to live until death.

IV. Elements of Section 1.1

The estate here now urges the court to expand section 1.1 to

transfers of real property in which the transferors have the right

to live until death. The estate alleges that the transferors here

relinquished all power and control more than three years prior by

transferring the home to an irrevocable trust which provided that

the transferors could reside in the home until death. The estate

argues that the at or after death" provision of N.J.S.A. 54:34-

l(c) is trumped by the transfer provisions of section 1.1 since

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the irrevocable transfer to trust was more than 3 years prior to

the death of the transferors.

Section 1.1 consists of a number of elements that must be

satisfied to overcome the at or after death provision of N.J.S.A.

54:34-1(c). These elements are as follows:

First, there must be a transfer of property by

deed, grant, bargain, sale, or gift;

Second, the transferor is entitled

income, right, interest or power

property transferred; and

to some

in the

Third, the transferor must three years prior

to death execute an irrevocable and complete

disposition of all reserved income, rights,

interest and powers in and over the property

transferred.

A. Transfer of property

First, there is not any dispute that there was a transfer of

property consisting of the transferors' residence to the trust.

B. Transferors' entitlement to some income, right, interest

or power.

The second issue is despite the transfer, did the transferors'

ability to remain in the home until death constitute an entitlement

to some income, right, interest or power in the property

transferred.

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It must be remembered that the "fundamental purpose [of the

at or after death provision in N.J.S.A. 54:34-1(c)] is to preclude

avoidance of the transfer inheritance tax by a lifetime transfer

which is, in effect, a substitute for a substantial equivalent of

a testate or intestate distribution." In re Estate of Lingle,

supra, 72 N.J. at 93; Estate of Berg v. Director, Div. of Taxation,

17 N.J. Tax 256, 262 (Tax 1998).

"It is a well-established rule, venerable with age, that a

transfer inter vivos by which the donor retains a life estate in

the subject matter is a transfer intended to take effect in

possession or enjoyment at or after death." Darr v. Kervick, 31

N.J. 476, 483 (1960). "A transfer is, of course, taxable under

the statute even though it be in form absolute, complete,

immediately effective, and direct to the donee, if in substance

and effect the donor retains or gets back for his life, the income

or enjoyment (or the equivalent thereof)". Id. at 484. "It is

substance, rather than form, which controls, and the transfer is

subject to the transfer inheritance tax even if stated by its terms

to be absolute, if it appears that the donor in actuality retains

a life interest in the property or its income". Id. "[I]n the

case of transfers in trust, taxability has been found where [] the

settlor retained income or some benefit for his life with remainder

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over on his death." In re Estate of Lichtenstein, supra, 52 N.J.

at 576.

"A careful review of the case law suggests that the following

factors must usually be found in order to bring any inter vivos

transaction within the reach of the statute: (1) the grantor or

settlor must transfer some property, or interest therein, while

retaining for his lifetime some or all of the economic benefits

therefrom; (2) there must be a consequent postponement of enjoyment

on the part of the grantee, promisee or other beneficiary; and (3)

both the grantor's retention and the grantee's postponement of

enjoyment must be for a period determinable by reference to the

grantor's death." In re Estate of Lingle, supra, 72 N.J. at 94-

95.

Here, the transferors retained life interests in the property

and the transferors did indeed live in the property until their

deaths. This retention of life interests by both transferors

postponed the niece's enjoyment of the property until the death of

both transferors. Moreover, both the transferors' retention and

the niece's postponement were determined by the death of the

transferors.

"So taxability in this state under the 'at or after death'

provision has required that the settlor retain in himself some

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realistic interest, power or control or some other 'string' during

his lifetime, or his death must be the determinative and

indispensable event in the shifting of economic benefits and

burdens." In re Estate of Lichtenstein, supra, 52 N.J. at 578.

By holding the "string" of being able to reside in the

property until death, the transferors retained for themselves and

did indeed exercise the right and power to enjoy the property.

Thus, the transfer is clearly contemplated by the at or after death

provision of N.J.S.A. 54:34-1(c) as well as the second prong of

section 1.1 since the transferors here are entitled to some right

and power through possession and use of the marital home until

death.

C. Irrevocable and complete disposition three years prior.

The estate argues that the exemption criteria set forth in

section 1.1 is satisfied since the transfer of the marital home

upon creation of the trust included an irrevocable and complete

disposition of the reserved life interest. Thus, the only issue

remaining is whether transferors' "transfer" of property to the

trust three years prior to death included an executed irrevocable

and complete "disposition" of the life estate. Both terms

"transfer" and "disposition" appear in section 1.1 and the estate

urges the court to read the terms synonymously. However, the

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statutory language, the interpretation of the language by the

Director of the Division of Taxation, and the legislative history

militate against reading the terms synonymously.

1. Statutory language.

"Ordinarily, a comparative analysis of the language of

contemporaneous statutes may, because of contrasting language

applicable to similar subject matter, be indicative of an intent

or purpose on the part of the Legislature to provide different

treatment." Malone v. Fender, 80 N.J. 129, 136 (1979), See also,

Great Adventure, Inc. v. Director, Div. of Taxation, 7 N.J. Tax

58, 65 (Tax 1984). If the Legislature intended that a mere

transfer of the life interest be enough, it would have so stated

rather than utilizing the term "disposition." By using the term

"disposition," the Legislature signaled that something different

has to be done with the reserved income, rights, interests and

powers for the transfer to not be taxable. That something

different is an irrevocable and complete disposition of the

property.

A court "begin[s] by reading the words chosen by the

Legislature in accordance with their ordinary meaning, unless the

Legislature has used technical terms, or terms of art, which are

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construed in accordance with those meanings.” Praxair Technology,

Inc. v. Director, Div. of Taxation, 201 N.J. 126, 136 (2009).

According to West's Tax Law Dictionary, 1096 (2016 Ed.), a transfer

is the "[a]ct of conveying the title to property from one person

to another.” However, for tax purposes, a disposition is something

more. [T]he term refers to any transaction which terminates an

interest in property.” Id. at 289. Thus, a disposition is more

than a transfer of legal title, it is the termination of an

interest in the property.

Additionally, courts give words in a statute their "common

acceptance and usage, but particular words may be enlarged or

restricted in meaning by their associates and the evident spirit

of the whole expression.” Sinclair v. Merck & Co., Inc., 195 N.J.

51, 64 (1998)0 Here, the statute indicates not merely a

disposition, but a complete disposition which signals that the

Legislature meant something more than just a mere transfer of

title.

2. Director's interpretation.

In interpreting section 1.1, the Director of the Division of

Taxation has adopted regulations. See N.J.A.C. 18:26-5.10. There

are three general principles that must be applied in interpreting

what the Director has done in this case. First is that the

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Director's determinations are entitled to a presumption of

validity. Atlantic City Trans. Co. v. Director, Div. of Taxation,

12 N.J. 130, 146 (1953). The presumption in favor of the taxing

authority can be rebutted only by cogent evidence that is definite,

positive and certain in quality and quantity to overcome the

presumption. Pantasote Co. v. City of Passaic, 100 N.J. 408, 413

(1985)0 See also Yilmaz v. Director, Div. of

Taxation, 390 N.J. Super. 435, 440, 23 N.J. Tax 361, 366 (App.

Div.), certif. denied, 192 N.J. 69 (2007).

been provided.

No such evidence has

The second general legal principal is that the Director's

regulations are presumptively valid and should receive deference

from the court unless they are inconsistent with the provisions of

the statute they interpret. Koch v. Director, Div. of Taxation,

157 N.J. 1, 8 (1999). The regulation here is consistent with the

statutory language and provides further clarity as to the statute's

breadth.

Third, regulations are promulgated by the Director in order

to clarify and interpret a statutory enactment. Prestia Realty

Inc. v. Hartz Mountain Indus., Inc., 303 N.J. Super. 140, 144 (App.

Div. 1997). The regulation provides that a transfer is not at nor

after death if a transferor "completely and irrevocably disposes

of all of his reserved income, rights, interests and powers in and

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over the transferred property including any right to possession,

use and enjoyment of the property." N.J.A.C. 18:26-5.10. In

conformity with the statute, the regulation explains the necessity

for something more than a mere transfer of an interest and instead

requires that the transferor "disposes" of his or her "possession,

use and enjoyment of the property" in order for the transaction

to not be considered occurring at or after death. This

interpretation and explanation of the statute is in full

conformance with the statutory purpose and is entitled to

deference. In this case, the transferors did not dispose of their

possession, use and enjoyment until vacating the property upon

death. Thus, under the regulation, the section 1.1 exemption does

not apply.

3. Legislative history of section 1.1.

"[I]f the text [of a statute] is susceptible to different

interpretations, the court considers extrinsic factors, such as

the statute's purpose, legislative history, and statutory context

to ascertain the Legislature's intent." Aponte-Correa v. Allstate

Ins. Co., 162 N.J. 318, 323 (2000). "The judicial goal [when

interpreting a statute] is to carry out fairly the legislative

purpose and plan, and history and contemporaneous construction may

well furnish important light as to that purpose and plan."

Bernhardt v. Alden Cafe, 374 N.J. Super. 271, 279 (App. Div. 2005).

211

"Statutes cannot be read in a vacuum void of relevant historical

and policy considerations and related legislation." Borough of

Matawan v. Monmouth Cnty. Bd. of Tax., 51 N.J. 291, 299 (1960).

Helfrich v. Township of Hamilton, 182 N.J. Super. 365, 370 (App.

Div. 1981).

The legislative history of section 1.1 confirms that the

purpose of the law is not to take transfers three years prior to

death in which the transferor retains a life interest outside the

realm of taxability. Rather, the purpose of the section 1.1 is to

except from taxability at or after death transfers in which the

transferor has relinquished all benefit of the property including

a life interest or life estate at least three years prior to death.

Prior to 1955, any transfer occurring at or after death, even

one in which the transferor had no interest, was subject to the

transfer tax. As then expressed by the New Jersey Supreme Court

in 1950, "[t]he test for determining when the transfer takes effect

in order to fall within the [at or after death] theory for taxing

purposes is whether possession or enjoyment of the property is

intended to take effect at or after the transferor's death,

irrespective of the time when title is to vest. The important

question is whether the shifting of the possession and enjoyment

of the subject matter of the succession is dependent upon the

settlor's death. Is his death a determining factor in the

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devolution of the possession and enjoyment of the estates granted?

The thing taxed under our transfer inheritance tax statute is the

transfer of the interest or property withheld from possession and

enjoyment until the transferor's death." Schroeder v. Zink, 4

N.J. 1, 9 (1950)

The law prior to 1955 further provided that "a separately and

specifically expressed remainder interest, where such remainder

interest is expressed to commence at a time at or after the death

of the donor, is taxable under our statute; notwithstanding that

by the very same act or instrument of transfer the donor

simultaneously transfers all other interests in the same property

and thereby completely and presently divests himself of all

interest or possibility of interest in the property as a whole."

In re Estate of Hollander, 123 N.J. Eq. 52, 56 (Prerog. Ct. 1938).

In Hollander, supra, a trust was created by a husband which

paid the income to the wife for the husband's lifetime, and then

the principal to the wife upon the husband's passing. Id. at 53-

54. There the court held the transfer of the principal which was

tied to the husband's death was a taxable transfer despite the

fact that the husband previously divested himself of all interest

in the property. Id. at 56.

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In other words, the law prior to 1955 provided that "[t]he

criterion of taxability . is whether there is an estate passing

at or after the death of the donor." Hartford v. Martin, 122

N.J.L. 283, 286 (E. & A. 1939) In Hartford, the decedent owned

shares of stock he conveyed to a trust to pay the income to him

for life and after death to his children. Hartford v. Martin, 122

N.J. Eq. 489, 490 (Prerog. Ct. 1937), aff'd, 120 N.J.L. 564 (Sup.

Ct. 1938), aff'd, 122 N.J.L. 283 (E. & A. 1939). Two years later,

he assigned the income to his children. Id. The prerogative court

determined that the separately stated remainder interest which

passed at the death of the decedent would come within the express

terms of the statute as being a transfer taking effect in

possession or enjoyment after the death of the decedent. Id. at

493-94.

That is where the law stood on the eve of the 1955 amendment

which became section 1.1. In the early 1950's, a wealthy New

Jersey family had five inter vivos trusts. In re Estate of

Lambert, supra, 63 N.J. at 456. In four of the trusts, the grantors

retained an income or other interest. Id. Later, the grantors of

the four trusts assigned their retained income or other interest

to either charities or to a person not otherwise entitled to the

remainder. Id. With the fifth trust, the grantor retained no

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mzumsteg

Typewritten Text

interest with the income payable to one person until death of the

grantor and then the remainder would pass to another person. Id.

Thus, the wealthy family with five trusts not only wanted to

avoid federal estate taxation, which at that time was recently

amended to preclude taxation in such circumstances, but also wanted

to avoid the New Jersey Transfer Inheritance Tax as well. Id. at

454-456. After some hand-wringing, the Director of the Division of

Taxation supported the measure which was to become Section 1.1.

Id. at 457.

The statement annexed to the bill indicated:

This bill is designed to cure a discrepancy

between the New Jersey Transfer Inheritance

Tax Law and the Federal Estate Tax Law and the

Estate Tax Laws of many of our sister states;

notably New York and Pennsylvania. New Jersey

now taxes trusts merely because the death of

a grantor causes a shift in beneficial

interest from one person to another. The tax

is asserted even though the grantor has

retained no beneficial interest in, and no

power over, the property. Such trusts are

exempt under Federal and New York statutes and

under the Pennsylvania Statute as construed by

the cases. The proposed act eliminates this

unfairness to residents of New Jersey in

comparison to residents of neighboring states.

[Id. at 452.]

The Legislature's intent in adopting this provision was to

exempt transfers occurring at or after the transferor's death in

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which the transferor had given up any and all interest at least

three years prior to death. In other words, the only involvement

of the transferor was that his or her death served as a trigger as

to when an interest would transfer. The Legislature certainly was

not considering by any stretch of the imagination that it was

exempting at or after death transfers in which the transferor

retained a life interest. Transfers in which a transferor kept a

life interest had long been subject to taxation. See e.g., Carter

v. Bugbee, 92 N.J.L. 390 (E. &. A. 1919). The Legislature merely

sought to fix the situation in which the transferor had actually

given all interest away and had not retained any Qstrings". In re

Estate of Lichtenstein, supra, 52 N.J. at 578. The Legislature was

of the opinion that once the strings were cut by the transferor

ith a complete and irrevocable disposition of retained interests,

that taxation would not occur.

Overall, based upon the plain language, the Director's

regulation and the legislative history, the death of the

transferors here resulted in an at or after death taxable transfer

that was not exempted by section 1.1.

V. Transfer of Husband's Interest.

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The estate in the alternative argues only half the interest

in the home is taxable. The trust was created in 2007. With the

creation of the trust, there were three interests. The remainder

interest which the niece received at or after the death of both

husband and wife, the life interest of husband and the life

interest of wife. Husband passed in 2007 and his interest

extinguished. Wife passed in 2013 and her interest extinguished.

Thus, per the express terms of the trust, the niece did not take

the property until after the death of husband and at the death of

wife.

Thus the transfer to the niece is fully taxable under the at

or after death provision of N.J.S.A. 54:34-l(c) As to the section

1.1 exemption, the trust was established only a few months prior

to husband's death. Without looking any further, section 1.1's

requirement that any disposition must be three years prior to death

results in section 1.1 not being applicable. Moreover, even though

wife created the trust more than three years prior to death, the

transfer to the niece is not exempt for the reasons stated

elsewhere in this opinion.

VI. Conclusion.

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In conclusion, for the foregoing reasons, this court

determines that the transfer of the marital home which was placed

in trust is subject to the New Jersey Transfer Inheritance Tax.

The motion for summary judgment of the estate is denied and

the motion for summary judgment of the director is granted. An

order will follow.

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Internal Revenue Code

Current Code

Subtitle B Estate and Gift Taxes §§ 2201-2801

Chapter 14 SPECIAL VALUATION RULES §§ 2701-2704

26 U.S. Code § 2702 - Special valuation rules in case of transfers of interests in trusts

(a)VALUATION RULES

(1) IN GENERAL

Solely for purposes of determining whether a transfer of an interest in trust to (or for the benefit of) a member of the transferor’s family is a gift (and the value of such transfer), the value of any interest in such trust retained by the transferor or any applicable family member (as defined in section 2701(e)(2)) shall be determined as provided in paragraph (2).

(2) VALUATION OF RETAINED INTERESTS

(A) In general The value of any retained interest which is not a qualified interest shall be treated as being zero.

(B) Valuation of qualified interest The value of any retained interest which is a qualified interest shall be determined under section 7520.

(3) EXCEPTIONS

(A) In general This subsection shall not apply to any transfer—

(i) if such transfer is an incomplete gift,

(ii) if such transfer involves the transfer of an interest in trust all the property in which consists of a residence to be used as a personal residence by persons holding term interests in such trust, or

(iii) to the extent that regulations provide that such transfer is not

inconsistent with the purposes of this section.

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(B) Incomplete gift For purposes of subparagraph (A), the term “incomplete gift” means any transfer which would not be treated as a gift whether or not consideration was received for such transfer.

(b)QUALIFIED INTEREST For purposes of this section, the term “qualified interest” means— (1) any interest which consists of the right to receive fixed amounts payable not less frequently than annually,

(2)

any interest which consists of the right to receive amounts which are payable not less frequently than annually and are a fixed percentage of the fair market value of the property in the trust (determined annually), and

(3) any noncontingent remainder interest if all of the other interests in the trust consist of interests described in paragraph (1) or (2).

(c) CERTAIN PROPERTY TREATED AS HELD IN TRUST

For purposes of this section—

(1) IN GENERAL The transfer of an interest in property with respect to which there is 1 or more term interests shall be treated as a transfer of an interest in a trust.

(2) JOINT PURCHASES

If 2 or more members of the same family acquire interests in any property described in paragraph (1) in the same transaction (or a series of related transactions), the person (or persons) acquiring the term interests in such property shall be treated as having acquired the entire property and then transferred to the other persons the interests acquired by such other persons in the transaction (or series of transactions). Such transfer shall be treated as made in exchange for the consideration (if any) provided by such other persons for the acquisition of their interests in such property.

230

(3) TERM INTEREST The term “term interest” means—

(A) a life interest in property, or

(B) an interest in property for a term of years.

(4) VALUATION RULE FOR CERTAIN TERM INTERESTS

If the nonexercise of rights under a term interest in tangible property would not have a substantial effect on the valuation of the remainder interest in such property—

(A) subparagraph (A) of subsection (a)(2) shall not apply to such term interest, and

(B) the value of such term interest for purposes of applying subsection (a)(1) shall be

the amount which the holder of the term interest establishes as the amount for which such interest could be sold to an unrelated third party.

(d) TREATMENT OF TRANSFERS OF INTERESTS IN PORTION OF TRUST

In the case of a transfer of an income or remainder interest with respect to a specified portion of the property in a trust, only such portion shall be taken into account in applying this section to such transfer.

(e) MEMBER OF THE FAMILY For purposes of this section, the term “member of the family” shall have the meaning given such term by section 2704(c)(2).

(Added Pub. L. 101–508, title XI, § 11602(a), Nov. 5, 1990, 104 Stat. 1388–497; amended Pub. L. 104–188, title I, § 1702(f)(11), Aug. 20, 1996, 110 Stat. 1872.)

231

http://thomas.loc.gov/cgi-bin/bdquery/L?d101:./list/bd/d101pl.lst:508(Public_Laws)

http://uscode.house.gov/statviewer.htm?volume=104&page=1388-497

http://www.gpo.gov/fdsys/pkg/PLAW-104publ188/html/PLAW-104publ188.htm

http://www.gpo.gov/fdsys/pkg/PLAW-104publ188/html/PLAW-104publ188.htm

http://uscode.house.gov/statviewer.htm?volume=110&page=1872

----- Reprinted with permission of LexisNexis.

ANDREW GRAY, III, EXECUTOR FOR THE

ESTATE OF BEATRICE JOCHMAN, PLAINTIFF,

v.

DIRECTOR, DIVISION OF TAXATION, DEFENDANT.

DOCKET NO. 000120-2013

TAX COURT OF NEW JERSEY

28 N.J. Tax 28; 2014 N.J. Tax LEXIS 8

May 5, 2014, Decided

SUBSEQUENT HISTORY: [**1] Approved for

Publication in the New Jersey Tax Court Reports.

CASE SUMMARY:

OVERVIEW: HOLDINGS: [1]-The court granted

summary judgment to the taxpayer because the decedent

made irrevocable gifts in trust, and the transfers were

completed more than three years prior to her death, thus,

tax was not to be imposed under N.J.S.A. § 54:34-1(c)

because the transfers were not made in contemplation of

death; [2]-Additionally, the court held that there was no

basis for imposing tax as testamentary substitutes intend-

ed to take effect at or after death under N.J.S.A. § 54:34-

1.1; [3]-The court noted that the practical effect is that

N.J.S.A. § 54:34-1.1 excludes some testamentary substi-

tutes from N.J.S.A. § 54:34-1(c)'s reach by imposing a

three-year time restriction on what transfers may be

deemed intended to take effect at or after death.

OUTCOME: court grants plaintiff's motion for sum-

mary judgment and, consequently, denies defendant's

cross-motion for same.

CORE TERMS: decedent, contemplation, taxation, gift,

irrevocable, transferor, years prior, summary judgment,

beneficiary, inheritance tax, reserved, testamentary,

property transferred, decedent's estate, inter vivos, mate-

rial facts, inheritance, transferred, expiration, revoke, tax

law, date of death, gift tax, statutory presumption, com-

pleted gifts, taxability, grantor, levy, trust period, transfer

of property

> Imposition of Tax [HN1] The New Jersey Transfer Inheritance Tax,

N.J.S.A. § 54:33-1 et seq., is a privilege levy upon the

right of succession to real and personal property trans-

ferred by a decedent in specified cases. At stake is the

resulting tax levy upon the transferee, and the amount

thereof depends upon the value of the property trans-

ferred and the transferee's relationship to decedent.

N.J.S.A. § 54:33-1 et seq., imposes a tax upon the trans-

fer of property, real or personal, of the value of $ 500.00

or over, or of any interest therein or income therefrom, in

trust or otherwise, to or for the use of any transferee,

distributee or beneficiary under certain scenarios. In part,

the Act will impose tax where real, tangible, or intangi-

ble property, is transferred by deed, grant, bargain, sale

or gift made in contemplation of the death of the grantor,

vendor or donor, or intended to take effect at or after

such death. N.J.S.A. § 54:34-1(c).

> Creation of Presumptions [HN2] With regard to transfers made in contemplation of

death, the second paragraph of N.J.S.A. § 54:34-1(c)

creates a statutory presumption. A transfer made without

adequate valuable consideration and within three years

prior to the death of the grantor of a material part of his

estate or in the nature of a final disposition or distribu-

tion thereof, shall, in the absence of proof to the contrary,

be deemed to have been made in contemplation of death

within the meaning of subsection c. of that section; but

no such transfer made prior to such three-year period

shall be deemed or held to have been made in contempla-

tion of death. N.J.S.A. § 54:34-1(c).

233

Page 2

28 N.J. Tax 28, *; 2014 N.J. Tax LEXIS 8, **

> Imposition of Tax [HN3] N.J.S.A. § 54:34-1.1 places an additional qualifier

on the aforementioned intended to take effect at or after

death basis for taxation. A transfer of property wherein

the transferor is entitled to some income, right, interest or

power, either expressly or by operation of law, shall not

be deemed a transfer intended to take effect at or after

transferor's death if the transferor, more than three years

prior to death, shall have executed an irrevocable and

complete disposition of all reserved income, rights, inter-

ests and powers in and over the property transferred.

> Inferences & Presumptions > Presumptions > Effects [HN4] The New Jersey Tax Court considers a plaintiff's

case from an initial presumption that determinations

made by the Director of the New Jersey Division of Tax-

ation are valid. New Jersey courts generally defer to the

interpretation that an agency gives to a statute when that

agency is charged with enforcement.

Administrative Law > Judicial Review > Standards of

Review > Statutory Interpretation [HN5] Under N.J.S.A. § 54:34-12, the state tax commis-

sioner shall forthwith assess and fix the cash value of the

estate and levy the tax to which the same is liable and he

shall give immediate notice thereof to interested parties.

Determinations by the Director of the New Jersey Divi-

sion of Taxation are afforded a presumption of correct-

ness, because courts have recognized the Director's ex-

pertise in the highly specialized and technical area of

taxation. Nevertheless, courts remain the final authority

with respect to statutory construction and have no obliga-

tion to summarily approve of the Director's administra-

tive interpretations.

> Interpretation [HN6] An administrative agency may not, under the

guise of interpretation, extend a statute to give it a great-

er effect than its language permits. New Jersey courts

afford great respect to the New Jersey Division of Taxa-

tion Director's decisions upon finding them reasonable

interpretations of the operative law. However, deference

to the Director's expertise may not supplant statutory

language. It is well-established that in construing a stat-

ute, one must first consider its plain language. Such lan-

guage should be read according to its ordinary or general

meaning, so long as that reading comports with the stat-

ute's legislative intent.

Standards of Review > Statutory Interpretation [HN7] The plain language found in N.J.S.A. § 54:34-1(c)

states that no such transfer made prior to such three-year

period shall be deemed or held to have been made in

contemplation of death. The restrictive three-year look-

back period found in N.J.S.A. § 54:34-1(c), also present

in N.J.S.A. § 54:34-1.1, reflects an explicit intent by the

Legislature to curtail an open-ended inquiry into the de-

cedent's motivation, for example, contemplation of death,

for every inter vivos transfer. The New Jersey Division

of Taxation may not simply hang its hat on the presump-

tion its determinations are valid when its administrative

determination contradicts an ordinary reading of the ap-

plicable statute. The Director's ultimate determination

could still prove meritorious upon further inquiry.

Civil Procedure > Summary Judgment > Evidence [HN8] Summary judgment shall be granted if the plead-

ings, depositions, answers to interrogatories and admis-

sions on file, together with the affidavits, if any, show

that there is no genuine issue as to any material fact chal-

lenged and that the moving party is entitled to a judg-

ment or order as a matter of law. R. 4:46-2(c). There is a

genuine issue of material fact only if, considering the

burden of persuasion at trial, the evidence submitted by

the parties, on the motion, together with all legitimate

inferences therefrom favoring the non-moving party,

would require submission of the issue to the trier of fact.

R. 4:46-2(c). The court must ascertain what rational con-

clusions a reasonable jury could derive from the evi-

dence in order to determine whether there is a genuine

issue of material fact. In making that decision, the court

must accept as true all evidence which supports the posi-

tion of the party defending against the motion and must

accord that party the benefit of all legitimate inferences

which can be deduced therefrom.

> Summary Judgment > Opposition > Supporting Ma-

terials [HN9] By its plain language, R. 4:46-2 dictates that a

court should deny a summary judgment motion only

where the party opposing the motion has come forward

with evidence that creates a genuine issue as to any ma-

terial fact challenged. That means a non-moving party

cannot defeat a motion for summary judgment merely by

pointing to any fact in dispute. If the opposing party of-

fers no affidavits or matter in opposition, or only facts

which are immaterial or of an insubstantial nature, a

mere scintilla, fanciful, frivolous, gauzy or merely suspi-

cious, he will not be heard to complain if the court grants

summary judgment, taking as true the statement of un-

contradicted facts in the papers relied upon by the mov-

234

Page 3


ing party, such papers themselves not otherwise showing

the existence of an issue of material fact.

> Estate & Gift Tax > Estate Tax > Imposition of Tax [HN10] In Estate of Berg v. Director, Div. of Taxation,

the New Jersey Tax Court notes that: N.J.S.A. § 54:34-

1(c) creates a statutory presumption that a transfer is in

contemplation of death, and is therefore subject to the

inheritance tax, if the transfer is without valuable consid-

eration within three years of the death of the transferor,

and is a material part of the transferor's estate or is in the

nature of a final disposition or distribution.

> Inferences & Presumptions > Presumptions > Crea-

tion of Presumptions [HN11] It is now firmly settled that the presumption in

the statute places the obligation upon the taxpayer to

establish by a preponderance of the evidence that a trans-

fer, made within the three-year period and meeting the

other specified requisites, was not made in contemplation

of death.

> Inferences & Presumptions > Presumptions > Crea-

tion of Presumptions [HN12] The statutory presumption contained in N.J.S.A.

§ 54:34-1(c) with regard to transfers is unrelated to the

policy of New Jersey courts to afford Director of New

Jersey Division of Taxation determinations a presump-

tion of correctness.

> Inferences & Presumptions > Presumptions > Effects [HN13] When the transfers under review were completed

by the testatrix more than five years before her death, the

statutory presumption, under N.J.S.A. § 54:34-1(c) does

not arise. The statute only presumes a decedent acted in

contemplation of death when making transfers, for ex-

ample, acting as transferor, within three years of death.

N.J.S.A. § 54:34-1(c) is not concerned with decedent's

rights as the beneficiary.

> Estate & Gift Tax > Estate Tax > Imposition of Tax [HN14] As the New Jersey Supreme Court has discussed

in Estate of Lichtenstein, the statute was amended in

1951 to include a three-year time limitation on those

transfers to be considered in contemplation of death. At

the present time that problem hangs over any person who

makes a gift, even though he expects to live for many

years, unless he can prepare evidence demonstrating that

the gift was made primarily for nontax reasons. The

amendment removes from the scope of the contemplation

of death clause all transfers made more than three years

prior to the date of death. On the other hand, the burden

of showing that the transfer was not in contemplation of

death will be borne by the estate in all cases where the

transfer was made within a period of three years ending

with the date of death. That will strengthen the position

of the Government in cases where the transfer occurred

between two and three years prior to the date of death.

Thus, the New Jersey statute's modern mandate is clear

and purposeful: no such transfer made prior to such

three-year period shall be deemed or held to have been

made in contemplation of death. N.J.S.A. § 54:34-1(c).

> State & Territorial Governments > Legislatures [HN15] The goal of effectuating the legislative plan as it

may be gathered from the enactment read in full light of

its history, purpose and context is paramount to any rule

of statutory construction.

Tax Law > State & Local Taxes > Estate & Gift Tax >

Estate Tax > Imposition of Tax [HN16] N.J.S.A. § 54:34-1.1 concerns only those trans-

fers intended to take effect at or after death. Admittedly,

little guidance from New Jersey courts exists in terms of

application and interpretation of N.J.S.A. § 54:34-1.1.


Estate Tax > Imposition of Tax [HN17] N.J.S.A. § 54:34-1.1 handily serves to modify

and restrict the second basis for taxation found in

N.J.S.A. § 54:34-1(c) which may impose tax upon trans-

fers intended to take effect at death. N.J.S.A. § 54:34-1.1

clearly applies only to transfers when the transferor is

entitled to some income, right, interest, or power in the

transferred property. Nevertheless, it employs the same

language regarding testamentary substitutes found in

N.J.S.A. § 54:34-1(c) as to transfers intended to take ef-

fect at or after death. The practical effect is that N.J.S.A.

§ 54:34-1.1 excludes some testamentary substitutes from

N.J.S.A. § 54:34-1(c)'s reach by imposing a three-year

time restriction on what transfers may be deemed intend-

ed to take effect at or after death. Accordingly, a com-

plete and irrevocable disposition of all reserved income,

rights, interests, and powers in and over the property

transferred made by decedent more than three years prior

to death will curtail the second basis for taxation under

N.J.S.A. § 54:34-1(c). It is worth reiterating that the sec-

ond paragraph of N.J.S.A. § 54:34-1(c) presumes some

transfers within three years of death were made in con-

templation of death. The presumption is the result of the

1951 amendment. The amendment, however, only ap-

235

Page 4


plies to the made in contemplation of death basis for tax-

ation.


Estate Tax > Imposition of Tax [HN18] The ultimate determination as to whether such

transfers are taxable as intended to take effect at or after

decedent's death should not be a single-step process. Ra-

ther, the statutes are best read in conjunction. First, the

court should determine whether the transferor, executed

an irrevocable and complete disposition of all reserved

income, rights, interests and powers in and over the

property transferred more than three years prior to death.

N.J.S.A. § 54:34-1.1. If not, those transfers are treated as

testamentary substitutes intended to take effect at or after

death, and tax should be imposed under N.J.S.A. § 54:34-

1(c). However, if the answer is yes, then the transfer

shall not be deemed a transfer intended to take effect at

or after transferor's death. N.J.S.A. § 54:34-1.1. In which

case, tax could not be imposed under the second basis,

concerning transfers intended to take effect at or after

death, of N.J.S.A. § 54:34-1(c).

> Tax Law > Federal Estate & Gift Taxes > Gifts (IRC

secs. 2035, 2501-2524) > General Overview [HN19] N.J.S.A. § 54:34-1.1 reflects New Jersey's sub-

stantial conformance with federal tax law. Specifically,

whether the transferor executed an irrevocable and com-

plete disposition of all reserved income, rights, interests

and powers in and over the property transferred evokes

particular standards used to determine whether a donor

made a completed gift for the purposes of imposing fed-

eral gift tax. N.J.S.A. § 54:34-1.1. Extensive federal

rules, regulations, and case law exist to value gifts. Fed-

eral resources may be useful in circumstances where the

court undertakes an analysis to determine the complete-

ness of a decedent's gratuitous transfers, i.e. gifts, be-

cause New Jersey does not impose a gift tax. Conse-

quently, state specific resources are lacking. Additional-

ly, N.J.S.A. § 54:38-7 requires the decedent's estate to

file a copy of the federal estate tax return with the New

Jersey Division of Taxation. Federal estate and gift law

provides a necessary resource, because it is an essential

component to computation of New Jersey estate and in-

heritance tax.


General Overview [HN20] New Jersey estate and inheritance tax laws sub-

stantially overlap with federal authorities. Tax will be

imposed upon: The estate of every resident decedent

which would have been subject to an estate tax payable

to the United States under the provisions of the federal

Internal Revenue Code in effect on December 31, 2001,

the amount of which tax shall be the maximum credit

that would have been allowable under the provisions of

that federal Internal Revenue Code in effect on that date.

N.J.S.A. § 54:38-1(a)(2)(a)(i).

Tax Law > Federal Estate & Gift Taxes > Gifts (IRC

secs. 2035, 2501-2524) > Elements > General Overview [HN21] I.R.C. § 2511 defines the types of transfers that

are subject to the federal gift tax. That section applies

whether the transfer is in trust or otherwise, whether the

gift is direct or indirect, and whether the property is real

or personal, tangible or intangible. § 2511(a). Under the

I.R.C., the gift tax is imposed upon the donor, and the

excise will only be imposed upon making a completed

gift. Treas. Reg. § 25.2511-2(a). As to any property, or

part thereof or interest therein, of which the donor has so

parted with dominion and control as to leave in him no

power to change its disposition, whether for his own

benefit or for the benefit of another, the gift is complete.

Treas. Reg. § 25.2511-2(b).

Estate, Gift & Trust Law > Trusts > General Overview [HN22] The essence of a gift by trust is the abandonment

of control over the property put in trust. The separable

interests transferred are not gifts to the extent that power

remains to revoke the trust or recapture the property rep-

resented by any of them, or to modify the terms of the

arrangement so as to make other disposition of the prop-

erty.

Estate, Gift & Trust Law > Trusts > General Overview [HN23] Reservation of certain powers, ability to alter the

income stream, or other rights are precisely the disposi-

tive factors as to whether there was a completed gift.

COUNSEL: Raphael G. Jacobs for plaintiff (Law Of-

fices of Jacobs & Bell, P.A., attorneys).

David B. Bender for defendant (John J. Hoffman, Acting

Attorney General of New Jersey, attorney).

JUDGES: ANDRESINI, J.T.C.

OPINION BY: ANDRESINI

OPINION

[*31] ANDRESINI, J.T.C.

This is the court's opinion with respect to the parties'

cross-motions for summary judgment. Andrew Gray, III,

236

Page 5


Executor for the Estate of Beatrice Jochman ("Plaintiff")

contends that the inheritance tax for Ms. Jochman's estate

should not be based on the inclusion of the values of the

Beatrice Jochman Unitrust and the Beatrice Jochman

Residence Trust. The Director, Division of Taxation

("Director") contends that the transfers were made in

contemplation of death and are therefore subject to the

inheritance tax. For the reasons set forth below, the court

grants plaintiff's motion for summary judgment and, con-

sequently, denies defendant's cross-motion for same.

Facts

Decedent created two irrevocable trusts. The first

was a Qualified Personal Residence Trust ("QPRT"), and

the second was a Grantor Retained Unitrust ("GRUT")

(reference to both trusts hereinafter is "Jochman Trusts").

The Jochman Trusts each had [*32] a fixed [**2] six-

year term which expired during the life of decedent. The

Director included the Jochman Trusts' respective values

as part of decedent's estate when making an assessment

of inheritance taxes.

In the Spring of 2004, Beatrice Jochman ("Dece-

dent") consulted with her attorney for estate planning

purposes. She was then aged 85, and her estate was esti-

mated to be in excess of $4 million. Decedent's attorney

recommended establishing irrevocable trusts to minimize

state and federal tax burdens on the estate.

In 1996, decedent underwent surgery to repair her

mitral valve as part of treatment for congestive heart

failure. The valve was repaired again in 2004. Medical

records from September 22, 2004 indicate she remained

under her doctor's care on a treatment of daily Lasix for

"[c]ontrolled congestive failure[.]" Decedent's attorney

certified discussing the need to establish trusts with

terms that expire before she died in order to achieve the

desired tax benefits. At that time, actuarial tables indicat-

ed decedent would live in excess of six years.1

1 Attorney for Plaintiff consulted two actuarial

tables. First, a Center for Disease Control table

indicates: in 2004, a female of any race, then

aged 85, is expected [**3] to live another 7.2

years; a white female is expected to live another

7.1 years. The second table comes from the cur-

rent New Jersey Rules of Court, and it indicates

that the life expectancy for an individual of any

sex or race is 6.9 years for those aged 84-85 and

6.5 for persons 85-86.

On September 24, 2004, decedent established two

trusts each with a term of six years expiring in Septem-

ber of 2010. The Beatrice Jochman Unitrust, a GRUT,

was funded with $1 million. The GRUT provided for

decedent to receive an annual amount equal to six per-

cent of the fair market value of the corpus throughout the

six-year term. Upon expiration of the trust period, the

corpus and accrued income was to be distributed in ac-

cordance with the trust document to decedent's siblings'

children.

On the same date, the title to decedent's residence

located at 282 Cedar Lane in River Vale, New Jersey

was transferred to a second QPRT. The third clause of

the QPRT reserved the right to [*33] use and occupy

the residence for the grantor, Ms. Jochman, for the trust

period. Subsequent to the expiration, the grantor was

given an option to rent the property from the trustee at

fair market value for a period not exceeding fifteen [**4]

years. In spite of the option, the River Vale residence

was put up for sale upon expiration of the six-year term,

was sold in 2011, and closed in early 2012. However, at

the motion hearing, it was indicated and undisputed that

decedent continued to live in the residence until her

death.

Jochman died on August 24, 2011 which was exact-

ly eleven months after the Jochman Trusts expired. Dur-

ing the audit of decedent's inheritance tax return, the Di-

rector established the position that the life expectancy

tables it utilized indicated that decedent could only be

expected to live 5.31 years upon creation of the trusts.

For that reason, both Jochman Trusts were included as

part of decedent's estate pursuant to N.J.A.C. 18:26-5.8

and assessed accordingly. However, in papers and during

oral argument this position regarding actuarial timetables

was abandoned in favor of reliance on the authorities

discussed below.

Conclusions of Law

[HN1] "The New Jersey Transfer Inheritance Tax,

N.J.S.A. 54:33-1 et seq. . . . is a privilege levy upon the

right of succession to real and personal property trans-

ferred by a decedent in specified cases." Gould v. Direc-

tor, Div. of Taxation, 2 N.J. Tax 316, 319-320 (Tax

1981). The present matter concerns the Director's deci-

sion to include the value of the Jochman Trusts in dece-

dent's estate. [**5] Specifically, the court is concerned

whether the Director's determination was proper under

N.J.S.A. 54:34-1(c) or N.J.S.A. 54:34-1.1 which govern

taxability of a decedent's inter vivos transfers. At stake is

the resulting tax levy "upon the transferee, and the

amount thereof depends upon the value of the property

transferred and the transferee's relationship to decedent."

Gould, supra, 2 N.J. Tax at 320.

N.J.S.A. 54:33-1, et seq. imposes a tax "upon the

transfer of property, real or personal, of the value of

$500.00 or over, or of any interest therein or income

therefrom, in trust or otherwise, to [*34] or for the use

of any transferee, distributee or beneficiary" under cer-

237

Page 6


tain scenarios. Id. In pertinent part, the Act will impose

tax where real, tangible, or intangible property, "is trans-

ferred by deed, grant, bargain, sale or gift [1] made in

contemplation of the death of the grantor, vendor or do-

nor, or [2] intended to take effect . . . at or after such

death." N.J.S.A. 54:34-1(c)(emphasis added). Thus, this

court could find decedent's gratuitous transfer of property

in trust is subject to taxation after fact sensitive analyses

of the two distinct bases for taxation under the Act.

Note that [HN2] with regard to transfers made in

contemplation of death, the second paragraph of N.J.S.A.

54:34-1(c) creates a statutory presumption. [**6]

A transfer . . . made without adequate

valuable consideration and within three

years prior to the death of the grantor . . .

of a material part of his estate or in the na-

ture of a final disposition or distribution

thereof, shall, in the absence of proof to

the contrary, be deemed to have been

made in contemplation of death within the

meaning of subsection c. of this section;

but no such transfer made prior to such

three-year period shall be deemed or held

to have been made in contemplation of

death.

[N.J.S.A. 54:34-1(c).]

Separately, N.J.S.A. 54:34-1.1 [HN3] places an addi-

tional qualifier on the aforementioned 'intended to take

effect at or after death' basis for taxation.2

A transfer of property . . . wherein the

transferor is entitled to some income,

right, interest or power, either expressly

or by operation of law, shall not be

deemed a transfer intended to take effect

at or after transferor's death if the trans-

feror, more than 3 years prior to death,

shall have executed an irrevocable and

complete disposition of all reserved in-

come, rights, interests and powers in and

over the property transferred.

[Id.]

2 For further analysis of the mechanics of

N.J.S.A. 54:34-1.1 see the court's discussion un-

der the 'Taxability as Transfers Intended to Take

Effect [**7] at or After Death' Section, infra.

Presumptive Validity of Director's Determination

The Director contends the decision to include the

Jochman Trusts' value in decedent's estate is presump-

tively valid, and summary judgment should be granted in

defendant's favor. Accordingly, the court elects to decide

whether the Director's determination [*35] is entitled to

a presumption of correctness first, because such finding

will ultimately impact the summary judgment analysis.

[HN4] This court considers plaintiff's case from an

initial presumption that determinations made by the Di-

rector are valid. See Campo Jersey, Inc. v. Director, Div.

of Taxation., 390 N.J. Super. 366, 383, 23 N.J. Tax 370,

915 A.2d 600 (App.Div.), cert. denied, 190 N.J. 395, 921

A.2d 448 (2007); L&L Oil Service, Inc. v. Director, Div.

of Taxation, 340 N.J. Super. 173, 183, 19 N.J. Tax 390,

773 A.2d 1220 (App.Div.2001); Atlantic City Transp. Co.

v. Director, 12 N.J. 130, 146, 95 A.2d 895 (1953). "New

Jersey courts generally defer to the interpretation that an

agency gives to a statute [when] that agency is charged

with enforc[ement.]" Koch v. Director, Div. of Taxation,

157 N.J. 1, 15, 722 A.2d 918 (1999).

[HN5] Under N.J.S.A. 54:34-12, "the state tax com-

missioner shall forthwith assess and fix the cash value of

the estate and levy the tax to which the same is liable and

he shall give immediate notice thereof [to interested par-

ties.]" Determinations by the Director are afforded a pre-

sumption of correctness, because "[c]ourts have recog-

nized the Director's expertise in the highly specialized

and technical area of taxation." Aetna Burglar & Fire

Alarm Co. v. Director, Div. of Taxation, 16 N.J. Tax 584,

589 (Tax 1997) (citing Metromedia, Inc v. Director, Div.

of Taxation, 97 N.J. 313, 327, 478 A.2d 742 (1984)).

Nevertheless, courts remain the final authority [**8]

with respect to statutory construction and have no obliga-

tion to summarily approve of the Director's administra-

tive interpretations. See Koch, supra, 157 N.J. at 15, 722

A.2d 918. See also N. J. Guild of Hearing Aid Dispensers

v. Long, 75 N.J. 544, 575, 384 A.2d 795 (1978).

[HN6] "[A]n administrative agency may not, under

the guise of interpretation, extend a statute to give it a

greater effect than its language permits." GE Solid State

v. Director, Div. of Taxation, 132 N.J. 298, 306, 625

A.2d 468 (1993). Our courts afford "great respect" to the

Director's decisions upon finding them reasonable inter-

pretations of the operative law. Metromedia, , supra, 97

N.J. at 327, 478 A.2d 742. See also N. J. Guild of Hear-

ing Aid [*36] Dispensers, supra 75 N.J. at 575, 384

A.2d 795; Atl. Transp. Co. v. Director, Div. of Taxation,

12 N.J. 130, 95 A.2d 895 (1953). However, deference to

the Director's expertise may not supplant statutory lan-

guage. "It is well-established that in construing a statute,

one must first consider its plain language. [S]uch lan-

238

Page 7


guage should be read according to its ordinary or general

meaning, so long as that reading comports with the stat-

ute's legislative intent." Koch, supra, 157 N.J. at 7, 722

A.2d 918. (citations omitted).

[HN7] The plain language found in N.J.S.A. 54:34-

1(c) states that "no such transfer made prior to such


made in contemplation of death." The restrictive three-

year look-back period found in N.J.S.A. 54:34-1(c), also

present in N.J.S.A. 54:34-1.1, reflects an explicit intent

by the Legislature to curtail an open-ended inquiry into

the decedent's motivation, i.e. contemplation of death, for

every inter vivos transfer. It is [**9] undisputed that the

Jochman Trusts were established exactly six years and

eleven months prior to decedent's death in 2011, and the

court recognizes those trusts were irrevocable in nature

by their terms. In light of the statutory provisions, the

court finds the Director's decision to include those irrev-

ocable trusts in decedent's estate was plainly unreasona-

ble. The Division may not simply hang its hat on the

presumption its determinations are valid when, as here,

its administrative determination contradicts an ordinary

reading of the applicable statute. The Director's ultimate

determination could still prove meritorious upon further

inquiry, but the Division of Taxation's determination will

not be presumed correct as the court proceeds in the

summary judgment analysis.

Summary Judgment Standard

Plaintiff contends that the estate is entitled to sum-

mary judgment as a matter of law, because there are no

material facts to support including the Jochman Trusts as

part of decedent's estate under N.J.S.A. 54:34-1(c),

N.J.A.C. 18:26-5.8, or relevant case law. The Director's

cross-motion asserts summary judgment is appropriate

since the transfers should be considered as made in con-

templation [*37] of death under N.J.S.A. 54:34-1(c) and

were also incomplete [**10] dispositions under N.J.S.A.

54:34-1.1.

[HN8] Summary judgment shall 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

v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 528-29,

666 A.2d 146 (1995). There is a genuine issue of material

fact "only if, considering the burden of persuasion at

trial, the evidence submitted by the parties, on the mo-

tion, together with all legitimate inferences therefrom

favoring the non-moving party, would require submis-

sion of the issue to the trier of fact." R. 4:46-2(c). The

court must ascertain what rational conclusions a reasona-

ble jury could derive from the evidence in order to de-

termine whether there is a genuine issue of material fact.

Brill, supra, 142 N.J. at 535, 666 A.2d 146. In making

this decision, "the court must accept as true all evidence

which supports the position of the party defending

against the motion and must accord that party the benefit

of all legitimate inferences which can be deduced there-

from." Pressler, Current N.J. Court Rules, comment 1 on

R. 4:40-2 (2014).

[HN9] "By its plain language, R. 4:46-2 dictates that

a court should deny a summary judgment motion only

where the [**11] party opposing the motion has come

forward with evidence that creates a 'genuine issue as to

any material fact challenged.'" Brill, supra, 142 N.J. at

529, 666 A.2d 146 (1995). "That means a non-moving

party cannot defeat a motion for summary judgment

merely by pointing to any fact in dispute." Ibid.

[I]f the opposing party offers no affida-

vits or matter in opposition, or only facts

which are immaterial or of an insubstan-

tial nature, a mere scintilla, 'fanciful, friv-

olous, gauzy or merely suspicious,' he will

not be heard to complain if the court

grants summary judgment, taking as true

the statement of uncontradicted facts in

the papers relied upon by the moving par-

ty, such papers themselves not otherwise

showing the existence of an issue of mate-

rial fact.

[Judson v. Peoples Bank & Trust Co.,

17 N.J. 67, 75, 110 A.2d 24 (1954) (cita-

tions omitted).]

The court finds the instant matter is ripe for summary

judgment, because the dispositive issues are solely legal

in nature.

[*38] Taxability as Transfers Made in Contemplation of

Death

The Director maintains its assessment was correct,

because the transfers were made by decedent in contem-

plation of death. [HN10] In Estate of Berg v. Director,

Div. of Taxation, the Tax Court noted that:

N.J.S.A. 54:34-1(c) creates a statutory

presumption that a transfer is in contem-

plation of death, and is therefore [**12]

subject to the inheritance tax, if [1] the

transfer is without valuable consideration

[2] within three years of the death of the

transferor, and [3] is a material part of the

transferor's estate or is in the nature of a

final disposition or distribution.

239

Page 8


[17 N.J. Tax 256, 264 (Tax 1998).]

The parties disagree whether the transfers made by dece-

dent in September of 2004 are presumed completed in

contemplation of death.3 However, when applicable:

[HN11] It is now firmly settled... that

the presumption in the statute places the

obligation upon the taxpayer to establish

by a preponderance of the evidence that a

transfer, made within the three-year peri-

od and meeting the other specified requi-

sites, was not made in contemplation of

death.

[In re Estate of Lichtenstein, 52 N.J.

553, 567, 247 A.2d 320 (1968).]

3 [HN12] The statutory presumption contained

in N.J.S.A. 54:34-1(c) is unrelated to the policy of

New Jersey courts to afford Director determina-

tions a presumption of correctness.

The court will address only the second element of

the analysis propounded by the Tax Court in Estate of

Berg, because it proves dispositive in regard to the statu-

tory presumption. The Director's position is that dece-

dent's rights to receive income and housing during the

trust period continued within three years of her death.

Accordingly, the Director [**13] argued the second el-

ement is satisfied regarding the requirement of transfers

within three years of the transferor's death. During oral

argument, taxpayer's attorney had a very simple and per-

suasive counterargument. The decedent completed the

gift in 2004.4

4 See p. 17 for extended discussion on complet-

ed gifts.

The Appellate Division once discussed a similar set

of circumstances:

Our attention is directed only to the two

irrevocable trusts, which the respondent

claims were established in contemplation

of death. At the outset, it is pertinent to

[*39] point out, that [HN13] since the

transfers under review were completed by

the testatrix more than five years before

her death, the statutory presumption, un-

der [N.J.S.A. 54:34-1(c)] does not arise.

[Provident Trust Co. v. Margetts, 5

N.J. Super. 420, 424, 69 A.2d 352

(App.Div.1949).]

The statute only presumes a decedent acted in contem-

plation of death when making transfers, i.e. acting as

transferor, within three years of death. N.J.S.A. 54:34-

1(c) is not concerned with decedent's rights as the bene-

ficiary. In the instant matter, the Jochman Trusts were

created roughly seven years prior to the death of the

transferor. Thus, decedent's inter vivos transfers to fund

the Jochman Trusts are not presumed, for the purposes of

the inheritance tax statute, to be made in contemplation

[**14] of her death.

Next, the court addresses whether the transfers are

nevertheless subject to taxation through N.J.S.A. 54:34-

1(c) without the presumption they were made in contem-

plation of death. Provident Trust Co. serves to demon-

strate the change in statute from 1949 to present. There-

in, after the court found the decedent's transfers were not

presumptively made in contemplation of death, the bur-

den shifted to the Director to prove they were. See gen-

erally Provident Trust Co., supra, 5 N.J. Super. 420. The

shifting of burdens and subsequent analysis is no longer

necessary. [HN14] As our state Supreme Court discussed

in Estate of Lichtenstein, the statute was amended in

1951 to include a three-year time limitation on those

transfers to be considered in contemplation of death. The

Court noted that although the amendment was not spon-

sored by the taxing authority, it was enacted to harmo-

nize New Jersey law with federal estate tax law. Estate of

Lichtenstein, supra, 52 N.J. at 566, 247 A.2d 320.

Subsequently, our Supreme Court looked to the Sen-

ate Finance Committee report for guidance. The report

explained:

At the present time this problem hangs

over any person who makes a gift, even

though he expects to live for many years,

unless he can prepare evidence demon-

strating that the gift was made primarily

for nontax reasons. [**15]

[The amendment] removes from the

scope of the contemplation of death

clause all transfers made more than 3

years prior to the date of death. On the

other hand, the burden of showing that the

transfer was not in contemplation of death

will be borne by the estate in all cases

where the transfer was made within a pe-

riod of 3 [*40] years ending with the

date of death. This will strengthen the po-

sition of the Government in cases where

240

Page 9


the transfer occurred between 2 and 3

years prior to the date of death.

[Ibid. (quoting (S. Rept. No. 2375,

81st Cong., 2d Sess., 1950-2 C.B. 524-

5)).]

Thus, the New Jersey statute's modern mandate is clear

and purposeful: "no such transfer made prior to such


made in contemplation of death." N.J.S.A. 54:34-1(c).

[HN15] "[T]he goal of effectuating the legislative

plan as it may be gathered from the enactment read in

full light of its history, purpose and context" is para-

mount to any rule of statutory construction. Koch, supra,

157 N.J. at 7, 722 A.2d 918 (quoting State v. Haliski, 140

N.J. 1, 9, 656 A.2d 1246 (1995)). The legislative plan

referenced by the Court in In re Estate of Lichtenstein

reflects a desire to impose a clear time restriction on the

contemplation of death basis for taxability of inter vivos

transfers. This court finds decedent's inter vivos irrevo-

cable [**16] transfers of assets to the Jochman Trusts

were completed more than three years prior to her death.

As such, the remaining elements of the analysis outlined

in Estate of Berg merit no further discussion. There is no

"made in contemplation of death" basis for imposing tax

on the value of decedent's transfers under N.J.S.A. 54:34-

1(c).

Taxability as Transfers Intended to Take Effect at or

After Death

The court next addresses if the Jochman Trusts are

taxable as testamentary substitutes intended to take effect

at or after decedent's death. The facts are clear and un-

disputed. After the fixed six-year term, all decedent's

rights to income from the GRUT ceased. After the expi-

ration of the QPRT, decedent retained only a fixed term

option to rent the River Vale residence for fair market

value. Even though decedent's beneficial interests in the

Jochman Trusts expired before her death, she received

income and housing by right as a beneficiary of those

trusts within three years of her death.

As such, the Director argues "those transfers that oc-

cur prior to the three-year period in which the transferor

retains some income, right, interest, or power in the

transfer, are considered to be transfers made in contem-

plation [**17] of death." (Def. Mot. Summ. J., [*41] 5,

Sept. 3, 2013). In supporting this position the Director

relies on N.J.S.A. 54:34-1.1 and the Director's regulation

N.J.A.C. 18:26-5.10. The contention that N.J.S.A. 54:34-

1.1 functions to further the transfers in "contemplation of

death" basis for taxation was reiterated during oral argu-

ment. At that time, the plaintiff's attorney felt the Direc-

tor's position conflated two distinct concepts, and that

N.J.S.A. 54:34-1.1 represents a separate and distinct ba-

sis for inheritance tax.

As previously mentioned,5 there are two bases for

taxation of testamentary substitutes under the Act. The

current focus is N.J.S.A. 54:34-1.1, [HN16] which con-

cerns only those transfers intended to take effect at or

after death. Admittedly, little guidance from New Jersey

courts exists in terms of application and interpretation of

N.J.S.A. 54:34-1.1 which is likely why neither party

squarely addressed the mechanics of the statute in papers

or during oral argument. For that reason, this court's

functional framework utilized in deciding the instant

matter is provided in detail below.

5 See generally p. 4 for a discussion of N.J.S.A.

54:34-1.1 and N.J.S.A. 54:34-1(c)

The New Jersey Supreme Court undertook the first

and only extensive analysis of the origin and implica-

tions of N.J.S.A. 54:34-1.1 when deciding In re Lambert,

63 N.J. 448, 452, 308 A.2d 11 (1973). Therein the Court

found:

[B]y reason of the [**18] 1955 act,

transfers, as to which either the transferor

retained no interest at inception or, if he

did, completely and irrevocably disposed

of the same more than three years before

death, are not subject to transfer inher-

itance tax as a transfer 'intended to take

effect in possession or enjoyment at or af-

ter' the death of the transferor.

[Id. at 459, 308 A.2d 11.]

In order to make its determination, the Court engaged in

a historical analysis tracking changes to federal tax law

and the subsequent pressures upon New Jersey inher-

itance tax law which ultimately resulted in more con-

formance.

As far as the scope and intent of the act

is concerned, it makes no difference that

the federal estate tax is a levy on the privi-

lege of transferring property at death

while our transfer inheritance tax levy is

on the privilege of succeeding to property

at death. The act deals with non-

includibility of a certain kind of transfer

to [*42] harmonize with federal law, its

language and the accompanying statement

are plain as to its purpose and the theory

of the tax is immaterial.

[Id. at 458, 308 A.2d 11.]

241

Page 10


A statement attached to the bill of the 1955 statute,

L. 1955, c. 135, N.J.S.A. 54:34-1.1, reads: "The proposed

bill does not affect the present rules of taxation of gifts

'in [**19] contemplation of death.'" Id. The court notes

the Act's combined provisions, N.J.S.A. 54:33-1 et seq.,

are consistent with those statements and contrary to the

Director's argument. Subsequently, this court finds

N.J.S.A. 54:34-1.1 is best construed as not applicable to

N.J.S.A. 54:34-1(c) in toto, but merely modifying one

basis of taxation under N.J.S.A. 54:34-1(c); transfers

intended to take effect at or after death.

For the aforementioned reasons, the Director's ar-

gument focusing on the "made in contemplation of

death" basis for taxation found in N.J.S.A. 54:34-1(c)

while discussing N.J.S.A. 54:34-1.1 is flawed. Such an

argument is at odds with the Legislature's intent and the

combined statutory scheme of the Act. Be that as it may,

this court does not find N.J.S.A. 54:34-1.1 creates a dis-

tinct basis for taxation either. Rather, the after-enacted

N.J.S.A. 54:34-1.1 [HN17] handily serves to modify and

restrict the second basis for taxation found in N.J.S.A.

54:34-1(c) which may impose tax upon transfers "in-

tended to take effect at death."

N.J.S.A. 54:34-1.1 clearly applies only to transfers

when the transferor is entitled to some income, right,

interest, or power in the transferred property. Neverthe-

less, it employs the same language regarding testamen-

tary substitutes found in N.J.S.A. 54:34-1(c) as to trans-

fers intended to take effect at or after death. The practical

effect is that N.J.S.A. 54:34-1.1 excludes some [**20]

testamentary substitutes from N.J.S.A. 54:34-1(c)'s reach

by imposing a three-year time restriction on what trans-

fers may be deemed intended to take effect at or after

death.6 Accordingly, a "complete and irrevocable disposi-

tion of all reserved income, [*43] rights, interests, and

powers in and over the property transferred" made by

decedent more than three years prior to death will curtail

the second basis for taxation under N.J.S.A. 54:34-1(c).

See N.J.S.A. 54:34-1.1.

6 It is worth reiterating that the second para-

graph of N.J.S.A. 54:34-1(c) presumes some

transfers within three years of death were made in

contemplation of death. The presumption is the

result of the 1951 amendment, discussed 2014

N.J. Tax LEXIS 8 at p. 10. The amendment, how-

ever, only applies to the 'made in contemplation

of death' basis for taxation.

Consequently, [HN18] the ultimate determination as

to whether such transfers are taxable as intended to take

effect at or after decedent's death should not be a single-

step process. Rather, the statutes are best read in con-

junction. First, the court should determine whether the

transferor, executed an "irrevocable and complete dispo-

sition of all reserved income, rights, interests and powers

in and over the property transferred" more than three

years prior to death. N.J.S.A. 54:34-1.1. If not, those

transfers [**21] are treated as testamentary substitutes

intended to take effect at or after death, and tax should be

imposed under N.J.S.A. 54:34-1(c). However, if the an-

swer is yes, then the transfer "shall not be deemed a

transfer intended to take effect at or after transferor's

death[.]" N.J.S.A. 54:34-1.1. In which case, tax could not

be imposed under the second basis, concerning transfers

intended to take effect at or after death, of N.J.S.A.

54:34-1(c).

As applied to the facts of this case, the court will de-

termine whether the decedent's transfers of property to

the Jochman Trusts were complete and irrevocable dis-

positions, and if the same occurred more than three years

prior to decedent's death. Such analysis of whether dece-

dent's gratuitous transfers to trusts constituted completed

gifts, and the timing of same, is aided by both federal

resources and New Jersey case law.7 N.J.S.A. 54:34-1.1

[HN19] reflects New Jersey's substantial conformance

with federal tax [*44] law.8 Specifically, whether the

transferor "executed an irrevocable and complete dispo-

sition of all reserved income, rights, interests and powers

in and over the property transferred" evokes particular

standards used to determine whether a donor made a

completed gift for the purposes of imposing federal gift

tax. N.J.S.A. 54:34-1.1

7 Extensive [**22] federal rules, regulations,

and case law exist to value gifts. Federal re-

sources may be useful in circumstances where the

court undertakes an analysis to determine the

completeness of a decedent's gratuitous transfers,

i.e. gifts, because New Jersey does not impose a

gift tax. Consequently, state specific resources

are lacking.

Additionally, N.J.S.A. 54:38-7 requires the

decedent's estate to file a copy of the federal es-

tate tax return with the Division of Taxation.

Federal estate and gift law provides a necessary

resource, because it is an essential component to

computation of New Jersey estate and inheritance

tax.

8 [HN20] New Jersey estate and inheritance tax

laws substantially overlap with federal authori-

ties. Tax will be imposed upon:

[T]he estate of every resident

decedent... which would have been

subject to an estate tax payable to

242

Page 11


the United States under the provi-

sions of the federal Internal Reve-

nue Code...in effect on December

31, 2001, the amount of which tax

shall be... the maximum credit that

would have been allowable under

the provisions of that federal In-

ternal Revenue Code in effect on

that date.

[N.J.S.A. 54:38-1(a)(2)(a)(i).]

Internal Revenue Code ("I.R.C.") § 2511 [HN21]

defines the types of transfers that are subject to the fed-

eral gift [**23] tax. This section applies "whether the

transfer is in trust or otherwise, whether the gift is direct

or indirect, and whether the property is real or personal,

tangible or intangible[.]" I.R.C.§ 2511(a). Under the

I.R.C., the gift tax is imposed upon the donor, and the

excise will only be imposed upon making a completed

gift. See Treas. Reg. § 25.2511-2(a). "As to any property,

or part thereof or interest therein, of which the donor has

so parted with dominion and control as to leave in him

no power to change its disposition, whether for his own

benefit or for the benefit of another, the gift is complete."

Treas. Reg. § 25.2511-2(b).

In Newberry v. Walsh, 20 N.J. 484, 486, 120 A.2d

242 (1956), our Supreme Court considered the imposi-

tion of inheritance tax on transfers to trust under the "in-

tended to take effect in possession or enjoyment at or

after such death" provision of N.J.S.A. 54:34-1(c). The

factual circumstances were dissimilar, but the Court's

analysis addresses when the gift over to trust was com-

pleted as part of the process to determine whether the

transfer was effectively intended to take effect at death.9

A central focus of the [*45] Court was the broad power

decedent retained over the trust until her death. Original-

ly, the trust terms gave decedent "'the power at any time

during her life by instrument in writing delivered [**24]

by her to the Trustees to modify, alter, amend or revoke

this instrument in whole or in part including the right to

change the beneficiaries [t]herein[.]'" Id. at 487, 120

A.2d 242. However, the decedent self-restricted her pow-

er one year prior to her death, and reserved only the

power to change beneficiaries among the recipients of

her bounty. Id.

9 Although the matter was decided in January of

1956, the action stemmed from an assessment

made in 1946. As such, the decision predates

N.J.S.A. 54-34-1.1, but this is of no moment. The

Court's discussion is highly relevant to this

court's inquiry as to whether a complete and ir-

revocable disposition, i.e. gift, of reserved rights

and interests was executed.

Herein, at death, both Jochman Trusts were expired,

and decedent held no rights to income and only retained

an option to rent the River Vale residence for fair market

value. On the other hand, the decedent in Newberry pos-

sessed the power to alter the beneficiaries, among a lim-

ited class, up to her death. More striking is the compari-

son between the power to revoke, alter, or amend the

trust instrument. In the instant matter, the decedent relin-

quished her rights to revoke or alter terms of the distribu-

tive scheme almost seven years before [**25] her death.

In Newberry, "[i]t was within [decedent's] power to alter

not only the present life estates of the two children but

also the distributive scheme of the principal. Not until

the death of Myrtle H. Newberry was this power extin-

guished." Id. at 490, 120 A.2d 242.

Lastly, the Court in Newberry emphasized the aspect

of finality, or specifically the lack thereof before the date

of death, to impose tax through N.J.S.A. 54:34-1(c). It

mattered not that the decedent had restricted her power

before death. "The purpose of the statute is to equate

inter vivos transfers with testamentary transfers for tax

purposes where the former are designed to enjoy the

benefits of the latter[.]" Id. at 491, 120 A.2d 242. The

Court stressed "that decedent had not fully exercised the

privilege of succession. Not until at or after her death

were the designated beneficiaries assured of their respec-

tive interests." Ibid. "The privilege of succession -- the

'shifting of the economic benefits and [*46] burdens of

property' -- is the thing taxable under the statute."

Schroeder v. Zink, 4 N.J. 1, 9, 71 A.2d 321 (1950).

The Court in Newberry acknowledged the transfers

in trust were vested, but altogether subject to total di-

vestment at will by the decedent. "Not until her death

was the control extinguished and the gifts made certain."

[**26] Id. Returning to the instant matter, facts and cir-

cumstances surrounding the funding of the trusts, the

expiration, and the date of death are well established.

Given those facts, the court finds decedent's gifts to trust

were complete upon execution on September 24, 2004.

Moreover, the court finds decedent executed an ir-

revocable and complete disposition over the property

transferred more than three years prior to her death.

[HN22] The essence of a gift by trust is

the abandonment of control over the

property put in trust. The separable inter-

ests transferred are not gifts to the extent

that power remains to revoke the trust or

recapture the property represented by any

of them[,] or to modify the terms of the

243

Page 12


arrangement so as to make other disposi-

tion of the property[.]"

[Smith v. Shaughnessy, 318 U.S. 176,

181, 63 S. Ct. 545, 87 L. Ed. 690, 1943

C.B. 1144 (1943) (citations omitted).]

Although she retained income and beneficial enjoyment

of her residence for the trust period, decedent abandoned

control over the property. Decedent retained no powers

to revoke or modify the terms of the trust like those

found in Newberry. The independent trustee was obligat-

ed to manage the trust property in accordance with the

trust documents upon expiration of the six-year term, and

decedent had no control [**27] so as to make another

disposition of those trust properties.

It is apparent the decedent completely transferred,

from the moment the trust instrument was executed, con-

trol over the future economic benefits of the property.

Comparatively, if the decedent appointed herself as trus-

tee and retained the power to change beneficiaries, there

would be no complete disposition. See generally New-

berry, supra. "[A] gift in trust is not subject to a gift tax

until it becomes absolute, that is, until the power to

change the beneficiaries therein has been surrendered by

the settlor[.]" Blumberg v. Smith, 138 F.2d 956, 957 (7th

Cir.1943). [*47] In this matter, decedent surrendered

her power to revoke and alter the terms in 2004, which is

more than three years prior to her death in 2011.

Lastly, one point should be discussed before the

court concludes analysis of N.J.S.A. 54:34-1.1. The Di-

rector's argument is essentially that decedent was a bene-

ficiary of the trusts which decedent established, and im-

position of tax is appropriate since those benefits contin-

ued within three years of her death. The line of reasoning

is fundamentally flawed. Whether or not the statute

deems transfers as 'intended to take effect at death' re-

quires inquiry into whether decedent executed a "com-

plete disposition [**28] of all reserved income, rights,

interests, and powers . . ." Id. (emphasis added). Certain-

ly, it is undisputed decedent was entitled to enforce her

rights under the trust instruments should the independent

trustee falter. However, decedent unequivocally reserved

nothing further at the time of execution. [HN23] Reser-

vation of certain powers, ability to alter the income

stream, or other rights are precisely the dispositive fac-

tors as to whether there was a completed gift. See New-

berry, supra, 20 N.J. at 491, 120 A.2d 242.

For the aforementioned reasons, the court finds that

decedent transferred the property to establish the Joch-

man Trusts. Upon execution, her disposition was com-

plete, irrevocable, and without the additional reservations

of income, rights, interests, or powers. As the trusts were

established in 2004, and Ms. Jochman died in 2011, the

transfers shall not be deemed intended to take effect at or

after her death in accordance with N.J.S.A. 54:34-1.1.

This treatment under N.J.S.A. 54:34-1.1 also precludes

imposition of tax under N.J.S.A. 54:34-1(c) as a testa-

mentary substitute intended to take effect at or after

death.

Conclusion

The decedent made irrevocable gifts in trust, and the

transfers were completed more than three years prior to

her death. Tax will not be imposed under New [**29]

Jersey's inheritance tax statute N.J.S.A. 54:34-1(c), be-

cause the transfers were not 'made in contemplation of

death.' Additionally, there is no basis for imposing tax as

testamentary substitutes intended to take effect at or

[*48] after death under N.J.S.A. 54:34-1(c), and the

same is prohibited by N.J.S.A. 54:34-1.1. Summary

judgment is granted in favor of taxpayer. Defendant's

cross-motion for same is denied.

244

Making It Stick:

Choosing the Right Parties to Trust Litigation and Nonjudicial Settlements

Andrew J. DeMaio, Esq.

Mother (Grantor) created an irrevocable trust. The trust assets are held in a single (pot)

trust until Mother’s death (She is still living). The trustee, Uncle, has the discretion to make

distributions among one or both of Mother’s children, Son and Daughter, based on a

nonascertainable standard.

Upon Mother’s death, the trust will be split into equal shares (one for each child). Each

child is the sole permissible distributee of his/her trust share until age 30, at which point the

share terminates and passes outright to the child if living. If child is not then living, his or her

descendants take that share. If child leaves no descendants, then Grantor’s descendants take. If

Grantor has no living descendants, the assets flow to Grantor’s intestate heirs. Those heirs

include adult cousins and the minor child of a deceased cousin.

1. The Trust Agreement contains no provisions regarding succession of trustees. Uncle

proposes to modify the trust to add a provision appointing successor trustees to be

effective upon Uncle’s death, disability or resignation. How can the change be

accomplished and whose consent is required?

2. Mother has now died. To enhance creditor protection, it is proposed that Son’s trust

be modified to provide that it terminates at age 55 rather than age 30. Son agrees.

Son has one adult child and one minor child. How can the change be accomplished

and whose consent in required?

3. After Mother’s death, it is proposed that Daughter’s trust be terminated and

distributed outright to her. Daughter (of course) agrees. Daughter has one adult child

and one minor child. How can the change be accomplished and whose consent in

required?

245

CHAPTER 276

AN ACT concerning trusts, supplementing Title 3B of the New Jersey Statutes, enacting

additional chapter 31, Uniform Trust Code, amending N.J.S.3B:14-37, and repealing

N.J.S.3B:11-5, N.J.S.3B:11-6, N.J.S.3B:11-7, and P.L.2001, c.144.

BE IT ENACTED by the Senate and General Assembly of the State of New Jersey:

1. An additional chapter, Chapter 31, is added to Title 3B of the New Jersey Statutes as

follows:

CHAPTER 31

UNIFORM TRUST CODE

TABLE OF CONTENTS

ARTICLE 1

GENERAL PROVISIONS AND DEFINITIONS

3B:31-1. Short Title.

3B:31-2. Scope.

3B:31-3. Definitions.

3B:31-4. Knowledge.

3B:31-5. Default and Mandatory Rules.

3B:31-6. Common Law of Trusts; Principles of Equity.

3B:31-7. Governing Law.

3B:31-8. Principal Place of Administration.

3B:31-9. Methods and Waiver of Notice.

3B:31-10. Others Treated as Qualified Beneficiaries.

3B:31-11. Nonjudicial Settlement Agreements.

3B:31-12. Rules of Construction.

ARTICLE 2

REPRESENTATION

3B:31-13. Representation: Basic Effect.

3B:31-14. Representation by Holder of General Testamentary Power of Appointment.

3B:31-15. Representation by Fiduciaries and Parents.

3B:31-16. Representation by Person Having Substantially Identical Interest.

3B:31-17. Appointment of Representative.

ARTICLE 3

CREATION, VALIDITY, MODIFICATION AND TERMINATION OF TRUST

3B:31-18. Methods of Creating Trust.

3B:31-19. Requirements for Creation.

3B:31-20. Written Trusts Created in Other Jurisdictions.

3B:31-21. Trust Purposes.

3B:31-22. Charitable Purposes; Enforcement.

3B:31-23. Creation of Trust Induced by Fraud, Duress or Undue Influence.

3B:31-24. Trust for Care of Animal.

3B:31-25. Noncharitable Trust Without Ascertainable Beneficiary.

3B:31-26. Modification or Termination of Trust; Proceedings for Approval or Disapproval.

3B:31-27. Modification or Termination of Noncharitable Irrevocable Trust by Consent.

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P.L.2015, CHAPTER 276

2

3B:31-28. Modification or Termination Because of Unanticipated Circumstances or Inability

to Administer Trust Effectively.

3B:31-29. Modification or Termination of Charitable Trust (Cy Pres).

3B:31-30. Modification or Termination of Uneconomic Trust.

3B:31-31. Reformation to Correct Mistakes.

3B:31-32. Construction to Conform Trust Terms to Probable Intent of Settlor.

3B:31-33. Modification to Achieve Settlor's Tax Objectives.

3B:31-34. Combination and Division of Trusts.

ARTICLE 4

CREDITOR'S CLAIMS; SPENDTHRIFT AND DISCRETIONARY TRUSTS

3B:31-35. Rights of Beneficiary's Creditor or Assignee.

3B:31-36. Spendthrift Provision.

3B:31-37. Special Needs Trusts.

3B:31-38. Discretionary Trusts; Effect of Standard.

3B:31-39. Creditor's Claim Against Settlor.

3B:31-40. Overdue Distribution.

3B:31-41. Personal Obligations of Trustee

ARTICLE 5

REVOCABLE TRUSTS

3B:31-42. Capacity of Settlor of Revocable Trust.

3B:31-43. Revocation or Amendment of Revocable Trust.

3B:31-44. Settlor's Powers.

3B:31-45. Limitation on Action Contesting Validity of Revocable Trust; Distribution of

Trust Property.

ARTICLE 6

OFFICE OF TRUSTEE

3B:31-46. Accepting or Declining Trusteeship.

3B:31-47. Trustee's Bond.

3B:31-48. Co-trustees.

3B:31-49. Vacancy in Trusteeship; Appointment of Successor.

3B:31-50. Resignation of Trustee.

3B:31-51. Removal of Trustee.

3B:31-52. Delivery of Property by Former Trustee.

3B:31-53. Reimbursement of Expenses.

ARTICLE 7

DUTIES AND POWERS OF TRUSTEE

3B:31-54. Duty to Administer Trust.

3B:31-55. Duty of Loyalty.

3B:31-56. Duty of Impartiality.

3B:31-57. Duty of Prudent Administration.

3B:31-58. Costs of Administration.

3B:31-59. Duty to Use Special Skills.

3B:31-60. Delegation by Trustee.

3B:31-61. Powers to Direct.

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3B:31-62. Powers to Direct Investment Functions.

3B:31-63. Control and Protection of Trust Property.

3B:31-64. Recordkeeping and Identification of Trust Property.

3B:31-65. Duty to Enforce and Defend Claims

3B:31-66. Duty to Collect Trust Property and Redress Breaches of Trust.

3B:31-67. Duty to Disclose and Discretion to Periodically Report.

3B:31-68. Discretionary Powers.

3B:31-69. General Powers of Trustee.

3B:31-70. Distribution Upon Termination.

ARTICLE 8

LIABILITY OF TRUSTEES AND RIGHTS OF PERSONS DEALING WITH TRUSTEE

3B:31-71. Remedies for Breach of Trust.

3B:31-72. Damages for Breach of Trust.

3B:31-73. Damages in Absence of Breach.

3B:31-74. Limitation of Action Against Trustee.

3B:31-75. Reliance on Trust Instrument.

3B:31-76. Event Affecting Administration or Distribution.

3B:31-77. Exculpation of Trustee.

3B:31-78. Beneficiary's Consent, Release, or Ratification.

3B:31-79. Limitation on Personal Liability of Trustee.

3B:31-80. Interest as General Partner.

3B:31-81. Certification of Trust.

ARTICLE 9

MISCELLANEOUS PROVISIONS

3B:31-82. Electronic Records and Signatures.

3B:31-83. Severability Clause.

3B:31-84. Application to Existing Relationships.

ARTICLE 1

GENERAL PROVISIONS AND DEFINITIONS

3B:31-1. Short Title.

This act shall be known and may be cited as the "Uniform Trust Code."

3B:31-2. Scope.

This act applies to express trusts, charitable or noncharitable, and trusts created pursuant to a

statute, judgment, or decree that requires the trust to be administered in the manner of an express

trust.

3B:31-3. Definitions.

As used in this act:

"Action," with respect to an act of a trustee, includes a failure to act.

“Beneficiary,” as it relates to trust beneficiaries, includes a person:

(1) who has any present or future interest, vested or contingent;

(2) who, in a capacity other than that of trustee, holds a power of appointment over trust

property;

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4

(3) who is the owner of an interest by assignment or other transfer; and

(4) as it relates to a charitable trust, any person who is entitled to enforce the trust.

"Charitable trust" means a trust, or portion of a trust, created for a charitable purpose

described in subsection a. of N.J.S.3B:31-22.

"Environmental law" means a federal, State, or local law, rule, regulation, or ordinance

relating to protection of the environment.

"Interests of the beneficiaries" means the beneficial interests provided in the terms of the

trust.

"Jurisdiction," with respect to a geographic area, includes a state or country.

"Power of withdrawal" means a presently exercisable general power of appointment other

than a power exercisable only upon consent of the trustee or a person holding an adverse interest.

"Property" means anything that may be the subject of ownership, whether real or personal,

legal or equitable, or any interest therein.

"Qualified beneficiary" means a beneficiary who, on the date the beneficiary's qualification is

determined:

(1) is a distributee or permissible distributee of trust income or principal;

(2) would be a distributee or permissible distributee of trust income or principal if the

interests of the distributees described in paragraph (1) terminated on that date; or

(3) would be a distributee or permissible distributee of trust income or principal if the trust

terminated on that date.

"Revocable," as applied to a trust, means revocable by the settlor without the consent of the

trustee or a person holding an adverse interest.

"Settlor" means a person, including a testator, who creates, or contributes property to, a trust.

If more than one person creates or contributes property to a trust, each person is a settlor of the

portion of the trust property attributable to that person's contribution except to the extent another

person has the power to revoke or withdraw that portion.

"Spendthrift provision" means a term of a trust which restrains both voluntary and

involuntary transfer of a beneficiary's interest.

"State" means a State of the United States, the District of Columbia, Commonwealth of

Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the

jurisdiction of the United States. The term includes an Indian tribe or band recognized by federal

law or formally acknowledged by a state.

"Terms of a trust" means the manifestation of the settlor's intent regarding a trust's provisions

as expressed in the trust instrument or as may be established by other evidence that would be

admissible in a judicial proceeding.

"Trust instrument" means an instrument executed by the settlor that contains terms of the

trust, including any amendments thereto.

"Trustee," in addition to the definition contained in N.J.S.3B:1-2, includes a corporate entity

in its capacity as trustee and a co-trustee where two or more are appointed.

3B:31-4. Knowledge.

a. Subject to subsection b. of this section, a person has knowledge of a fact if the person:

(1) has actual knowledge of it;

(2) has received a notice or notification of it; or

(3) from all the facts and circumstances known to the person at the time in question, has

reason to know it.

b. An organization that conducts activities through employees has notice or knowledge of a

fact involving a trust only from the time the information was received by an employee having

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5

responsibility to act for the trust, or would have been brought to the employee's attention if the

organization had exercised reasonable diligence. An organization exercises reasonable diligence

if it maintains reasonable routines for communicating significant information to the employee

having responsibility to act for the trust and there is reasonable compliance with the routines.

Reasonable diligence does not require an employee of the organization to communicate

information unless the communication is part of the individual's regular duties or the individual

knows a matter involving the trust would be materially affected by the information.

3B:31-5. Default and Mandatory Rules.

a. Except as otherwise provided in the terms of the trust, this act governs the duties and

powers of a trustee, relations among trustees, and the rights and interests of a beneficiary.

b. The terms of a trust prevail over any provision of this act except:

(1) the requirements for creating a trust;

(2) the duty of a trustee to act in good faith and in accordance with the purposes of the trust;

(3) the requirement that a trust and its terms be for the benefit of its beneficiaries, and that

the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve;

(4) the power of the court to modify or terminate a trust under N.J.S.3B:31-26 through

N.J.S.3B:31-33;

(5) the effect of a spendthrift provision and the rights of certain creditors and assignees to

reach a trust as provided in article 4 of this act;

(6) the power of the court under N.J.S.3B:31-47 to require, dispense with, or modify or

terminate a bond;

(7) the duty under subsections a. and b. of N.J.S.3B:31-67 to respond to the request of a

qualified beneficiary of an irrevocable trust who has attained the age of 35 years for a copy of the

trust instrument or for other information reasonably related to the administration of the trust;

(8) the effect of an exculpatory term under N.J.S.3B:31-77;

(9) the rights under N.J.S.3B:31-79 through N.J.S.3B:31-81 of a person other than a trustee

or beneficiary;

(10) periods of limitation for commencing a judicial proceeding; and

(11) the power of the court to take such action and exercise such jurisdiction as may be

necessary in the interests of justice.

3B:31-6. Common Law of Trusts; Principles of Equity.

The common law of trusts and principles of equity supplement this act, except to the extent

modified by this act or another statute of this State.

3B:31-7. Governing Law.

The meaning and effect of the terms of a trust are determined by:

a. the law of the jurisdiction designated in the terms unless the designation of that

jurisdiction's law is contrary to a strong public policy of the jurisdiction having the most

significant relationship to the matter at issue; or

b. in the absence of a controlling designation in the terms of the trust, the law of the

jurisdiction having the most significant relationship to the matter at issue.

3B:31-8. Principal Place of Administration.

a. Without precluding other means for establishing a sufficient connection with the

designated jurisdiction, terms of a trust designating the principal place of administration are valid

and controlling if:

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6

(1) a trustee maintains a place of business located in or a trustee is a resident of the

designated jurisdiction; or

(2) all or part of the administration occurs in the designated jurisdiction.

In the absence of terms of a trust designating the principal place of administration, the initial

principal place of administration of a nontestamentary trust shall be this State if the trust is

governed by the law of this State, and the principal place of administration of a testamentary

trust shall be the jurisdiction in which the decedent was domiciled at the time of death.

b. A trustee is under a continuing duty to administer the trust at a place appropriate to its

purposes, its administration, and the interests of the beneficiaries.

c. The trustee, in furtherance of the duty prescribed by subsection b. of this section, may

transfer the trust's principal place of administration to another State or to a jurisdiction outside of

the United States.

d. The trustee shall notify the qualified beneficiaries of a proposed transfer of a trust's

principal place of administration not less than 60 days before initiating the transfer. The notice

of proposed transfer shall include:

(1) the name of the jurisdiction to which the principal place of administration is to be

transferred;

(2) the address and telephone number at the new location at which the trustee can be

contacted;

(3) the date on which the proposed transfer is anticipated to occur; and

(4) the date, not less than 60 days after the giving of the notice, by which the qualified

beneficiary is required to notify the trustee of an objection to the proposed transfer.

e. The authority of a trustee under this section to transfer a trust's principal place of

administration terminates if a qualified beneficiary notifies the trustee of an objection to the

proposed transfer on or before the date specified in the notice, unless the trustee secures judicial

approval for the transfer.

f. In connection with a transfer of the trust's principal place of administration, the trustee

may transfer some or all of the trust property to a successor trustee designated in the terms of the

trust or appointed pursuant to N.J.S.3B:31-49.

3B:31-9. Methods and Waiver of Notice.

a. Notice to a person under this act or the sending of a document to a person under this act

shall be accomplished in a manner reasonably suitable under the circumstances and likely to

result in receipt of the notice or document. Permissible methods of notice or for sending a

document include first-class mail, personal delivery, delivery to the person's last known place of

residence or place of business, or a properly directed textual electronic message.

b. Notice otherwise required under this act or a document otherwise required to be sent

under this act need not be provided to a person whose identity or location is unknown to and not

reasonably ascertainable by the trustee.

c. Notice under this act or the sending of a document under this act may be waived by the

person to be notified or sent the document.

d. Notice of a judicial proceeding shall be given as provided in the applicable New Jersey

Rules of Court.

3B:31-10. Others Treated as Qualified Beneficiaries.

a. Whenever notice to qualified beneficiaries of a trust is required under this act, the trustee

shall also give notice to any other beneficiary who has sent the trustee a request for notice.

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b. A charitable organization expressly designated to receive distributions under the terms of

a charitable trust or a person appointed to enforce a trust created for the care of an animal or

another noncharitable purpose as provided in N.J.S.3B:31-24 or N.J.S.3B:31-25 has the rights of

a qualified beneficiary under this act.

c. The Attorney General of this State has the rights of a qualified beneficiary with respect to

a charitable trust having its principal place of administration in this State.

3B:31-11. Nonjudicial Settlement Agreements.

a. For purposes of this section, "interested persons" means persons whose consent would be

required in order to achieve a binding settlement were the settlement to be approved by the court.

b. Except as otherwise provided in subsection c. of this section or any other provision of this

chapter, interested persons may enter into a binding nonjudicial settlement agreement with

respect to any matter involving a trust.

c. A nonjudicial settlement agreement is valid only to the extent it does not violate a

material purpose of the trust and includes terms and conditions that could be properly approved

by the court under this act or other applicable law.

d. Matters that may be resolved by a nonjudicial settlement agreement include:

(1) the interpretation or construction of the terms of the trust;

(2) the approval of a trustee's report or accounting;

(3) direction to a trustee to refrain from performing a particular act or the grant to a trustee of

any necessary or desirable power;

(4) the resignation or appointment of a trustee and the determination of a trustee's

compensation;

(5) transfer of a trust's principal place of administration; and

(6) liability of a trustee for an action relating to the trust.

e. Any interested person may request the court to approve a nonjudicial settlement

agreement, to determine whether the representation as provided in article 2 was adequate, and to

determine whether the agreement contains terms and conditions the court could have properly

approved.

f. A nonjudicial settlement may not be used to produce a result that is contrary to other

sections of Title 3B of the New Jersey Statutes, including, but not limited to, terminating or

modifying a trust in an impermissible manner.

3B:31-12. Rules of Construction.

The rules of construction that apply in this State to the interpretation of and disposition of

property by will also apply as appropriate to the interpretation of the terms of a trust and the

disposition of the trust property.

ARTICLE 2

REPRESENTATION

3B:31-13. Representation: Basic Effect.

a. Notice to a person who may represent and bind another person under this article has the

same effect as if notice were given directly to the other person.

b. The consent of a person who may represent and bind another person under this article is

binding on the person represented unless the person represented objects to the representation

before the consent would otherwise have become effective.

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8

c. Except as otherwise provided in N.J.S.3B:31-27 and N.J.S.3B:31-43, a person who under

this article may represent a settlor who lacks capacity may receive notice and give a binding

consent on the settlor's behalf.

d. A settlor may not represent and bind a beneficiary under this article with respect to the

termination or modification of a trust under subsection a. of N.J.S.3B:31-27.

3B:31-14. Representation by Holder of General Testamentary Power of Appointment.

a. To the extent there is no conflict of interest between the holder of a general testamentary

power of appointment and the persons represented with respect to the particular question or

dispute, the holder may represent and bind persons whose interests, as permissible appointees,

takers in default, or otherwise, are subject to the power.

b. A holder of a general power of appointment in favor of the holder or holder’s estate shall

not be deemed to have a conflict with permissible appointees and takers in default.

3B:31-15. Representation by Fiduciaries and Parents.

To the extent there is no conflict of interest between the representative and the person

represented or among those being represented with respect to a particular question or dispute:

a. a guardian of the property may represent and bind the estate that the guardian of the

property controls;

b. a guardian of the person may represent and bind the ward if no guardian of the property

has been appointed;

c. an agent having authority to act with respect to the particular question or dispute may

represent and bind the principal;

d. a trustee may represent and bind the beneficiaries of the trust;

e. a personal representative of a decedent's estate may represent and bind persons interested

in the estate; and

f. a parent may represent and bind the parent's minor or unborn child if a guardian for the

child has not been appointed.

3B:31-16. Representation by Person Having Substantially Identical Interest.

Unless otherwise represented, a minor, incapacitated, or unborn individual, or a person

whose identity or location is unknown and not reasonably ascertainable, may be represented by

and bound by another having a substantially identical interest with respect to the particular

question or dispute, but only to the extent there is no conflict of interest between the

representative and the person represented.

3B:31-17. Appointment of Representative.

a. If the court determines that an interest is not represented under this article or that the

otherwise available representation might be inadequate, the court may appoint a guardian ad

litem or other representative to receive notice, give consent, and otherwise represent, bind, and

act on behalf of a minor, incapacitated, or unborn individual, or a person whose identity or

location is unknown. A guardian ad litem or other representative may be appointed to represent

several persons or interests.

b. A guardian ad litem or other representative may act on behalf of the individual or person

represented with respect to any matter arising under this act, whether or not a judicial proceeding

concerning the trust is pending.

c. A guardian ad litem or other representative may consider the benefit accruing to the

living members of the individual's family.

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ARTICLE 3

CREATION, VALIDITY, MODIFICATION AND TERMINATION OF TRUST

3B:31-18. Methods of Creating Trust.

A trust may be created by:

a. transfer of property under a written instrument to another person as trustee during the

settlor's lifetime or by will or other written disposition taking effect upon the settlor's death;

b. written declaration by the owner of property that the owner holds identifiable property as

trustee; or

c. written exercise of a power of appointment in favor of a trustee.

3B:31-19. Requirements for Creation.

a. A trust is created only if:

(1) the settlor has capacity to create a trust;

(2) the settlor indicates an intention to create the trust;

(3) the trust has a definite beneficiary or is:

(a) a charitable trust;

(b) a trust for the care of an animal, as provided in N.J.S.3B:31-24; or

(c) a trust for a noncharitable purpose, as provided in N.J.S.3B:31-25;

(4) the trustee has duties to perform; and

(5) the same person is not the sole trustee and sole beneficiary of all beneficial interests.

b. A beneficiary is definite if the beneficiary can be ascertained now or in the future, subject

to the provisions of section 14 of P.L.1999, c.159 (C.46:2F-10) or any other applicable rule

against perpetuities.

c. A power in a trustee to select a beneficiary from an indefinite class is valid if exercised

within a reasonable time and is not void as provided in section 14 of P.L.1999, c.159 (C.46:2F-

10) or any other applicable rule against perpetuities or restraint on alienation. If invalid, the

power fails and the property subject to the power passes to the persons who would have taken the

property had the power not been conferred.

d. A written instrument which creates a trust or transfers property to a trust shall not be

invalid or ineffective because the transferee is identified as the trust rather than the trustee

thereof.

3B:31-20. Written Trusts Created in Other Jurisdictions.

A written trust not created by will is validly created if its creation complies with the law of

the jurisdiction in which:

a. the trust instrument was executed;

b. at the time the trust was created, the settlor was domiciled, had a place of abode, or was a

national;

c. at the time the trust was created, a trustee was domiciled or had a place of business; or

d. at the time the trust was created, any trust property was located.

3B:31-21. Trust Purposes.

A trust may be enforced only to the extent its purposes are lawful, not contrary to public

policy, and possible to achieve. A trust and its terms shall be for the benefit of its beneficiaries.

3B:31-22. Charitable Purposes; Enforcement.

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a. A charitable trust is one that is created for the relief of poverty, the advancement of

education or religion, the promotion of health, governmental or municipal purposes, or other

purpose the achievement of which is beneficial to the community.

b. f the terms of a charitable trust do not state a particular charitable purpose or beneficiary,

and the trustee or other person authorized to state a particular charitable purpose or name a

particular charitable beneficiary fails to make a selection, the court may select one or more

charitable purposes or beneficiaries. The selection shall be consistent with the settlor's intention

to the extent it can be ascertained.

c. A proceeding to enforce a charitable trust may be brought by the settlor, by the Attorney

General, by the trust’s beneficiaries or by other persons who have standing.

3B:31-23. Creation of Trust Induced by Fraud, Duress, or Undue Influence.

A trust is void to the extent its creation was induced by fraud, duress, or undue influence.

3B:31-24. Trust for Care of Animal.

a. A trust may be created to provide for the care of an animal alive during the settlor's

lifetime. The trust terminates upon the death of the animal or, if the trust was created to provide

for the care of more than one animal alive during the settlor's lifetime, upon the death of the last

surviving animal.

b. A trust authorized by this section may be enforced by the settlor or by a person appointed

in the terms of the trust or, if no person is so appointed, by a person appointed by the court. A

person having an interest in the welfare of the animal may request the court to appoint a person

to enforce the trust or to remove a person appointed.

c. Property of a trust authorized by this section may be applied only to its intended use,

except to the extent the court determines that the value of the trust property exceeds the amount

required for the intended use. Except as otherwise provided in the terms of the trust, property

not required for the intended use shall be distributed to the settlor, if then living, otherwise to the

settlor's estate.

3B:31-25. Noncharitable Trust Without Ascertainable Beneficiary.

Except as otherwise provided in N.J.S.3B:31-24 or by another statute, the following rules

apply:

a. A trust may be created for a noncharitable but otherwise valid purpose without a definite

or definitely ascertainable beneficiary or for a noncharitable but otherwise valid purpose to be

selected by the trustee.

b. A trust authorized by this section may be enforced by the settlor or by a person appointed

in the terms of the trust or, if no person is so appointed, by a person appointed by the court.

c. Property of a trust authorized by this section may be applied only to its intended use,

except to the extent the court determines that the value of the trust property exceeds the amount

required for the intended use. Except as otherwise provided in the terms of the trust, property

not required for the intended use shall be distributed to the settlor, if then living, otherwise to the

settlor's estate.

3B:31-26. Modification or Termination of Trust; Proceedings for Approval or Disapproval.

a. In addition to the methods of termination prescribed by N.J.S.3B:31-27 through

N.J.S.3B:31-33, a trust terminates to the extent the trust is revoked or expires pursuant to its

terms, no purpose of the trust remains to be achieved, or the purposes of the trust have become

unlawful, contrary to public policy of this State, or impossible to achieve.

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b. A proceeding to approve or disapprove a proposed modification or termination under

N.J.S.3B:31-27 through N.J.S.3B:31-33, or trust combination or division under N.J.S.3B:31-34,

may be commenced by a trustee or beneficiary. The settlor of a charitable trust may maintain a

proceeding to modify the trust under N.J.S.3B:31-29.

3B:31-27. Modification or Termination of Noncharitable Irrevocable Trust by Consent.

a. A noncharitable irrevocable trust may be modified or terminated upon consent of the

trustee and all beneficiaries, if the modification or termination is not inconsistent with a material


b. A noncharitable irrevocable trust may be terminated upon consent of all of the

beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any

material purpose of the trust. A noncharitable irrevocable trust may be modified upon consent of

all of the beneficiaries if the court concludes that modification is not inconsistent with a material


c. A spendthrift provision in the terms of the trust is not presumed to constitute a material


d. Upon termination of a trust under subsection a. or b. of this section, the trustee shall

distribute the trust property as agreed by the beneficiaries.

e. If not all of the beneficiaries consent to a proposed modification or termination of the

trust under subsection a. or b. of this section, the modification or termination may be approved

by the court if the court is satisfied that:

(1) if all of the beneficiaries had consented, the trust could have been modified or terminated

under this section; and

(2) the interests of a beneficiary who does not consent will be adequately protected.

3B:31-28. Modification or Termination Because of Unanticipated Circumstances or Inability

to Administer Trust Effectively.

a. The court may modify the administrative or dispositive terms of a trust or terminate the

trust if, because of circumstances not anticipated by the settlor, modification or termination will

further the purposes of the trust. To the extent practicable, the modification shall be made in

accordance with the settlor's probable intent.

b. The court may modify the administrative terms of a trust if continuation of the trust on its

existing terms would be impracticable or wasteful or impair the trust's administration.

c. Upon termination of a trust under this section, the trustee shall distribute the trust

property in a manner consistent with the purposes of the trust.

3B:31-29. Modification or Termination of Charitable Trust (Cy Pres).

a. Except as otherwise provided in subsection b. of this section, if a particular charitable

purpose becomes unlawful, impracticable, impossible to achieve, or wasteful:

(1) the trust does not fail, in whole or in part;

(2) the trust property does not revert to the settlor or the settlor's estate; and

(3) the court may modify or terminate the trust by directing that the trust property be applied

or distributed, in whole or in part, in a manner consistent with the settlor's charitable purposes.

b. A provision in the terms of a charitable trust that would result in distribution of the trust

property to a noncharitable beneficiary prevails over the power of the court under subsection a.

of this section.

3B:31-30. Modification or Termination of Uneconomic Trust.

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a. After notice to the qualified beneficiaries, the trustee of a trust consisting of trust property

having a total value less than $100,000 may terminate the trust if the trustee concludes that the

value of the trust property is insufficient to justify the cost of administration.

b. The court may modify or terminate a trust or remove the trustee and appoint a different

trustee if it determines that the value of the trust property is insufficient to justify the cost of

administration.

c. Upon termination of a trust under this section, the trustee shall distribute the trust

property in a manner consistent with the purposes of the trust.

d. This section does not apply to an easement for conservation or preservation.

3B:31-31. Reformation to Correct Mistakes.

The court may reform the terms of a trust, even if unambiguous, to conform the terms to the

settlor's probable intent if it is proved by clear and convincing evidence that there was a mistake

of fact or law, whether in expression or inducement.

3B:31-32. Construction to Conform Trust Terms to Probable Intent of Settlor.

Nothing in this act shall prevent the court from construing the terms of a trust, even if

unambiguous, to conform to the settlor’s probable intent.

3B:31-33. Modification to Achieve Settlor's Tax Objectives.

To achieve the settlor's tax objectives, the court may modify the terms of a trust in a manner

that is not contrary to the settlor's probable intent. The court may provide that the modification

has retroactive effect.

3B:31-34. Combination and Division of Trusts.

a. Subject to subsection b. of this section,

(1) the trustees of two or more trusts or parts of trusts may combine the trusts or parts thereof

into a single trust, even if such trusts or parts thereof are created by different settlors or under

different instruments, and even if the trusts have different trustees; and

(2) the trustees of a single trust may divide the trust into two or more separate trusts, in

which case distributions provided by the governing instrument may be made from one or more of

the separate trusts.

b. A combination or division under this section may be effected only if the result does not

impair rights of any beneficiary or adversely affect the achievement of the purposes of the trust.

ARTICLE 4

CREDITOR'S CLAIMS; SPENDTHRIFT AND DISCRETIONARY TRUSTS

3B:31-35. Rights of Beneficiary's Creditor or Assignee.

Except as otherwise provided by law, to the extent a beneficiary's interest is not protected by

a spendthrift provision, a creditor or assignee of the beneficiary may reach the beneficiary's

interest by attachment of present or future distributions to or for the benefit of the beneficiary,

subject to N.J.S.2A:17-50 through N.J.S.2A:17-56 and sections 3 and 4 of P.L.1981, c.203

(C.2A:17-56.1a and C.2A:17-56.6) or other applicable law. The court may limit the award to

such relief as is appropriate under the circumstances.

3B:31-36. Spendthrift Provision.

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a. A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer

of a beneficiary's interest.

b. A term of the trust providing that the interest of a beneficiary is held subject to a

"spendthrift trust," or words of similar import, is sufficient to restrain both voluntary and

involuntary transfer of the beneficiary's interest.

c. A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift

provision and, except as otherwise provided in this article, a creditor or assignee of the

beneficiary may not reach the interest or a distribution by the trustee before its receipt by the

beneficiary.

d. A spendthrift provision is valid even though a beneficiary is named as the sole trustee or

as a co-trustee of the trust.

e. A valid spendthrift provision does not prevent the appointment of interests through the

exercise of a power of appointment.

3B:31-37. Special Needs Trusts.

Even if a trust contains a spendthrift provision, the following shall apply:

a. Special Needs

(1) “Protected person” means a person who is:

(a) an aged, blind, or disabled individual as defined at 42 U.S.C. s.1382c;

(b) developmentally disabled as defined in section 2 of P.L.1979, c.105 (C.30:1AA-2); or

(c) under age 18, or over age 18 and a full-time student, with serious disabilities that

reasonably may prevent the individual from being self sufficient as an adult.

(2) “Special needs trust” means an OBRA '93 trust, as defined in subsection a. of section 3 of

P.L.2000, c.96 (C.3B:11-37), or trust governed by a written instrument which:

(a) grants a trustee broad discretion to determine whether and when to distribute;

(b) limits distributions during the trust term to distributions to benefit one or more protected

persons, although the trust shall have at least one protected person as beneficiary;

(c) provides that the trustee does not have any obligation to pay the protected person’s

obligations or fund his support;

(d) does not give the protected person any right to require the trustee to distribute at a

specific time or for a particular purpose or to assign or encumber interests in the trust; and

(e) evidences the grantor's intent to supplement rather than replace or impair government

assistance that the protected person receives or for which he otherwise may be eligible.

b. Notwithstanding any other provision of this act or other law:

(1) trustees of a special needs trust have broad discretion over distributions;

(2) no creditor of a protected person may reach or attach a protected person's interest in a

special needs trust and no creditor may require the trustees to distribute to satisfy a protected

person's creditor's claim; and

(3) a special needs trust shall terminate at such time as provided in its governing instrument.

c. A special needs trust shall not be required to repay government aid provided to a

protected person unless the aid was provided on the basis that the special needs trust would repay

the aid when the protected person dies, or the special needs trust terminates sooner and the

special needs trust instrument expressly calls for such repayment. This provision does not apply

to a first-party, self-settled OBRA ’93 trust as defined in subsection a. of section 3 of P.L.2000,

c.96 (C.3B:11-37).

d. Notwithstanding N.J.S.3B:31-35 and N.J.S.3B:31-36, trustees of a special needs trust

shall exercise their discretion in good faith to further trust purposes and courts may exercise their

equity authority to remedy trustee abuses of discretion.

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3B:31-38. Discretionary Trusts; Effect of Standard.

a. Whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not

compel a distribution that is subject to the trustee’s discretion, even if:

(1) The discretion is expressed in the form of a standard of distribution; or

(2) The trustee has abused the discretion.

b. This section does not limit the right of a beneficiary to maintain a judicial proceeding

against a trustee for an abuse of discretion or failure to comply with a standard for distribution.

c. With respect to the powers set forth in section 1 of P.L.1996, c.41 (C.3B:11-4.1), the

provisions of this section shall apply even though the beneficiary is the sole trustee or a co-

trustee of the trust.

3B:31-39. Creditor's Claim Against Settlor.

a. Whether or not the terms of a trust contain a spendthrift provision, the following rules

apply:

(1) During the lifetime of the settlor, the property of a revocable trust is subject to claims of

the settlor's creditors.

(2) With respect to an irrevocable trust, a creditor or assignee of the settlor may reach the

maximum amount that can be distributed to or for the settlor's benefit. If a trust has more than

one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed

the settlor's interest in the portion of the trust attributable to that settlor's contribution.

(3) After the death of a settlor, and subject to the settlor's right to direct the source from

which liabilities will be paid, the property of a trust that was revocable at the settlor's death is

subject to claims of the settlor's creditors, costs of administration of the settlor's estate, the

expenses of the settlor's funeral and disposal of remains, and to a surviving spouse or partner in a

civil union and children to the extent the settlor's probate estate is inadequate to satisfy those

claims, costs, expenses.

b. For purposes of this section:

(1) during the period the power may be exercised, the holder of a power of withdrawal is

treated in the same manner as the settlor of a revocable trust to the extent of the property subject

to the power; and

(2) upon the lapse, release, or waiver of the power, the holder is treated as the settlor of the

trust only to the extent the value of the property affected by the lapse, release, or waiver exceeds

the greater of the amount specified in section 2041(b)(2) or 2514(e) of the federal Internal

Revenue Code of 1986 (26 U.S.C. s.2041(b)(2) or 26 U.S.C. s.2514(e)), or section 2503(b) of the

federal Internal Revenue Code of 1986 (26 U.S.C. s.2503(b)), in each case as in effect on the

effective date of this act, or as later amended.

3B:31-40. Overdue Distribution.

a. For the purposes of this section, “mandatory distribution” means a distribution of income

or principal that the trustee is required to make to a beneficiary under the terms of the trust,

including a distribution upon termination of the trust. The term excludes a distribution subject to

the exercise of the trustee’s discretion, regardless of whether the terms of the trust (1) include a

support or other standard to guide the trustee in making distribution decisions, or (2) provide

that the trustee “may” or “shall” make discretionary distributions, including distributions

pursuant to a support or other standard.

b. Except as otherwise provided in section 1 of P.L.1996, c.41 (C.3B:11-4.1), whether or

not a trust contains a spendthrift provision, a creditor or assignee of a beneficiary may reach a

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mandatory distribution of income or principal, including a distribution upon termination of the

trust, if the trustee has not made the distribution to the beneficiary within a reasonable time after

the mandated distribution date.

3B:31-41. Personal Obligations of Trustee.

Trust property is not subject to personal obligations of the trustee, even if the trustee becomes

insolvent.

ARTICLE 5

REVOCABLE TRUSTS

3B:31-42. Capacity of Settlor of Revocable Trust.

The capacity required to create, amend, revoke, or add property to a revocable trust, or to

direct the actions of the trustee of a revocable trust, is the same as that required to make a will.

3B:31-43. Revocation or Amendment of Revocable Trust.

a. Unless the terms of a trust expressly provide that the trust is irrevocable, or that it is

proved by clear and convincing evidence that the settlor intended for it to be irrevocable, the

settlor may revoke or amend the trust. This subsection does not apply to a trust created under an

instrument executed before the effective date of this act.

b. If a revocable trust is created or funded by more than one settlor:

(1) to the extent the trust consists of community property, the trust may be revoked by either

spouse or partner in a civil union acting alone but may be amended only by joint action of both

spouses or partners; and

(2) to the extent the trust consists of property other than community property, each settlor

may revoke or amend the trust with regard to the portion of the trust property attributable to that

settlor's contribution.

c. The settlor may revoke or amend a revocable trust:

(1) by substantial compliance with a method provided in the terms of the trust; or

(2) if the terms of the trust do not provide a method or the method provided in the terms is

not expressly made exclusive, by:

(a) executing a later will or codicil that expressly refers to the trust or specifically devises

property that would otherwise have passed according to the terms of the trust; or

(b) any other writing manifesting clear and convincing evidence of the settlor's intent.

d. Upon revocation of a revocable trust, the trustee shall deliver the trust property to the

settlor as the settlor directs.

e. A settlor's powers with respect to revocation, amendment, or distribution of trust property

may be exercised by an agent under a power of attorney only to the extent expressly authorized

by the terms of the trust and the power.

f. A guardian of the property of the settlor may exercise a settlor's powers with respect to

revocation, amendment, or distribution of trust property only with the approval of the court

supervising the guardianship.

g. A trustee who does not know that a trust has been revoked or amended is not liable to the

settlor or settlor's successors in interest for distributions made and other actions taken on the

assumption that the trust had not been amended or revoked.

3B:31-44. Settlor's Powers.

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While a trust is revocable, rights of the beneficiaries are subject to the control of, and the

duties of the trustee are owed exclusively to, the settlor.

3B:31-45. Limitation on Action Contesting Validity of Revocable Trust; Distribution of

Trust Property.

a. A person may commence a judicial proceeding to contest the validity of a trust that was

revocable at the settlor's death within the earlier of:

(1) Three years after the settlor's death; or

(2) Four months, in the case of a resident, or six months, in the case of a nonresident, after

the trustee sent the person a copy of the trust instrument and a notice informing the person of the

trust's existence, of the trustee's name and address, and of the time allowed for commencing a

proceeding.

b. Upon the death of the settlor of a trust that was revocable at the settlor's death, the trustee

may proceed to distribute the trust property in accordance with the terms of the trust. The trustee

is not subject to liability for doing so unless:

(1) the trustee knows of a pending judicial proceeding contesting the validity of the trust; or

(2) a potential contestant has notified the trustee in writing of a possible judicial proceeding

to contest the validity of the trust and the trustee has received written notice of a judicial

proceeding commenced within 90 days after the contestant sent the notification.

c. A beneficiary of a trust that is determined to have been invalid is liable to return any

distribution received.

ARTICLE 6

OFFICE OF TRUSTEE

3B:31-46. Accepting or Declining Trusteeship.

a. Except as otherwise provided in subsection c. of this section, a person designated as

trustee accepts the trusteeship:

(1) in the case of a testamentary trustee or substituted testamentary trustee, as provided in

N.J.S.3B:11-2, and

(2) in the case of any other trustee,

(a) by substantially complying with a method of acceptance provided in the terms of the

trust; or

(b) if the terms of the trust do not provide a method or the method provided in the terms is

not expressly made exclusive, by accepting delivery of the trust property, exercising powers or

performing duties as trustee, or otherwise indicating acceptance of the trusteeship.

b. A person designated as trustee who has not yet accepted the trusteeship may renounce the

trusteeship. A designated trustee who does not accept the trusteeship within a reasonable time

after knowing of the designation is deemed to have renounced the trusteeship.

c. A person designated as trustee, without accepting the trusteeship, may:

(1) act to preserve the trust property if, within a reasonable time after acting, the person

sends a renunciation of the trusteeship to the settlor or, if the settlor is dead or lacks capacity, to

the qualified beneficiaries and to any designated successor trustee; and

(2) inspect or investigate trust property to determine potential liability under environmental

or other law or for any other purpose.

3B:31-47. Trustee's Bond.

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a. A trustee shall give bond to secure performance of the trustee's duties as prescribed by

N.J.S.3B:15-1 et seq. if the court finds that a bond is needed to protect the interests of the

beneficiaries or is required by the terms of the trust and the court has not dispensed with that

requirement.

b. Unless otherwise directed by the court, the cost of the bond is an expense of the trust.

3B:31-48. Co-trustees.

a. Co-trustees who are unable to reach a unanimous decision may act by majority decision.

A dissenting trustee who joins in carrying out a decision of the majority but expresses his dissent

in writing promptly to his co-trustees shall not be liable for the act of the majority.

b. If a vacancy occurs in a co-trusteeship, the remaining co-trustees shall act for the trust

unless the trust instrument provides otherwise.

c. A co-trustee shall participate in the performance of a trustee's function unless the co-

trustee is unavailable to perform the function because of absence, illness, disqualification under

other law, or other temporary incapacity or the co-trustee has properly delegated the performance

of the function to another trustee.

d. If a co-trustee is unavailable to perform duties because of absence, illness,

disqualification under other law, other temporary incapacity, or a vacancy remains unfilled and

prompt action is necessary to achieve the purposes of the trust or to avoid injury to the trust

property, the remaining co-trustee or a majority of the remaining co-trustees shall act for the

trust.

e. A trustee may not delegate to a co-trustee the performance of a function the settlor

reasonably expected the trustees to perform jointly. Unless a delegation was irrevocable, a

trustee may revoke a delegation previously made.

f. A trustee who does not join in an action of a co-trustee or co-trustees because of absence,

illness, disqualification or other temporary incapacity shall not be liable for that action.

g. Notwithstanding subsection a. or f. of this section, every trustee shall exercise reasonable

care to:

(1) prevent a co-trustee from committing a breach of trust; and

(2) compel a co-trustee to redress a breach of trust.

3B:31-49. Vacancy in Trusteeship; Appointment of Successor.

a. A vacancy in a trusteeship occurs if:

(1) a person designated as trustee renounces the trusteeship;

(2) a person designated as trustee cannot be identified or does not exist;

(3) a trustee resigns or is discharged;

(4) a trustee is disqualified or removed;

(5) a trustee dies; or

(6) a guardian or conservator is appointed for an individual serving as trustee.

b. If one or more co-trustees remain in office, a vacancy in a trusteeship need not be filled

unless the trust instrument provides otherwise. A vacancy in a trusteeship shall be filled if the

trust has no remaining trustee.

c. A vacancy in a trusteeship of a noncharitable trust that is required to be filled shall be

filled in the following order of priority:

(1) by a person designated pursuant to the terms of the trust to act as successor trustee;

(2) by a procedure established pursuant to the terms of the trust to appoint a successor

trustee;

(3) by a person appointed by unanimous agreement of the qualified beneficiaries; or

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(4) by a person appointed by the court.

d. A vacancy in a trusteeship of a charitable trust that is required to be filled shall be filled

in the following order of priority:

(1) by a person designated pursuant to the terms of the trust to act as successor trustee; or

(2) by a person appointed by the court.

e. Whether or not a vacancy in a trusteeship exists or is required to be filled, the court may

appoint an additional trustee or special fiduciary whenever the court considers the appointment

desirable for the administration of the trust.

f. A person appointed to fill a vacancy in a trusteeship shall have all the powers and

discretions of the original trustee.

3B:31-50. Resignation of Trustee.

a. A trustee may resign:

(1) upon at least 30 days' notice to the qualified beneficiaries, the settlor, if living, all co-

trustees, and the trustee or trustees, if any, designated pursuant to the terms of the trust to

succeed the resigning trustee; or

(2) with the approval of the court.

b. In approving a resignation, the court may issue orders and impose conditions reasonably

necessary for the protection of the trust property.

c. Any liability of a resigning trustee or of any sureties on the trustee's bond for acts or

omissions of the trustee is not discharged or affected by the trustee's resignation.

3B:31-51. Removal of Trustee.

a. The settlor, a co-trustee, or a beneficiary may request the court to remove a trustee, or a

trustee may be removed by the court on its own initiative.

b. The court may remove a trustee for any of the reasons stated in N.J.S.3B:14-21.

c. Pending a final decision on a request to remove a trustee, or in lieu of or in addition to

removing a trustee, the court may order such appropriate relief as may be necessary to protect the

trust property or the interests of the beneficiaries.

3B:31-52. Delivery of Property by Former Trustee.

a. Unless a co-trustee remains in office or the court otherwise orders, and until the trust

property is delivered to a successor trustee or other person entitled to it, a trustee who has

resigned or been removed has the duties of a trustee and the powers necessary to protect the trust

property.

b. A trustee who has resigned or been removed shall proceed expeditiously to deliver the

trust property within the trustee's possession to the co-trustee, successor trustee, or other person

entitled to it, but a resigning trustee may retain a reasonable reserve for the costs of finalizing

that trustee’s administration of the trust.

3B:31-53. Reimbursement of Expenses.

a. In addition to the compensation allowed by N.J.S.3B:18-2 et seq., a trustee is entitled to

be reimbursed out of the trust property for:

(1) expenses that were properly incurred in the administration of the trust; and

(2) to the extent necessary to prevent unjust enrichment of the trust, expenses that were not

properly incurred in the administration of the trust.

b. An advance by a trustee of money or other property for the protection of the trust gives

rise to a lien against trust property to secure reimbursement.

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ARTICLE 7

DUTIES AND POWERS OF TRUSTEE

3B:31-54. Duty to Administer Trust.

Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in

accordance with its terms and purposes and the interests of the beneficiaries, and in accordance

with this act and other applicable law.

3B:31-55. Duty of Loyalty.

a. A trustee shall administer the trust with undivided loyalty to and solely in the best

interests of the beneficiaries.

b. Subject to the rights of persons dealing with or assisting the trustee as provided in

N.J.S.3B:14-37, a sale, encumbrance, or other transaction involving the investment or

management of trust property entered into by the trustee for the trustee's own personal account or

which is otherwise affected by a conflict between the trustee's fiduciary and personal interests is

voidable by a beneficiary affected by the transaction unless:

(1) the transaction was authorized by the terms of the trust;

(2) the transaction was approved by the court;

(3) the beneficiary did not commence a judicial proceeding within the time allowed by

N.J.S.3B:31-74;

(4) the beneficiary consented to the trustee's conduct, ratified the transaction, or released the

trustee in compliance with N.J.S.3B:31-78; or

(5) the transaction involves a contract entered into or a claim acquired by the trustee before

the person became a trustee.

c. A sale, encumbrance, or other transaction involving the investment or management of

trust property is presumed to be affected by a conflict between personal and fiduciary interests if

it is entered into by the trustee with:

(1) the trustee's spouse or partner in a civil union;

(2) the trustee's parents, parents’ descendants, or the spouse or partner in a civil union of any

of the foregoing;

(3) an agent, accountant, or attorney of the trustee; or

(4) a corporation or other person or enterprise in which the trustee, or a person that owns a

significant interest in the trustee, has an interest that might affect the trustee's judgment.

d. A transaction between a trustee and a beneficiary that does not concern trust property but

that occurs during the existence of the trust or while the trustee retains significant influence over

the beneficiary and from which the trustee obtains an advantage attributable to the existence of

the trust is voidable by the beneficiary if the beneficiary establishes that the transaction was

unfair to the beneficiary.

e. A transaction not concerning trust property in which the trustee engages in the trustee's

individual capacity involves a conflict between personal and fiduciary interests if the transaction

concerns an opportunity properly belonging to the trust.

f. In voting shares of stock of a corporation or in exercising powers of control over similar

interests in other forms of enterprise, the trustee shall act in the best interests of the beneficiaries

and shall vote to elect or appoint directors or other managers who will manage the corporation or

enterprise in the best interests of the beneficiaries.

g. This section does not preclude the following transactions, if fair to the beneficiaries:

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(1) an agreement between a trustee and a beneficiary relating to the appointment or

compensation of the trustee;

(2) payment of reasonable compensation to the trustee;

(3) a transaction between the trust and another trust, decedent's estate, guardianship,

conservatorship, or other fiduciary relationship of which the trustee is a fiduciary or in which a

beneficiary has an interest;

(4) a deposit of trust money in a regulated financial-service institution operated by or

affiliated with the trustee; or

(5) an advance by the trustee of money for the protection of the trust.

h. The court may appoint a special fiduciary to make decisions with respect to any proposed

transaction that might violate this section if entered into by the trustee.

3B:31-56. Duty of Impartiality.

If a trust has two or more beneficiaries, the trustee shall act impartially in investing,

managing, and distributing the trust property, giving due regard to the beneficiaries' respective

interests.

3B:31-57. Duty of Prudent Administration.

A trustee shall administer the trust as a prudent person would, by considering the purposes,

terms, distributional requirements, and other circumstances of the trust. In satisfying this

standard, the trustee shall exercise reasonable care, skill, and caution.

3B:31-58. Costs of Administration.

In administering a trust, the trustee may incur only costs that are appropriate and reasonable

in relation to the trust property, the purposes of the trust, and the skills of the trustee.

3B:31-59. Duty to Use Special Skills.

A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's

representation that the trustee has special skills or expertise, has a duty to use those special skills

or expertise.

3B:31-60. Delegation by Trustee.

a. A trustee may delegate ministerial, administrative and management duties and powers

that a prudent trustee of comparable skills could properly delegate under the circumstances.

b. The trustee shall exercise reasonable care, skill, and caution in:

(1) selecting an agent;

(2) establishing in writing the scope and terms of the delegation, consistent with the purposes

and terms of the trust; and

(3) periodically reviewing the agent's actions in order to monitor the agent's performance and

compliance with the terms of the delegation.

c. A trustee shall provide reasonable written notice to the qualified beneficiaries on each

occasion upon which the trustee delegates duties pursuant to this section, including the identity

of the agent.

d. A trustee who complies with subsections b. and c. of this section is not liable to the

beneficiaries or to the trust for an action of the agent to whom the function was delegated.

e. In performing a delegated function, the agent shall owe to the trustee and the

beneficiaries the same duties as the fiduciary and shall be held to the same standards as the

fiduciary.

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f. By accepting a delegation of powers or duties from the trustee of a trust that is subject to

the law of this State, an agent submits to the jurisdiction of the courts of this State, even if the

delegation agreement provides otherwise.

3B:31-61. Powers to Direct.

a. While a trust is revocable, the trustee may follow a direction of the settlor that is contrary

to the terms of the trust.

b. If the terms of a trust confer upon a person other than the settlor of a revocable trust the

power to direct certain actions of the trustee, the trustee shall act in accordance with a written

exercise of the power unless the attempted exercise is contrary to the terms of the trust or the

trustee knows the attempted exercise would constitute a breach of a fiduciary duty that the

person holding the power owes to the beneficiaries of the trust.

c. The terms of a trust may confer upon a trustee or other person a power to direct the

modification or termination of the trust.

d. A person, other than a beneficiary, who holds a power to direct is required to act in good

faith with regard to the purposes of the trust and the interests of the beneficiaries. The holder of

a power to direct is liable for any loss that results from the holder’s failure to act in good faith.

3B:31-62. Powers to Direct Investment Functions.

a. When one or more persons are given authority by the terms of a governing instrument to

direct, consent to or disapprove a fiduciary's actual or proposed investment decisions, such

persons shall be considered to be investment advisers and fiduciaries when exercising such

authority unless the governing instrument otherwise provides.

b. If a governing instrument provides that a fiduciary is to follow the direction of an

investment adviser, and the fiduciary acts in accordance with such a direction, then except in

cases of willful misconduct or gross negligence on the part of the fiduciary so directed, the

fiduciary shall not be liable for any loss resulting directly or indirectly from any such act.

c. If a governing instrument provides that a fiduciary is to make decisions with the consent

of an investment adviser, then except in cases of willful misconduct or gross negligence on the

part of the fiduciary, the fiduciary shall not be liable for any loss resulting directly or indirectly

from any act taken or omitted as a result of such investment adviser's failure to provide such

consent after having been requested to do so by the fiduciary.

d. For purposes of this section, "investment decision" means with respect to any investment,

the retention, purchase, sale, exchange, tender or other transaction affecting the ownership

thereof or rights therein and with respect to nonpublicly traded investments, the valuation

thereof, and an adviser with authority with respect to such decisions is an investment adviser.

e. Whenever a governing instrument provides that a fiduciary is to follow the direction of an

investment adviser with respect to investment decisions, then, except to the extent that the

governing instrument provides otherwise, the fiduciary shall have no duty to:

(1) Monitor the conduct of the investment adviser;

(2) Provide advice to the investment adviser or consult with the investment adviser; or

(3) Communicate with or warn or apprise any beneficiary or third party concerning instances

in which the fiduciary would or might have exercised the fiduciary's own discretion in a manner

different from the manner directed by the investment adviser.

Absent clear and convincing evidence to the contrary, the actions of the fiduciary pertaining

to matters within the scope of the investment adviser's authority, such as confirming that the

investment adviser's directions have been carried out and recording and reporting actions taken at

the investment adviser's direction, shall be presumed to be administrative actions taken by the

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fiduciary solely to allow the fiduciary to perform those duties assigned to the fiduciary under the

governing instrument. Such administrative actions shall not be deemed to constitute an

undertaking by the fiduciary to monitor the investment adviser or otherwise participate in actions

within the scope of the investment adviser's authority.

3B:31-63. Control and Protection of Trust Property.

A trustee shall take reasonable steps to take control of and protect the trust property.

3B:31-64. Recordkeeping and Identification of Trust Property.

a. A trustee shall keep adequate records of the administration of the trust.

b. A trustee shall keep trust property separate from the trustee's own property.

c. Except as otherwise provided in subsection d. of this section, a trustee shall cause the

trust property to be designated so that the interest of the trust, to the extent feasible, appears in

records maintained by a party other than a trustee or beneficiary.

d. If the trustee maintains records clearly indicating the respective interests, a trustee may

invest as a whole the property of the trust with other fiduciary accounts maintained by the

trustee.

3B:31-65. Duty to Enforce and Defend Claims.

A trustee shall take reasonable steps to enforce claims of the trust and to defend claims

against the trust.

3B:31-66. Duty to Collect Trust Property and Redress Breaches of Trust.

a. A trustee shall take reasonable steps to compel a former trustee or other person to deliver

trust property to the trustee.

b. A trustee shall take reasonable steps to redress a breach of trust known to the trustee to

have been committed by a former trustee.

3B:31-67. Duty to Disclose and Discretion to Periodically Report.

a. A trustee shall keep the qualified beneficiaries of the trust reasonably informed about the

administration of the trust and of the material facts necessary for them to protect their interests.

Unless unreasonable under the circumstances, a trustee shall promptly respond to a beneficiary’s

request for information related to the administration of a trust.

b. A trustee, upon request of a beneficiary, shall promptly furnish to the beneficiary a copy

of the trust instrument.

c. A trustee seeking the protection of N.J.S.3B:31-74 may provide the beneficiaries with a

report of the trust property, liabilities, receipts, and disbursements, including the source and

amount of the trustee’s compensation, a listing of the trust assets, and, if feasible, their respective

market values.

3B:31-68. Discretionary Powers.

Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust,

including the use of such terms as “absolute,” “sole,” or “uncontrolled,” the trustee shall exercise

a discretionary power in good faith and in accordance with the terms and purposes of the trust

and the interests of the beneficiaries.

3B:31-69. General Powers of Trustee.

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a. Except as limited by section 1 of P.L.1996, c.41 (C.3B:11-4.1) and other express

statutory restrictions, a trustee, without authorization by the court, may exercise:

(1) powers conferred by the terms of the trust; or

(2) except as limited by the terms of the trust:

(a) all powers over the trust property which an unmarried competent owner has over

individually owned property;

(b) any other powers appropriate to achieve the proper investment, management, and

distribution of the trust property; and

(c) any other powers conferred by this act and by Title 3B of the New Jersey Statutes.

b. The exercise of a power is subject to the fiduciary duties prescribed by this act and by

Title 3B of the New Jersey Statutes.

3B:31-70. Distribution Upon Termination.

a. Upon the occurrence of an event terminating or partially terminating a trust, the trustee

shall proceed expeditiously to distribute the trust property to the persons entitled to it, subject to

the right of the trustee to retain a reasonable reserve for the payment of debts, expenses, and

taxes.

b. Upon termination or partial termination of a trust, the trustee may mail or deliver a

proposal for distribution to all persons who have a right to object to the proposed distribution.

The proposal shall notify all persons who have a right to object to the proposal of their right to

object and that their objection is required to be in writing and received by the trustee within 30

days after the mailing or delivery of the proposal. The right of any person to object to the

proposed distribution on the basis of the kind or value of asset he or another beneficiary is to

receive, if not waived earlier in writing, terminates if he fails to object in writing received by the

trustee within 30 days after mailing or delivery of the proposal.

ARTICLE 8

LIABILITY OF TRUSTEES AND RIGHTS OF PERSONS DEALING WITH TRUSTEE

3B:31-71. Remedies for Breach of Trust.

a. A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust.

b. To remedy a breach of trust that has occurred or may occur, the court may:

(1) compel the trustee to perform the trustee's duties;

(2) enjoin the trustee from committing a breach of trust;

(3) compel the trustee to redress a breach of trust by paying money, restoring property, or

other means;

(4) order a trustee to account;

(5) appoint a special fiduciary to take possession of the trust property and administer the

trust;

(6) suspend the trustee;

(7) remove the trustee as provided in N.J.S.3B:31-51;

(8) reduce or deny compensation to the trustee;

(9) subject to N.J.S.3B:14-37, void an act of the trustee, impose a lien or a constructive trust

on trust property, or trace trust property wrongfully disposed of and recover the property or its

proceeds; or

(10) order any other appropriate relief.

3B:31-72. Damages for Breach of Trust.

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a. A trustee who commits a breach of trust is liable to the beneficiaries affected for the

greater of:

(1) the amount required to restore the value of the trust property and trust distributions to

what they would have been had the breach not occurred; or

(2) the profit the trustee made by reason of the breach.

b. Except as otherwise provided in this subsection, if more than one trustee is liable to the

beneficiaries for a breach of trust, a trustee is entitled to contribution from the other trustee or

trustees based on the comparative degree of culpability for the breach. However, a trustee who

committed the breach in bad faith or with reckless indifference to the purposes of the trust or the

interests of the beneficiaries is not entitled to contribution from a trustee who was not guilty of

such conduct. A trustee who received a benefit from the breach of trust is not entitled to

contribution from another trustee to the extent of the benefit received.

3B:31-73. Damages in Absence of Breach.

a. A trustee is accountable to an affected beneficiary for any profit made by the trustee

arising from the administration of the trust, even absent a breach of trust, except where the

interest in the transaction involved is fully disclosed to the beneficiary and consent is freely

given.

b. Absent a breach of trust, a trustee is not liable to a beneficiary for a loss or depreciation

in the value of trust property or for not having made a profit.

3B:31-74. Limitation of Action Against Trustee.

a. A beneficiary may not commence a proceeding against a trustee for breach of trust more

than six months after the date the beneficiary or a representative of the beneficiary was sent a

report that adequately disclosed the existence of a potential claim for breach of trust and

informed the beneficiary of the time allowed for commencing a proceeding.

b. A report adequately discloses the existence of a potential claim for breach of trust if it

provides sufficient information so that the beneficiary or representative knows of the potential

claim or should have inquired into its existence.

c. If subsection a. of this section does not apply, a judicial proceeding by a beneficiary

against a trustee for breach of trust may be commenced only within five years after the first to

occur of:

(1) the removal, resignation, or death of the trustee;

(2) the termination of the beneficiary's interest in the trust; or

(3) the termination of the trust.

Notwithstanding the foregoing, this subsection shall not operate to bar any proceeding by a

beneficiary until five years after such beneficiary: (a) has attained majority; (b) has knowledge of

the existence of the trust; and (c) has knowledge that such beneficiary is or was a beneficiary of

the trust.

d. For purposes of subsection a. of this section, a beneficiary is deemed to have been sent a

report if:

(1) in the case of a beneficiary having capacity, it is sent to the beneficiary; or

(2) in the case of a beneficiary who under article 2 of this act may be represented and bound

by another person, if it is received by his representative.

e. This section does not preclude an action to recover for fraud or misrepresentation related

to the report.

3B:31-75. Reliance on Trust Instrument.

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A trustee who acts in reasonable reliance on the terms of the trust as expressed in the trust

instrument is not liable to a beneficiary for a breach of trust to the extent the breach resulted from

the reliance.

3B:31-76. Event Affecting Administration or Distribution.

If the happening of an event, including marriage, divorce, performance of educational

requirements, or death, affects the administration or distribution of a trust, a trustee who has

exercised reasonable care to ascertain the happening of the event is not liable for a loss resulting

from the trustee's lack of knowledge.

3B:31-77. Exculpation of Trustee.

a. A term of a trust relieving a trustee of liability for breach of trust is unenforceable to the

extent that it:

(1) relieves the trustee of liability for breach of trust committed in bad faith or with reckless

indifference to the purposes of the trust or the interests of the beneficiaries; or

(2) was inserted as the result of an abuse by the trustee of a fiduciary or confidential

relationship to the settlor.

b. An exculpatory term drafted or caused to be drafted by the trustee is invalid as an abuse

of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is

fair under the circumstances and that its existence and contents were adequately communicated

to the settlor.

3B:31-78. Beneficiary's Consent, Release, or Ratification.

A trustee is not liable to a beneficiary for breach of trust if the beneficiary, while having

capacity, consented to the conduct constituting the breach, released the trustee from liability for

the breach, or ratified the transaction constituting the breach, unless:

a. the consent, release, or ratification of the beneficiary was induced by improper conduct of

the trustee; or

b. at the time of the consent, release, or ratification, the beneficiary did not know of the

beneficiary's rights or of the material facts relating to the breach.

3B:31-79. Limitation on Personal Liability of Trustee.

a. Except as otherwise provided in the contract, a trustee is not personally liable on a

contract properly entered into in the trustee's fiduciary capacity in the course of administering the

trust if the trustee in the contract disclosed the fiduciary capacity.

b. A trustee is personally liable for torts committed in the course of administering a trust, or

for obligations arising from ownership or control of trust property, including liability for

violation of environmental law, only if the trustee is personally at fault.

c. A claim based on a contract entered into by a trustee in the trustee's fiduciary capacity, on

an obligation arising from ownership or control of trust property, or on a tort committed in the

course of administering a trust, may be asserted in a judicial proceeding against the trustee in the

trustee's fiduciary capacity, whether or not the trustee is personally liable for the claim.

3B:31-80. Interest as General Partner.

a. Except as otherwise provided in subsection c. of this section or unless personal liability is

imposed in the contract, a trustee who holds an interest as a general partner in a general or

limited partnership is not personally liable on a contract entered into by the partnership after the

trust's acquisition of the interest if the fiduciary capacity was disclosed in the contract or in a

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statement previously filed pursuant to the “Uniform Partnership Act (1996),” P.L.2000, c.161

(C.42:1A-1 et seq.) or the “Uniform Limited Partnership Law (1976),” P.L.1983, c.489

(C.42:2A-1 et seq.).

b. Except as otherwise provided in subsection c. of this section, a trustee who holds an

interest as a general partner is not personally liable for torts committed by the partnership or for

obligations arising from ownership or control of the interest unless the trustee is personally at

fault.

c. The immunity provided by this section does not apply if an interest in the partnership is

held by the trustee in a capacity other than that of trustee or is held by the trustee's spouse or

partner in a civil union or one or more of the trustee's descendants, siblings, or parents, or the

spouse or partner in a civil union of any of them.

d. If the trustee of a revocable trust holds an interest as a general partner, the settlor is

personally liable for contracts and other obligations of the partnership as if the settlor were a

general partner.

3B:31-81. Certification of Trust.

a. Instead of furnishing a copy of the trust instrument to a person other than a beneficiary,

the trustee may furnish to the person a certification of trust containing the following information:

(1) that the trust exists and the date the trust instrument was executed;

(2) the identity of the settlor;

(3) the identity and address of the currently acting trustee;

(4) the powers of the trustee;

(5) the revocability or irrevocability of the trust and the identity of any person holding a

power to revoke the trust;

(6) the authority of co-trustees to sign and whether all or less than all are required in order to

exercise powers of the trustee; and

(7) the name in which title to trust property may be taken.

b. A certification of trust shall be signed by all persons identified as currently acting as

trustee.

c. A certification of trust shall state that the trust has not been revoked, modified, or

amended in any manner that would cause the representations contained in the certification of

trust to be incorrect.

d. A certification of trust need not contain the dispositive terms of a trust.

e. A recipient of a certification of trust may require the trustee to furnish copies of those

excerpts from the original trust instrument and later amendments which designate the trustee and

confer upon the trustee the power to act in the pending transaction.

f. A person who acts in reliance upon a certification of trust without knowledge that the

representations contained therein are incorrect is not liable to any person for so acting and may

assume without inquiry the existence of the facts contained in the certification. Knowledge of

the terms of the trust may not be inferred solely from the fact that a copy of all or part of the trust

instrument is held by the person relying upon the certification.

g. A person making a demand for the trust instrument in addition to a certification of trust or

excerpts is liable for damages if the court determines that the person did not act in good faith in

demanding the trust instrument.

h. This section does not limit the right of a person to obtain a copy of the trust instrument in

a judicial proceeding concerning the trust.

ARTICLE 9

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MISCELLANEOUS PROVISIONS

3B:31-82. Electronic Records and Signatures.

The provisions of this act governing the legal effect, validity, or enforceability of electronic

records or electronic signatures, and of contracts formed or performed with the use of such

records or signatures, conform to the requirements of section 102 of the “Electronic Signatures in

Global and National Commerce Act” (15 U.S.C. s.7002), and supersede, modify, and limit the

requirements of that act.

3B:31-83. Severability Clause.

If any provision of this act or its application to any person or circumstances is held invalid,

the invalidity does not affect other provisions or applications of this act which can be given

effect without the invalid provision or application, and to this end the provisions of this act are

severable.

3B:31-84. Application to Existing Relationships.

a. Except as otherwise provided in this act:

(1) this act applies to all trusts created before, on, or after its effective date;

(2) this act applies to all judicial proceedings concerning trusts commenced on or after its

effective date;

(3) this act applies to judicial proceedings concerning trusts commenced before its effective

date unless the court finds that application of a particular provision of this act would

substantially interfere with the effective conduct of the judicial proceedings or prejudice the

rights of the parties, in which case the particular provision of this act does not apply and the

superseded law applies;

(4) any rule of construction or presumption provided in this act applies to trust instruments

executed before the effective date of the act unless there is clear indication of a contrary intent in

the terms of the trust; and

(5) an act done before the effective date is not affected by this act.

b. If a right is acquired, extinguished, or barred upon expiration of a prescribed period that

has commenced to run under any other statute before the effective date of the act, that statute

continues to apply to the right even if that statute has been repealed or superseded by this act.

2. N.J.S.3B:14-37 is amended to read as follows:

Protection of persons assisting or dealing with fiduciary.

3B:14-37. Protection of persons assisting or dealing with fiduciary.

a. A person other than a beneficiary who in good faith either assists a fiduciary or deals

with him for value is protected as if the fiduciary properly exercised his power.

b. The fact that a person knowingly deals with a fiduciary does not alone require the

person to inquire into the existence of a power or the propriety of its exercise.

c. Except as to real property specifically devised by will, no provision in any will, trust

or order of court purporting to limit the power of a fiduciary is effective except as to persons

with actual knowledge thereof.

d. A person who in good faith pays, transfers or delivers to a fiduciary money or other

property is not responsible for the proper application thereof by the fiduciary; and any right

or title acquired from the fiduciary in consideration of the payment, transfer or delivery is not

invalid in consequence of a misapplication by the fiduciary.

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e. A person other than a beneficiary who in good faith assists a former trustee, or who in

good faith and for value deals with a former trustee, without knowledge that the trusteeship

has terminated is protected from liability as if the former trustee were still a trustee.

f. The protection here expressed extends to instances in which some procedural

irregularity or jurisdictional defect occurred in proceedings leading to the issuance of letters,

including a case in which the alleged decedent is found to be alive.

g. The protection here expressed is in addition to that provided by comparable

provisions of the laws relating to commercial transactions and laws simplifying transfers of

securities by fiduciaries.

Repealer.

3. The following sections are repealed:

N.J.S.3B:11-5;

N.J.S.3B:11-6;

N.J.S.3B:11-7; and

Section 1 of P.L.2001, c.144 (C.3B:11-38).

4. This act shall take effect on the 180th day following enactment.

Approved January 19, 2016.

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4:26-3. Virtual Representation of Future Interest

▪ (a) Representation by Presumptive Taker. In an action affecting property in which any person in being or unborn has or may have a future

interest other than a life or lesser estate, or where it is not known or is difficult to ascertain who is the person or class having such interest, it

shall be necessary to join as parties to the action only the person or persons who would be entitled to such property if the event or contingency terminating all present estates and successive life or lesser

estates therein had occurred on the date of the commencement of the action, and the judgment entered therein shall be binding upon all

persons, whether in being or not, who may claim the future interest in the property, unless it shall affirmatively appear in the action that there exists a conflict of interest between the persons so joined and the persons not

joined. Should such conflict exist, the court may, in its discretion, appoint from among the persons then next entitled upon the occurrence of the

event or contingency, one person to represent all persons (whether in being or not) who may claim any future interest in the property.

▪ (b) Representation by Donee of Power of Appointment. Where a party to an action is the donee of a power of appointment of any type, it

shall not be necessary to join the potential or permissible appointees of the power or takers in default, and the judgment entered therein shall be binding upon the appointees, unless it shall affirmatively appear in the

action that there exists a conflict of interest between the donee of the power and the appointees.

▪ (c) Representation by Other Parties or Guardians. In an action in

which the interests of a person not in being are or may be affected or in

which it is not known or is difficult to ascertain who is the person or class affected thereby and as to which paragraphs (a) and (b) are inapplicable

because of the lack of a representative as therein described or because of the nature of the interest involved, the court, in its discretion, may appoint a party to the action to represent such persons, and the judgment

entered therein shall be binding upon the persons so represented. If, however, it shall appear that no party to the action adequately represents

the interests of such persons, the court shall appoint a guardian ad litem to represent them.

▪ (d) Joinder of Additional Parties. Notwithstanding paragraphs (a), (b) and (c) hereof, the court, in its discretion, may require the joinder of

additional persons.

Note: Source-R.R. 4:30-3. Paragraph (b) amended July 14, 1992 to be effective

September 1, 1992.

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Social Security, (Old-Age, Survivors and Disability Insurance (OASDI)) and estate planning

By Jack F. Meola, CPA, JD, LLM

Estate Planning - One of the most important components of estate planning is ensuring that you have an

in-depth understanding of your assets. Not only is this important at the onset of estate planning, but it is

an important factor to consider when looking down the road to the future. With lawmakers painting a

sometimes bleak and uncertain future for social security, many individuals are looking at ways to plan

for their financial future in case they are unable to rely solely on social security. While this is certainly a

wise financial move, discounting social security’s impact on your estate can be a costly mistake.

As it stands now, social security provides a steady stream of monthly income when conditions for its

receipt are met. That’s not likely to drastically change anytime soon. Given that the current projected

life expectancy for those turning 65 this year is approximately 85, those monthly payments could add up

to around $1 million over the terms of period of installments. A recent article from MarketWatch.com

reminds us that we should not discount the impact social security can have on our estates, and

therefore requires an experienced estate planning attorney and accountant familiar with social security

so that they can help a client understand how social security benefits can affect the estate.

One of the biggest reducers of wealth is catastrophic health care costs. Long-term medical care can

cause a significant reduction in the size of your estate, even if your estate is quite large. By using social

security benefits to pay for long-term care insurance and/or by investing social security benefits, you can

provide financial security for yourself and your loved ones in case of any debilitating disease. Chronic

medical problems can plague older individuals, and the care associated with such conditions can drain

your financial security in a matter of months. By using social security benefits to potentially help offset

the costs on long-term care, you position yourself to better handle the costs of such serious medical

conditions before they arise.

Background -Social Security, (Old-Age, Survivors and Disability Insurance (OASDI), 42 U.S.C. §§ 401 et

seq. pays benefits to almost 60 million Americans, including retirement benefits to 49 million who have

qualified for benefits by paying payroll taxes. It even pays your clients who are extremely wealthy and

therefore can have accumulations that add to the overall estate.

Benefits to Three Groups

Social Security pays benefits to three groups: retired workers; disabled workers; and derivative spousal,

survivor and family benefits. Social Security retirement benefits are essentially a lifetime annuity

adjusted annually for inflation by cost-of-living adjustments. In your projections of asset accumulation

do you consider this an asset especially where there is a long life expectancy.

How do you become eligible for social security?

Social Security Wage Tax

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Eligibility for Social Security benefits arises from a worker (the term used by the Social Security statute)

having worked in “covered employment” and paid the Social Security wage tax. Covered employment

refers to employment that is subject to the Social Security wage tax, which includes almost all

employment in the private sector.

1. To receive retirement benefits, anyone born after 1928 must have at least 40 “quarters of

coverage.” 42 U.S.C. § 414(a)(2). Absent the 40 quarters of coverage, no retirement benefits are

paid. The worker must have earned $1,300 per quarter (in 2017). The worker’s total wages for

the year are divided by four with the result determining how many quarters of coverage will be

credited.

2. Personal Earning and Benefit Estimate Statement-Individuals with questions about their

quarters of coverage can request a “Personal Earning and Benefit Estimate Statement” from the

Social Security Administration. Go on-line to www.socialsecurity.gov.The report will also show

the earnings reported each year. Mistakes in the report can be corrected by a showing of tax

returns and Form W-2 earnings statements.

Important Concepts

Full Retirement Age - Individuals are eligible for their “primary insurance account” (PIA) at “full

retirement age,” which is based upon the year of birth. Those born in 1943 to 1954, have a full

retirement age of 66. Those born in 1955 or later have a full retirement age as follows:

1955 66 and 2 months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and 8 months 1959 66 and 10 months After 1959 67 years Where to Apply To receive retirement benefits, the individual must apply for them with the Social Security Administration, either in person at a local Social Security office or on-line. Early Retirement Options and the Earnings Test- Claim Benefits at Age 62 A worker may claim benefits as early as age 62, but doing so permanently reduces benefits compared to taking them at their full retirement age. The amount of the reduction is 5/9 of 1% per month for the first 36 months before the age of full retirement and 5/12 of 1% for each additional month thereafter or a permanent reduction of 25% compared to what would have been paid had the worker waited until age 66. The effect of claiming benefits at different ages is demonstrated by the maximum benefit that can be paid. In 2015, a worker was eligible for the maximum annual benefit at age 62 of $2,025 per month or $24,300 per year; for a worker age 66 it was $2,663 or $31,956; and for a worker age 70 it was $3,501 or $42,012.

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Social Security Earnings Test A worker who claims benefits before full retirement age is subject to the Social Security earnings test that lowers benefits based on the worker’s earned income. 42 U.S.C. § 403. For those under full retirement age, the earnings test does not apply to the first $16,920 of earnings (in 2017). Any reduction in benefits due to excess earnings only effects the benefits paid in the year of the excess earnings. Benefits paid in later years are not affected. Earnings above the exempt amount reduce the recipient’s benefits by $1 for every $2 of earning. Excess Earnings and Full Retirement Age In the year that the recipient reaches full retirement age the earnings threshold is $44,880 (in 2017). Only earnings in the months before reaching normal retirement age count against this limit. Earning above this amount reduce the recipient’s benefits by $1 for every $3 of earnings. Earning after the date they turn 66 have no effect on benefits. In the first year after claiming benefits before the full retirement age, and only for the first year, the earnings test is calculated on a monthly, not an annual, basis. The total earnings for the year are divided by 12 and that number establishes the monthly excess earning limit but only for the months in which income was earned. For example, if the individual turned age 62 on January 1, but began collecting benefits in May, earnings from January through April would not affect benefits paid in May or thereafter. Earnings Definition “Earnings” refers only to income from the performance of personal services whether performed as an employee or an independent contractor. Deferred compensation is excluded when received if it was earned prior to the year the worker claimed Social Security benefits. Royalties are also excluded if the patent or copyright was obtained before the claim for benefits, but if the patent or copyright was issued after the commencement of benefits, the royalties are counted as earnings. Recalculation of Benefits When the worker reaches full retirement age, the reduction in the monthly benefit that occurred due to claiming benefits and earning more than the exempt amount is recalculated to account for the benefit reduction caused by the excess earnings. For example, if the worker claimed benefits at age 62 and had excess earnings over the next four years that in total caused a reduction in benefits equal to six months of benefits, when reaching full retirement age, the permanent reduction in benefits thereafter will be recalculated as if the worker had claimed benefits at age 62½. The result is that the monthly benefit will be modestly increased, and, if the worker lives their actuarial life expectancy, the benefits lost to excess earnings will be recovered. Deferred Retirement Options A. After Full Retirement Age

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A worker does not have to claim benefits at full retirement age. Every month until age 70 that benefits are deferred, they are permanently increased by 0.666% or 8% per year. A worker with a full retirement age of 66 who delays claiming benefits until age 70 will receive 32% more in monthly benefits than if they had retired at age 66. There is no benefit to delaying after age 70 because there is no further benefits. When you have a guaranteed monthly income, you can make more informed choices regarding important financial matters. Knowing that monthly social security payments can be used as a safety net to at least cover basic necessities can give you more room to expand your investment portfolio without worrying that you may need to rely on funds tied up in financial transactions. This can also help you delay penalties and other fees that might be associated with withdrawing assets from your financial portfolio, including retirement accounts and other investment options. Calculation of the Benefit Amount is dependent upon a Worker’s Primary Insurance Amount or PIA. The PIA calculation is based on the worker’s “Average Indexed Monthly Earnings” or AIME, which is determined only by the worker’s earnings that were subject to the Social Security wage tax. The AIME is calculated using the highest 35 years of earnings (indexed for inflation). If the worker had fewer than 35 years of taxed earnings, the missing years are essentially included as “zero.” The AIME Is Recalculated if the worker is still working after commencing benefits, the AIME is recalculated by replacing lower earning years (or years of zero income) with higher years with the result that the worker’s benefits increase accordingly. The AIME calculation results in a higher percentage replacement of wages by benefits for lower income workers. For workers who claim benefits at age 66, the percentage of wage replacement runs from about 40% for those with a low AIME to about 25% for workers who have 35 years of taxed earnings at the maximum amount. Spousal Derivative Benefits- In addition to retirement benefits for workers, Social Security pays derivative benefits to spouses that are based upon the worker’s Primary Insurance Amount (PIA), which is the amount that the worker would receive if they elected to receive benefits at their full retirement age. The payment of derivative benefits does not reduce or otherwise affect the worker’s benefits. To be eligible for the spousal benefits the applicant must: ● be at least age 62, or have in their care a child below the age of 16, and ● be legally married and the marriage has lasted at least one year, and ● the other spouse must have begun taking his or her benefits. 42 U.S.C. § 416(b)(2). Exceptions The one year marriage rule does not apply if the individual seeking spousal benefits is the natural (biological) parent of the other spouse’s child (even if the child is deceased.) State law determines who is married including whether common law marriage is granted status as a legal marriage. The spouse of a worker who has filed for benefits is eligible for a benefit equal to 50% of the worker’s PIA as adjusted for any cost-of-living increases. 42 U.S.C. § 402(b)(2). Deemed Filing

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The spouse will receive the greater of 50% of the worker’s benefit or what the spouse would receive based on their PIA. This is called “deemed filing” because when a spouse applies for their own benefit they are “deemed” to have applied for the spousal benefit. If, for example, Cally is entitled to benefits on her work record of $1,000 a month, but $1,350 a month based on her 50% spousal benefit, she will receive $1,350 that represents a combination of her $1,000 and a $350 additional benefit based on her spouse’s earnings record. Deemed filing does not apply if the applicant receives spousal benefits based on the fact that they are caring for a child who is under age 16 or if the applicant is disabled. Restricted Application Social Security automatically pays the higher benefit amount unless the spouse files a restricted application that requests only spousal benefits. This option is only available to spouses born on or before January 1, 1954. For example, Bobby, who was born in 1951 and just turned 66, is married to Roberta, age 67 who filed for benefits when she turned age 66. She receives $3,000 a month. At age 66, Bobby is eligible for benefits of $2,100 a month. Bobby files a restricted application meaning that he is not filing for benefits based on his work record but is filing for spousal benefits based on what Roberta receives. Bobby will receive 50% of what Roberta receives or $1,500 a month. At age 70, Bobby will file for benefits based on his own work record and receive about $2,800 a month or 32% more than he would have received at age 66. By filing a restricted application, Bobby will have given up $600 a month for 48 months or $28,800. But in return, he will receive $700 a month more for life. If he lives for approximately 3 years and 5 months (or until age 73 and 5 months), he will have recovered the foregone $28,800. File and Suspend Prior to 2016, a spouse could file for benefits and then suspend them. That filing would enable the other spouse to claim spousal benefits. Meanwhile, the suspended benefits would grow by 0.666% per month. After April 29, 2016, using the “file and suspend” method no longer creates a spousal benefit. The right of a spouse to claim spousal benefits depends upon the other spouse actually receiving benefits. The spousal derivative benefit is based on the PIA of the other spouse, not the benefit amount that is being paid to the other spouse. Taking benefits before age 66 by one spouse will not reduce the spousal benefit for the other spouse, nor will commencing benefits after age 66 increase the spousal benefit. Note, however, that the spousal benefit does increase along with cost of living increases in the other spouse’s benefits. The spousal benefit also increases if the other spouse’s benefits increase because that spouse continued to work after claiming benefits and one or more of those years replaced earlier lower income years and so increased the spouse’s retirement benefits. Surviving Spousal Benefits A. Benefits Based Upon the Earnings Record of the Deceased Spouse A surviving spouse of a deceased worker has rights to benefits based upon the earnings record of the deceased worker or based on his or her own work record if that would pay greater benefits. Therefore, a surviving spouse who has reached full retirement age (currently age 66) receives benefits equal to 100% of what the deceased spouse actually received. If the deceased spouse had taken benefits early, such at

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age 62, or delayed benefits until age 70, the surviving spouse receives 100% of the reduced or increased benefits, as the case might be. The number of quarterly credits of the deceased spouse that are required for a surviving spouse to have survivor benefits depends on the age at death of the deceased spouse. No more than 40 are required. To determine the number of required credits subtract the year in which the deceased spouse turned 22 from the year of their death. For example, Curtis, now deceased, turned 22 in 1982 and died in 2012 at age 52. His surviving spouse will be eligible for benefits if he had 30 qualifying quarters, i.e. quarters in which he had sufficient wages to meet the minimum required to create a qualified quarter. There are special rules for spouses who were caring for minor children at the time of the death of the spouse. Term of Marriage The surviving spouse must have been married to the deceased spouse for at least nine months, though this requirement is waived if the deceased spouse’s death was accidental or incurred in the line of duty as an active member of the armed services. If the surviving spouse remarries before age 60, he or she is ineligible for benefits as a surviving spouse. However, if they remained married for at least one year, they are eligible for spousal benefits based on the earnings record of their new, current spouse. Remarriage by the surviving spouses after reaching age 60 will not disqualify them from surviving spouse benefits. After they have been married one year, however, Social Security will pay only whichever benefits are greater – as a surviving spouse or as a current spouse in the new marriage. Page 15-5 Benefit Claiming Strategies: Single Individual, Never Married with No Children A. Age 62 Claiming benefits can be seen as a series of decision points that first arise at age 62. At present age 62 is the most popular age at which to claim benefits, though the percentage of retirees doing so is declining. That is because there are more sophisticated workers and the fear of living much longer. B. Earnings Limit It is unwise to claim benefits at age 62 if the individual expects to continue to work and have earnings high enough to cause a reduction in the benefit amount. All earning above that limit reduce Social Security benefits by $1 for every $2 of such earnings. The effect is a “tax” of 50% on earnings above the limit. That “earnings tax” is exacerbated by a possible federal income tax on the Social Security benefits and by the imposition of the Social Security wage tax of 6.2% plus the Medicare wage tax of 1.45% on the earnings for a total of 7.65%. The cumulative effect of the taxes and reduction in Social Security benefits makes claiming benefits while continuing to work full-time an unwise choice in most cases. C. Working Part-Time or Acting as Consultant

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Claiming benefits at age 62 and working part-time or acting as consultant with earnings below the annual limit is a popular option. D. Effect of Claiming Early For the effect of claiming early assume the benefit at age 66 is $28,000, at age 62 it is $21,000 (a 25% reduction), and at age 70 it is $36,960 (a 32% increase). Assume the individual lives until age 82. Start benefits at age 62 20 years at $21,000/year = $420,000 Start benefits at age 66 16 years at $28,000/year = $448,000 Start benefits at age 70 12 years at $36,960/year = $443,520 If the time value of money is included in the calculations, the values of claiming at ages 62 and 66, as compared to claiming at age 70, are somewhat greater than the mere total of benefits collected. If the individual lives until age 92, deferring the start date of benefits until age 70 makes sense: Start benefits at age 62 30 years at $21,000/year = $630,000 Start benefits at age 66 26 years at $28,000/year = $728,000 Start benefits at age 70 22 years at $36,960/year = $813,120 If the individual dies at age 72, starting benefits at age 62 made sense. Start benefits at age 62 10 years at $21,000/year = $210,000 Start benefits at age 66 6 years at $28,000/year = $168,000 Start benefits at age 70 2 years at $36,960/year = $73,920 Life Expectancy Although current health, family history, economic status, race and gender are predictive for a group, they tell individuals very little about how long they can expect to live past age 62. The unknowable nature of life expectancy creates a risk that the individual may live a long time, which might be desirable in many respects, but it means that individuals who began Social Security benefits at age 62 will have lower total lifetime benefits. F. Long Life If Social Security benefits are perceived as insurance against the risk of living a long life without sufficient income, delaying the onset of benefits is the prudent choice for a single individual. Even an individual who retires at age 66 might be wise to wait until age 70 to claim benefits. G. When to Start Benefits Although when to start benefits depends upon a number of factors that vary from individual to individual, for a single individual, a few presumptions prevail: 1. Before Age 66 -Do not claim benefits before age 66 if your projected wages exceed the annual earnings limit.

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2. Terminally Ill- Begin benefits as soon as you can if you are diagnosed terminally ill or are very likely to die within ten years.

3. Thirty-Five Years of Highest Earnings- Because benefits are based on the 35 years of highest earnings, don’t begin benefits until you have 35 years of qualifying wages.

4. Before Age 70 - After retirement, but before age 70, delay benefits until age 70 if you have

adequate income. 5. Spend Down Savings- Spend down savings after retirement in order to permit you to defer

starting benefits. 6. Delaying Benefits - Delaying benefits from age 66 to 70 means you must live at least until age

82½ (ignoring the time value of money) to have been paid as many dollars compared to having begun benefits at age 66.

7. Unsure of Whether to Delay- If you are unsure of whether to delay past age 66, start benefits at age 68 and split the difference so that you only have to live to age 78½ to recover the benefits foregone at ages 66 and 67. 8. Begin Benefits Before Age 70 - You may want to begin benefits before age 70 if you have costly travel plans or another identifiable need for more income, with the idea that an increase in income at age 68 is more “valuable” than additional dollars received later, such as age 85. Another approach for financially secure individuals in utilizing social security benefits is to collect them as soon as you are eligible and to use those monthly payments to invest in continued financial security for you and your loved ones. While opting to collect social security when first eligible will likely result in a reduction of the monthly benefit received, if you do not depend on the monthly social security payment and instead redirect those payments to opportunities with greater financial prospects then the amount of benefit collected is less important. H. Change of Circumstances If circumstances change, there are three options. 1. Claim Benefits, But Withdraw - Claim benefits, but withdraw the claim within 12 months and pay back all amounts received. By withdrawing and paying back the benefits, the individual is treated as they never applied for benefits. 2. Suspend Benefits - A recipient can suspend benefits. Suspension does not result in any obligation to pay back benefits; it merely suspends benefits until either the individual reaches age 70 when benefits are automatically restarted or until the individual reverses the suspension and reinstates benefits. For the months that the suspension is in effect, the benefit rises by the appropriate percentage. 3. Suspend Benefits But Later Reverse the Suspension - Suspend benefits but later reverse the suspension and receive a lump sum equal to the amount of benefits foregone during the period of the suspension. The retroactive reversal causes amount of the benefit to revert to what it would have been at the time of the suspension except for any subsequent increase due to inflation. Note the individual must file and suspend. Merely not filing does not create this option. XIII. Benefit Claiming Strategies: Married Couples of Similar Ages

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A. Derivative Spousal Benefits Derivative spousal benefits complicate the timing of benefits for married couples. If a couple has been married for at least a year both are eligible for spousal benefits, although only one spouse at a time can claim spousal benefits. The spouse is entitled to a benefit equal to 50% of the primary insurance amount (PIA) of the other living spouse. A surviving spouse benefits are equal to 100% of the PIA of a deceased spouse. Both living and surviving spousal benefits are subject to age restrictions. And the spousal benefit is paid only if it exceeds what the claimant would receive in Social Security benefits on their earnings record. B. When to Claim Spousal Benefits - A husband or wife can claim spousal benefits if age 62 or older. The amount of the spousal benefit is based upon what the other spouse would receive at age 66, their full retirement age even if the other spouse has not yet reached that age. The other spouse must have applied for benefits for there to be a spousal benefit. Applying for spousal benefits before reaching full retirement age (age 66 for those born before 1955) reduces the benefits. C. Spouses Born On or Before January 1, 1954 Spouses born on or before January 1, 1954 who have reached their full retirement age, 66, can file a “restricted” application for benefits application by which the spouse files only for spousal benefits, not for benefits on his or her own earnings record. By doing so, spouses’ benefits based on their earnings record can rise every year while they collect benefits equal to one-half of their spouse’s. At age 70, the spouse files for full benefits based upon his or her own earning record. D. Spouses of Similar Age Spouses of similar age with similar earnings are usually going to collect benefits on their own work record rather than receive the spousal benefit. E. Spouses of a Similar Age with Unequal Earnings Records In the case of spouses of a similar age with unequal earnings records, the lower earning spouse may qualify for spousal benefits. Although a spouse can file for a spousal benefit at age 62, doing so permanently reduces the amount of the benefit. Unless the couple cannot financially afford to live without the younger spouse claiming at age 62, the younger spouse should wait until at least age 66 to file for benefits. Even better would be for the younger spouse to file a restricted application at age 66 and only claim spousal benefits until filing at age 70 for his or her own benefits. XIV. Benefit Claiming Strategies: Married Couples of Different Ages A. Spouses of Different Ages Spouses of different ages must carefully calculate at what years they should claim benefits. If financially feasible, the older spouse should wait and file for benefits at age 70 in order to maximize his or her benefits. If born before 1954, the younger spouse should file a restricted application for benefits at age 66 in order to claim the spousal benefit while permitting his or her own benefit to rise until age 70. If both delay claiming benefits on their earnings record until they reach age 70, the couple will maximize their annual benefits. The strategy depends upon the couple being able to afford the younger spouse collecting benefits only equal to 50% of the older spouse’s until the younger turns age 70. B. Effect of Early Claiming

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If one spouse starts benefits at age 62 that does not affect the amount of the spousal benefit of the other spouse. For example, if Ed is age 62 and has started his benefits, and his spouse, Eve is age 66, she can file a restricted application for spousal benefits and receive 50% of what Ed would receive at age 66, his full retirement age, not 50% of what he is actually receiving. At age 70, Eve will file for benefits on her own earnings record, having permitted them to rise to the maximum amount. Note that if Ed has not reached age 66, Eve must have reached her full retirement age, 66, to file for spousal benefits, otherwise she will be deemed to have filed for retirement benefits based on her own earnings record. XV. Strategy to Benefit a Surviving Spouse A. Claim Benefits at Full Retirement Age A surviving spouse who claims benefits at their full retirement age is eligible for a benefit equal to 100% of the actual amount of the benefit paid to the deceased spouse if that amount is greater than the benefit paid to the surviving spouse on his or her own earning’s record. Although a surviving spouse can claim benefits at age 60, doing so reduces the amount of benefits by a percentage amount for each month that the individual is under age 66. Waiting until full retirement age 66 avoids the penalty for claiming early and results in a benefit that is 40% higher than if claimed at age 60. The surviving spouse has the option of claiming benefits on their own earnings record at age 62 and later after reaching full retirement age of 66, claiming survivor benefits if that amount exceeds the amount of the retirement benefit that he or she began at age 62. In most cases, the better choice would be to defer claiming any benefits until age 66. B. Defer Claiming Benefits Because the survivor benefit is based upon the actual benefit that had been paid to the deceased spouse, the higher earning spouse should consider deferring benefits to age 70 in order to possibly increase the amount of the benefit for the other, surviving spouse. This strategy should be considered when the older spouse is considerably older and can be expected to predecease the younger spouse whose retirement benefits will be lower than the amount of the older spouse’s deferred benefits that began at age 70. XVI. Divorced Couples A. Derivative Benefit An individual who was married at least ten consecutive years to an individual qualified to receive Social Security benefits can receive a derivative benefit equal to 50% of that individual’s benefit amount at their full retirement age, currently age 66. When to claim the benefit should be based solely on the age and the financial need of the divorced spouse. A benefit paid to the former spouse is based on what the former spouse would receive at full retirement age (age 66 in 2016), not the actual benefit paid to the former spouse and does not depend of the former spouse having filed for benefits. The divorced spouse can claim benefits at age 62 but doing so will permanently reduce the amount of the benefit. B. Effect of Claiming The claiming of benefits by a divorced spouse based on the benefits payable to the divorced spouse does not affect the benefits paid the former spouse or their current spouse. A divorced spouse therefore

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need not be concerned about any effect on the former spouse if the divorced spouse claims benefits as a divorced spouse. C. Failure of the Former Spouse to Claim Benefits The failure of the former spouse to claim benefits does not affect the right of a divorced spouse to claim benefits. As long as the former spouse is at least age 62 and therefore eligible for benefits, and the divorce has been final for at least two years, the divorced spouse can receive Social Security benefits. If the former spouse has already reached full retirement age, 66, the two-year waiting period does not apply. Excess earnings of the former spouse that reduce his or her benefit will not reduce the derivative benefit of the divorced spouse. D. More than One Marriage If the divorced spouse had more than one marriage that lasted at least ten years, the Social Security automatically selects the former spouse whose earnings record would pay the larger benefit. Multiple divorced spouses can collect benefits based on a single former spouse’s earnings. E. Unmarried, Divorced Spouse of a Deceased Former Spouse An unmarried, divorced spouse of a deceased former spouse is eligible for survivor benefits and can file for benefits as early as age 60, but that reduces the amount of the benefit as compared to waiting until full retirement age, currently age 66. If the divorced spouse files for survivor benefits at full retirement age, the divorced spouse of the deceased worker will be treated like the spouse of a deceased worker and receive a benefit equal to that which was being paid to their former spouse at the time of death. Remarriage before age 60 terminates this benefit. Remarriage after age 60 does not, but the remarried, divorced spouse will qualify for the greater of benefits of the deceased former spouse or his or her current spouse.

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DEFENSIVE ESTATE PLANNING TO AVOID LITIGATION AND

CLAIMS AGAINST THE ATTORNEY

Lori M. McNeely, Esq.

INTRODUCTION

This section of the materials highlights a few of the most common areas in

estate planning that can lead to litigation, malpractice claims and ethics complaints,

together with practice tips on how to avoid them. Knowledge of the practice area

and applicable common law and statutory law is the best defense.

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I. THE ATTORNEY-CLIENT RELATIONSHIP

A. Whom do you represent?

As in any representation, it is important to establish exactly who is the client.

This should be clearly laid out in a retainer agreement. When a husband and wife

come in for a consultation, it is advisable to use a “DUAL REPRESENTATION”

retainer agreement. This retainer agreement advises the clients that you represent

both of them, points out that their individual interests may differ, and advises them

of the right to seek separate counsel. It also requires them to acknowledge this

advice and waive any conflict or right to privilege vis-à-vis each other. In other

words if W informs the attorney about an asset of which H is unaware, that

information will not be kept secret by the attorney. However, there are some

practitioners who prefer to hold such confidences which, if this is the case, should

be clearly delineated in the retainer agreement. From the standpoint of defending

against litigation (between parties post-mortem and as against an attorney), it is my

position that full disclosure provides the best protection.

When representing a fiduciary (guardian, attorney-in-fact, trustee, estate

representative) it is especially important to distinguish between representing John

Doe in his individual capacity and representing John Doe in a fiduciary capacity.

The outcome of many lawsuits and claims against attorneys in this area may turn

on the distinction. For example, if son comes to you with his power of attorney for

Dad seeking representation there are three possible clients: Dad, son individually,

and son in his fiduciary capacity. The problem arises when attorneys overlap this

representation. In some cases, it may make sense to have overlapping

representation if there is no litigation and/or the interests are not adverse. In the

power of attorney situation, there is the added layer of whether Dad has capacity or

not. Are you representing Dad through his son as attorney-in-fact, or son in his

capacity as fiduciary? Careful examination of the facts and circumstances of the

case, and a well-drafted retainer agreement, are essential here. And once a position

has been taken with regard to identification of the client, the attorney should not

deviate from that position.

Where children or other family members are involved in the planning, such

as in asset protection planning, care should be taken to make clear to the other

family members that you represent the testator(s) and not the children –

particularly where children are being asked to sign a care agreement or other

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agreement incidental to a transfer of assets to the children during the parents’

lifetime(s). It is important to maintain as normal an attorney-client relationship

with the testator (including privacy and confidentiality) even when a client insists

that his/her daughter/son attend a meeting. Children or other family members

should be advised before having them execute any document of their right to

consult with an independent attorney of their choosing.

B. Areas in which to proceed with caution:

1. Blended families or multiple marriage situations

2. Clients in nursing homes or hospitals

3. Cases in which the entire family is involved (parents and

children)

4. Cases in which one party requests that you draft a power of

attorney for mom/dad/whomever and appointing them as agent

5. Unusual or disparate bequests

6. Estate planning client cannot meet you in person or want to

proceed over the telephone.

7. Third parties are the ones calling to schedule appointments.

II. WHAT DUTY (IF ANY) IS OWED THE BENEFICIARY OF AN

ESTATE?

A. By the executor?

Care should be taken when advising a client on how to choose a fiduciary.

An executor is required to settle and distribute an estate as expeditiously and

efficiently as is consistent with the best interests of the estate. This includes all

debts and obligations of the estate. N.J.S.A. 3B:10-23. See also Taylor v. Errion,

137 N.J. Eq. 221 (Ch. Div. 1945). If a proposed fiduciary has financial problems

of their own, a history of wastefulness or inattention to matters, or does not get

along well with the other beneficiaries, the testator may be well advised to choose

a different fiduciary. At a minimum, beneficiaries may be suspicious and

distrustful of this person from the onset. Litigation is often spawned by mere

distrust (even without evidence of any wrongdoing).

B. By the attorney representing the estate/executor?

In many cases, Courts have been reluctant to extend the duty of an estate

attorney or estate planning attorney to beneficiaries. However, practitioners should

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still be aware of pitfalls that can nevertheless lead to malpractice claims based on

general negligence grounds. In Estate of Albanese v. Lolio, 393 N.J. Super. 355

(App. Div. 2007) the Appellate Court “declined to extend the duty an attorney

owed to third parties who are beneficiaries of an estate the attorney represents, or

to hold that the attorney has an obligation to consider and advise all beneficiaries

of the tax consequences of a bequest or legacy”. Once again, this holding seems to

emphasize the importance of establishing right up front who is the client. In

dealing with beneficiaries or potential beneficiaries who may call “to ask a quick

question” it is wise to begin such communications with the disclaimer “I cannot

give you legal advice…” if you have to speak to them at all.

In an earlier case, Barner v. Sheldon, 292 N.J. Super. 258 (Law Div. 1995),

an attorney prepared decedent’s estate plan and was retained by the executor

(surviving spouse) after decedent’s death to represent her in the administration.

The Court held that the attorney owed no duty to the beneficiaries to advise them

of their right to disclaim their share of the estate (which would have resulted in

substantial tax savings). The attorney for the executor represents the fiduciary and

does not owe a duty to the beneficiaries.

But in IMO Gerald C. Kelly an attorney was disbarred for a conflict

stemming from acting as attorney in one estate and as executor of a related estate.

C. Scrivener Acting as Executor

1. What if the client for whom you are drafting a Will asks you to serve

as executor? Although it is not expressly prohibited by Statute or Rules of

Professional Conduct, it may be the better practice to refer that client to another

firm to draft the Will if the client insists that you serve as executor (unless it is a

family member).

If you are going to draft the Will that appoints you as executor, you must

avoid all appearances of undue influence or other impropriety. Full disclosure

should be made including other alternatives available; the amount of compensation

involved and the fact that family members serving may waive that compensation;

and a clear explanation of the duties and authority that will be conferred upon an

executor. Although New Jersey does not require that this disclosure be in writing,

it is advisable to do so. Certain other states require a written disclosure.

2. What if your client wants to require that the executor use your law

office for legal services for the estate administration? This requirement would

likely not be binding, but if your client insists upon this language being used, you

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should advise the executor post-death that this provision is not binding upon them

and let the executor know that they are free to hire the law firm of his or her

choice. See N.J. Eth. Opinion 487 (1981), attached.

3. Gifts in the Will to the attorney-scrivener should be avoided, unless

the client is a family member. If the non-family member client is insistent, you

should refer them to another attorney to draft the Will.

D. Food for Thought

Attorneys also should be mindful of the potential for ethics complaints, as

well as malpractice claims. The following section contains some additional

applicable cases, statutes and rules for consideration:

1. N.J.S.A. 3B:18-6 – allows an attorney fiduciary a “just counsel

fee” in addition to commission. The burden is on the attorney to establish the legal

services performed as distinguished from typical administrative duties of an

executor/administrator.

2. R.P.C. 1.7 (b)(2) – Conflict of Interest.

3. R.P.C. 1.5 – A lawyer’s fee shall be reasonable. When the

lawyer has not regularly represented the client, the basis or rate of the fee shall be

communicated in writing to the client before or within a reasonable time after

commencing the representation.

4. R.P.C. 1.8(c) – a lawyer shall not prepare an instrument giving

the lawyer, or a person related to the lawyer, any substantial gift from a client,

including a testamentary gift, except where the client is related to the donee.

5. NJ Ethics Opinion 683 (1996): Interprets N.J.S.A. 3B:18-6 to

allow a scrivener of a will to act as executor therein. Attorneys should not solicit

their clients to appoint them as executors.

6. NJ Ethics Opinion 487 (1981): See attachment for Opinion.

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E. PRACTICE TIPS

1. Have a carefully drafted retainer agreement with your client

clearly delineating the scope of representation and identity of the client. Use Dual

Representation Agreements where appropriate.

2. Have your prospective estate planning clients complete a

questionnaire to identify assets and how they are titled, identify non-probate assets

and how they are titled, and detail/identify all family members including ages and

addresses. They should date and sign it.

3. Meet with estate planning clients privately and do so in person

wherever possible.

4. Make appointments with the principal/testator direct, not

through a third party.

5. Document your file with memoranda of any unusual bequests

(and the reasons why) or any “suspicious” circumstances you want to chronicle.

Remember that your estate planning file is discoverable, so this is a great

opportunity to memorialize noteworthy events or observations.

6. If there are any concerns (or accusations) regarding capacity,

either perform your own mini-mental status test or ask for an opinion from your

client’s physician as to the ability to make a will. The requisite capacity to execute

a will is very low. The test is whether she can comprehend the property she is

about to dispose of; the natural objects of her bounty; the meaning of the business

in which she is engaged; the relation of each of the factors to the others; and the

distribution that is made by the will”. Matter of Will of Lieb, 260 N.J. Super. 519,

524 (App. Div. 1992).

7. Never give the unexecuted copies of your documents to your

client (or worse yet, another party) to be executed outside of your presence or the

presence of someone on your staff.

8. Be careful when drafting powers of attorney at the request of a

third party.

295

9. Avoid taking any legal position which places you or your

fiduciary client in conflict with her duties as executor or administrator. Attorneys

often have to remind their client that her primary duty of loyalty is to the

estate/ward/principal. It is up to the attorney to recognize and point out these

conflicts because they often are difficult for the average lay person to spot. If a

conflict arises, it is advisable to refer the client to another attorney to address the

specific beneficiary needs. Failure to avoid the conflict may result in your client’s

removal as fiduciary, loss of legal fees, and possible malpractice/ethics claims.

10. Advise your fiduciary client of her obligation to identify and

pay all debts of the estate first. Too often, the fiduciary wants to focus on a quick

disbursement of the assets without understanding that the executor’s duty extends

not just to the beneficiaries but also the creditors of the estate. I advise all of my

clients that they should expect to take a full year to finalize the estate. This allows

for the expiration of the statutory waiting period for creditors to file their claims.

11. If you are acting as executor or court-appointed administrator,

keep track separately of time spent on administrative duties and time spent on legal

services. Examples of legal work include: filing petition for probate; preparing

renunciations and disclaimers; preparing and filing estate tax returns; litigation;

preparing accountings; preparing Refunding Bonds and Releases. The question to

ask yourself here is whether the task requires any specific knowledge or expertise

that the average layperson does not have?

296

Law and Mediation Offices

Moorestown Office: 505 South Lenola Road - Suite 103

Moorestown, New Jersey 08057 (856) 439-0057 Fax (856) 439-0041

Princeton Office:

Princeton Overlook 100 Overlook Drive, 2nd Fl.

Princeton, New Jersey 08540 (609) 375-2651 Hours by appointment

_______________________________________________________________________________________________ MEMBERS *New Jersey Bar LORI M. McNEELY* +New York Bar COLLEEN A. McGUIGAN* ^Connecticut

Bar REBECCA G. ESMI*^+

PLEASE REPLY TO MOORESTOWN

Mr. and Mrs. John Doe

70 Main Street

Anytown Square, New Jersey 08690

Re: Estate Planning – Dual Representation

Dear Mr. and Mrs. Doe:

It was my pleasure meeting with Valerie and I look forward to meeting with both of you

next week to discuss matters relating to your estate planning needs and desires. There

are certain considerations that arise when a law firm represents both a husband and wife

in estate planning matters. It is extremely important that you understand these

considerations so you can make an informed decision for dual representation by this

firm.

Spouses can and often do have differing, and sometimes conflicting, interests and

objectives regarding their estate plans. For example, they may have different views on

how property should pass after the death of one or both of them. In some situations, a

lawyer may recommend that holdings be restructured to take advantage of available tax

benefits and such restructuring may involve gifts from one spouse to the other. Some of

these actions can affect the division of property in the event of a future divorce. Further,

when there have been prior marriages and/or children, the distribution desires of one

spouse may not match the desires of the other spouse.

Each couple’s situation is unique and each individual’s goals and objectives deserve

consideration and counsel. If you each had separate lawyers, you would each have an

“advocate” for your position and would receive totally independent advice. Information

given to your own lawyer is confidential and cannot be disclosed by the attorney to your

spouse without your written consent. This is not the case when one firm advises both of

you.

A single law firm representing both of you cannot be an advocate for only one of you.

Information conveyed to the firm by either of you regarding your estate plan must be

disclosed to the other spouse regardless of whether the informing spouse consents to the

disclosure. If a conflict or dispute arises regarding the disclosure of information, we

either must disclose the information to the other spouse or withdraw from representing

297

either of you since to continue to represent the two of you without revealing such

information to the other would be a violation of the attorney-client relationship.

After considering the above factors, each of you must decide whether you wish this firm

to proceed with representing you jointly in connection with your estate planning and

related matters. If you do, please review the below statement and if it meets with your

approval, please sign and date it as indicated. Please return the executed statement in

the enclosed envelope. If either of you subsequently desires separate counsel, you are

complete free to do so.

Upon receipt of the executed statement, I will proceed to evaluate your estate planning

after our meeting next week.

Thank you. If you have any questions, please do not hesitate to contact me.

Very truly,

LORI M. McNEELY, Esq.

ACKNOWLEDGMENT AND ACCEPTANCE OF DUAL REPRESENTATION

We have reviewed the foregoing letter from Lori M. McNeely, Esquire regarding dual

representation. We realize there may be areas where our interests and objectives may

differ and areas where potential or actual conflict of interests may exist between us in

connection with our estate planning and related matters. We understand and agree that

any information received by the law firm of McNeely McGuigan & Esmi, LLC from

either of us or from third parties will be disclosed by the firm to the other and that there

will not be any confidentiality as to these issues. We further understand that either of us

may retain separate, independent counsel in connection with these matters at any time.

After careful consideration, we request that McNeely McGuigan & Esmi, LLC represent

us jointly in connection with our estate planning and related matters and each of us

consents to that dual representation.

Dated: _____________________, 2017 _______________________________

Dated:_____________________, 2017 _______________________________

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145 N.J.L.J. 1501

September 30, 1996

5 N.J.L. 2095

September 30, 1996

ADVISORY COMMITTEE ON PROFESSIONAL ETHICS

Appointed by the New Jersey Supreme Court

OPINION 683

Conflict of Interest - Attorney/Scrivener

Serving as Fiduciary for Client

The inquirer asks whether, as scrivener of a client's will, he may properly accept appointment

as executor. The inquirer expresses concern that such action may be thought to violate RPC

1.8(c), which provides:

A lawyer shall not prepare an instrument giving the lawyer, or a person related to the lawyer

as parent, child, sibling, or spouse, any substantial gift from a client, including a testamentary

gift, except where the client is related to the donee.

Granting that fiduciary commissions may be "substantial" in an estate or trust administration,

such commissions are in no way a gift, but represent payment earned for services rendered.

This conclusion is specifically assumed by N.J.S. 3B:18-6 which sets forth:

If the fiduciary is a duly licensed attorney of this State and shall have performed

professional services in addition to his fiduciary duties, the court shall, in addition to the

commissions provided by this Chapter, allow him a just counsel fee. If more than one fiduciary

shall have performed the professional services, the court shall apportion the fee among them

according to the services rendered by them respectively.

The statute has been instrumentally implicated in two leading New Jersey cases. In the first, In

re Estate of Simon, 93 N.J. Super. 579, 585 (App. Div. 1967), the Court remarked, in evaluating

a request for counsel fees, that it was appropriate for the judiciary to take into consideration that

counsel "also received an allowance in his capacity as co-executor." The governing statute, it

was said, in authorizing allowances for legal services, "implicitly casts upon the Court the duty

of determining whether such a fiduciary has performed professional services in addition to his

fiduciary duties."

In a later case, the Appellate Division also established as a concomitant prerequisite that, "in

appraising the value of legal services to an estate, such services must be segregated from services

by the attorney rendered as a fiduciary, for which he is separately compensated by commissions

on corpus and income." In re Estate or Seabrook, 127 N.J. Super. 135, 147 (App. Div.

1974). See also, 7A N.J. Prac. §1546, Wills and Administration, Clapp and Black (Revised 3rd.

ed. 1984).

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The Committee's conclusion is that, subject to the applicable statutory and substantive case

law, as a matter of professional ethics, a scrivener may properly prepare a will naming himself as

a fiduciary, and may properly be paid for services in both capacities. In so doing, counsel should

be particularly aware of the disclosure and consultation instructions set forth in RPC 1.7(b)(2).

That said, however, the Committee believes it may be helpful to the Bar to go somewhat

beyond the specific inquiry. The overall issue of attorneys serving as fiduciaries has been the

subject of considerable discussion, some heated, in other states and nationally.

Canon 5-6 of the Code of Professional Responsibility of the American Bar Association

provides that an attorney shall "not consciously influence a client to name him as an executor

(or) trustee." If the client does request the lawyer to act, the attorney must "avoid even the

appearance of impropriety." In that context, we believe counsel should take care to advise the

client as to alternatives and as to the attorney's compensation in both capacities. In some

jurisdictions, but not New Jersey, this approach has been codified by requiring the attorney not

only to make extensive disclosure, but also to enter into a written understanding with the client.

The foregoing comments have been derived partly from the 1993 Draft Statement of the

American Bar Association Task Force on Attorneys Acting in Other Fiduciary Roles. This

critique will, observes one commentator "have a major impact on the time-honored practices of

attorney-draftsmen who become fiduciaries. "I Financial and Estate Planning §70.30 (1993).

We have also had reference to Professor John R. Price's Commentaries on the Model Rules of

Professional Conduct (1993), which were formally adopted by the members of the American

College of Trust and Estate Counsel. Finally, throughout the New Jersey Rules of Professional

Conduct, openness and full disclosure, as between attorney and client, are repeatedly advanced

as essential parts of the relationship. See RPC's 1.4(b), 1.7(a)(2), 1.7(b)(2), 1.8(a)(1), 1.8(f)(1),

1.9(a)(1) and 2.3(a)(3). Careful adherence to these rules and to the spirit of these rules may often

deter later charges (whether merited or not) of negligence, breach of loyalty or overreaching.

Such charges can be especially difficult to meet where the lawyer can no longer rely upon the

confidence of the perhaps long time (now deceased) client and must deal instead with others who

may feel at best indifferent, and at worst suspicious, of the attorney/scrivener/fiduciary.

The Committee should not be understood by the foregoing to inferentially criticize attorneys

who accept fiduciary appointments from their clients. Qualified lawyers are well able to act as

executors or trustees. Often, by reason of long knowledge of the client and family circumstances,

counsel may be the very best choice. As in all other attorney-client dealings, however, counsel

must be careful to avoid any improper or intrusive appearance. A record which amply

demonstrates the lawyer's sensitive attention to these details should go far in deflecting unwanted

difficulties.

* * *

This archive is a service of Rutgers University School of Law - Camden

300

http://www-camlaw.rutgers.edu/

http://njlaw.rutgers.edu/collections/ethics/acpe/acp487_1.html

108 N.J.L.J. 501

December 3, 1981

ADVISORY COMMITTEE ON PROFESSIONAL ETHICS

Appointed by the New Jersey Supreme Court

OPINION 487

Attorney's Including

Person Gain in Client's Will

The inquirer requests us to provide the ethical considerations surrounding the preparation and execution of a client's last will and testament under the following circumstances: (l) Where the scrivener, absent a request from the testator, includes a direction that the executor retain the services of the scrivener or his firm as attorney for the estate. (2) Where the scrivener is specifically directed by the testator to include such a provision. (3) Where the testator directs the scrivener to appoint himself as executor or trustee under his last will and testament. (4) Where the testator directs the scrivener to include a provision for a legacy for himself. Inquiry l. The suggested practice would clearly violate DR 2-103(A). The thrust of DR 2-103(A) is that professional employment must be initiated by the client. The inclusion of such designations as a matter of form in the preparation of wills is violative of DR 2-103(A). In State

v. Gulbankian, 54 Wis.2d. 605, 196 N.W.2d. 733 (Sup. Ct. 1972), 57 A.L.R.3d. 696 (1974), the Wisconsin Supreme Court in concluding the conduct to be unethical, cites former Canon 11, existing DR 2-103(A) and the "appearance" of solicitation that results from such a systematic inclusion as the three reasons that such conduct should be frowned upon. Our Supreme Court in In re Honig, l0 N.J. 75 78 (1952), held: The lawyer should refrain from any action whereby for his personal benefit or gain he abuses or takes advantage of the confidence reposed in him by his client. Clearly, this proposition is still a viable ethical standard notwithstanding the fact that it was bottomed on former Canon ll, since replaced by the Disciplinary Rules. See also ABA Comm. on Professional Ethics, Opinion 602 1963) We are of the opinion that such conduct is unethical. Inquiry 2. The inclusion of a mandatory designation of the scrivener as attorney for the executor at the insistence of the testator provides a more vexing problem. In his treatise on legal ethics, Henry S. Drinker handles the question thus: A question is sometimes raised as to the propriety of a lawyer's inserting in the will a legacy to himself, or a provision appointing him executor or trustee, or one directing his executors to employ him as counsel for the estate. This, of course, depends on the surrounding circumstances. If they are such that the lawyer might reasonably be accused of using undue influence, he will be wise to have the provision inserted in a codicil drawn by another lawyer. Where, however, a testator is entirely competent and the relation has been a longstanding one, and where the

301


suggestion originates with testator, there is no necessity of having another lawyer in the case of a reasonable legacy, or of a provision appointing the draftsman executor, or of a direction that he be retained by the executors. In the case of the latter provision, it should be clearly explained to the testator that it will not be binding on the executor, who will be free to choose his own counsel, since a lawyer has no vested interest in representing the estate of one whose will he has drawn." Drinker, Legal Ethics 94 (1953) *** (footnote omitted)

This position of Drinker's may be followed provided the scrivener advises the executor or trustee upon the death of the testator that the mandatory nature of the appointment has no effect, and he is free to select counsel of his own choosing. Inquiry 3. The appointment of the attorney (scrivener) as executor or trustee can be handled somewhat more simply where it is the true desire of the testator. Again, where the provision in the will results from the systematic inclusion by the attorney of the clause without a specific request of the testator DR 2-103(A) is violated. This Committee feels that the Drinker position heretofore outlined may be followed; that is to say, where the testator is entirely competent and the relation has been a long-standing one and where the suggestion originates with the testator, there is no necessity for having another lawyer prepare the provision appointing the draftsman executor or trustee. It is advisable, however, that a memorandum of these facts be prepared and maintained by the scrivener. Inquiry 4. The legacy problem as outlined by Drinker, supra, depends upon the circumstances. However, lurking in the background of every legacy to the scrivener are the dangers of overreaching, abuse of the confidence reposed in him by his client, actual undue influence, and the presumption of undue influence created by the confidential relationship with the testator. At the very least, the "appearance" of these evils is present. The New Jersey Supreme Court in In re

Davis, 14 N.J. 166, 171 (1953), stated as follows: We wish to reiterate what has been said repeatedly by our courts as to the proprieties of a situation where the testatrix wishes to make her attorney or a member of his immediate family a beneficiary under a will. Ordinary prudence requires that such a will be drawn by some other lawyer of the testatrix' own choosing, so that any suspicion of undue influence is thereby avoided. Such steps are in conformance with the spirit of Canons 6, ll, of the Canons of Professional Ethics promulgated by this court. Subsequently, the New Jersey Supreme Court presented the problem

thus:

Our courts have on occasion said that where a testator wishes to name his attorney or a member of his attorney's family as a beneficiary, ordinary prudence requires that the will be drawn by some other lawyer of the testator's choosing, and thus to avoid the suspicion of an abuse of the confidential relationship. In re Nixon's Will, supra, Brogan, C.J.- In re Davis' Will, supra,- where Mr. Justice Oliphant said: 'Such steps are in conformance with the spirit of Canons 6, 11 of the Canons of Professional Ethics promulgated by this court.' See also In re Putnam's Will, supra.

302


Canon 11 declares that the lawyer should refrain from any action whereby for his personal benefit or gain he abuses or takes advantage of the confidence reposed in him by his client.' It would seem to be equally imperative that the lawyer also avoid the suspicion of benefit or gain. By the civil law a will written by a person in favor of himself was void. Bennett v. Bennett, 50 N.J. Eq. 439, 446 (Prerog.1892). This by an ordinance under Claudius, that the writer of another's will should not mark down a legacy for himself. 28 L.R.A., N.S. 272. Clearly these admonitions from our Supreme Court spanning 27 years dictate that the prudent practice under these circumstances is to have the legacy created by independent counsel in a codicil or having independent counsel prepare the entire will. See also State v. Horan, 21 Wis 2d. 66, 123 N.W. 2d. 488 (Sup. Ct. 1963), and State Bar Association v. Behnke, 276 N.W. 2d. 838 (Sup. Ct. Iowa 1979); In re Gonyo, 73 Wis. 2d. 624, 245 N.W. 2d.. 893 (Sup. Ct. 1976), and cases collected in 98 ALR 2d. 1234 (1964).

* * *

This archive is a service of Rutgers University School of Law - Camden

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http://www-camlaw.rutgers.edu/

New Jersey Statutes Annotated

New Jersey Rules of Court

Part I. Rules of General Application

Appendix to Part I

Rules of Professional Conduct (Refs & Annos)

RPC 1.7

RPC 1.7 Conflict of Interest: General Rule

Currentness

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the

representation involves a concurrent conflict of interest. A concurrent conflict of

interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially

limited by the lawyer’s responsibilities to another client, a former client, or a third person or

by a personal interest of the lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph

(a), a lawyer may represent a client if:

(1) each affected client gives informed consent, confirmed in writing, after full disclosure

and consultation, provided, however, that a public entity cannot consent to any such

representation. When the lawyer represents multiple clients in a single matter, the

consultation shall include an explanation of the common representation and the advantages

and risks involved;

(2) the lawyer reasonably believes that the lawyer will be able to provide competent and

diligent representation to each affected client;

(3) the representation is not prohibited by law; and

(4) the representation does not involve the assertion of a claim by one client against another

client represented by the lawyer in the same litigation or other proceeding before a tribunal.

Credits:

Note: Adopted July 12, 1984 to be effective September 10, 1984; text deleted and new text adopted November

17, 2003 to be effective January 1, 2004.

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https://www.law.cornell.edu/ethics/nj/code/NJ_CODE.HTM#Informed_consent

https://www.law.cornell.edu/ethics/nj/code/NJ_CODE.HTM#Confirmed_in_writing

https://www.law.cornell.edu/ethics/nj/code/NJ_CODE.HTM#Reasonable_belief

https://www.law.cornell.edu/ethics/nj/code/NJ_CODE.HTM#Tribunal

Last revised : 2/3/2017

ESTATE PLANNING QUESTIONNAIRE

(MARRIED/DOMESTIC PARTNERS)

Date ______________________________ File Number _________________________________

Home Phone No. ____________________ Business Phone No. ___________________________

E-mail address ______________________ Fax No. ____________________________________

This form is extremely important. Your accuracy and completeness in responding will help me best

represent you. Please bring this information with you to our initial appointment.

I. BACKGROUND

A. PERSONAL DATA

(Spouse A) (Spouse B)

Full Name _______________________________ Full Name ________________________________

(print full legal name) (print full legal name)

Street Address _______________________________________________________________________

City ______________________________ State _________________ Zip ____________________

Birth Date _____________________________ Birth Date ________________________________

Social Security No. _____________________ Social Security No. _________________________

U.S. Citizen? ____ Yes _____No U.S. Citizen? _____Yes _____No

Veteran/Military? ____ Yes _____No Veteran/Military? ____ Yes _____No

Annual Income _______________________ Annual Income _____________________________

B. REFERRAL

By whom were you referred to this office?

Name ______________________________________________________________________________

Street Address _______________________________________________________________________

City ______________________________________________________State ________ Zip _________

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II. LAST WILL AND TESTAMENT

A. DISPOSITIVE INTENTIONS

1. SPOUSE AND CHILDREN

Do you wish to provide primarily for your spouse and secondarily for your children? _____Yes _____ No

Do you wish to treat all of your children equally? _____Yes _____ No

If not, why?________________________________________________________________________________

After your spouse’s death, at what age do you want distribution to your children? ________________________ (e.g. typical plans provide for immediate distributions or for 1/3 at age 25, ½ of the remaining amount at age 30 and the

entire remaining amount at age 35)

2. CHILDREN (if applicable)

Child’s Name Address (including zip code) Date of Birth

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Have either of you been married previously? _____ Yes _____ No

If yes, please provide copies of any separation or divorce agreement(s)

Does the Spouse A have any children by a previous marriage or relationship? _____ Yes _____ No

Does the Spouse B have any children by a previous marriage or relationship? _____ Yes _____ No

Are all of your children in good health? _____ Yes _____ No

Are any of your children disabled? _____ Yes _____ No

Have all of your children completed their education? _____ Yes _____ No

Are any of your children receiving SSI or other form of government benefits? _____ Yes _____ No

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3

Do any of your family members have any problems with: Creditors/Legal? _____ Yes _____ No

Drug Addiction _____ Yes _____ No

Alcoholism? _____ Yes _____ No

Spending habits? _____ Yes _____ No

Marriage/relationship ______Yes _____No

OTHER:___________________________

3. GRANDCHILDREN

Do you want to leave a specific amount of money or a percentage of your estate to your grandchildren?

_______ Yes ______ No

Grandchild’s Name Address (including zip code) Date of Birth

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Do you wish to treat all of your grandchildren equally? ______ Yes ______ No

If not, why? _______________________________________________________________________________

How much do you want to leave your grandchildren?_______________________________________________

At what age do you want distribution to your grandchildren? _________________________________________________

(e.g. typical plans provide for immediate distributions for 1/3 at age 25, ½ of the remaining amount at age 30 and the

entire remaining amount at age 35)

4. OTHER BENEFICIARIES

Do you want your will to benefit anyone other than children, grandchildren i.e. charity or other person?

________ Yes _______ No

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If so, please list:

__________________________________________________________________________________________

Name of Beneficiary Address of Beneficiary Relationship Dollar Amount

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

B. EXECUTOR

Whom do you want to serve as your Executor?

(Spouse A)

First Choice: _____ Spouse _____ Other ____________________________________________________

Second Choice _____________________________________________________________________________

Third Choice ______________________________________________________________________________

(Spouse B)

First Choice: _____ Spouse _____ Other ____________________________________________________

Second Choice _____________________________________________________________________________

Third Choice ______________________________________________________________________________

C. TRUSTEE

If a Trust is established, whom do you want to serve as your Trustee?

(Spouse A)

First Choice _______________________________________________________________________________

Second Choice _____________________________________________________________________________

(Spouse B)

First Choice _______________________________________________________________________________

Second Choice _____________________________________________________________________________

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D. GUARDIAN

If you have minor or disabled child/children, whom do you want to act as Guardian?

First Choice _______________________________________________________________________________

Second Choice _____________________________________________________________________________

III. POWER OF ATTORNEY

Do either of you currently have a Power of Attorney? Please provide copy _____ Yes _____ No

Whom do you want to appoint as your agent?

(Spouse A)

First Choice _________________________________________________________________________

(Name) (Address)

Second Choice _______________________________________________________________________

(Name) (Address)

(Spouse B)

First Choice _________________________________________________________________________

(Name) (Address)

Second Choice _______________________________________________________________________

(Name) (Address)

IV. LIVING WILL/HEALTH CARE DIRECTIVE

(Spouse A)

Do you want a Living Will? _____ Yes _____ No

Do you want your Living Will to provide for withdrawal of artificial food and fluid? ______Yes _____No

Do you want to donate your eyes or organs? ______ Yes _____No

Whom do you want to make your medical decisions?

First Choice _________________________________________________________________________

(Name) (Address)

Second Choice _______________________________________________________________________

(Name) (Address)

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Do you want the person making your medical decisions to consult with any other person prior to acting?

______Yes _____No

If yes, with whom?__________________________________________________________________________

What is the name and address of your primary care physician?

Full Name of Physician ______________________________________________________________________

Street Address _____________________________________________________________________________

City _______________________________________________ State _________________ Zip ____________

(Spouse B)

Do you want a Living Will? _____ Yes _____ No

Do you want your Living Will to provide for withdrawal of artificial food and fluid? _____ Yes _____ No

Do you want to donate your eyes or organs? _____ Yes _____ No

Whom do you want to make your medical decisions?

First Choice _________________________________________________________________________

(Name) (Address)

Second Choice _______________________________________________________________________

(Name) (Address)

Do you want the person making your medical decisions to consult with any other person prior to acting?

_____ Yes _____ No

If yes, with whom?__________________________________________________________________________

What is the name and address of your primary care physician?

Full Name of Physician ______________________________________________________________________

Street Address _____________________________________________________________________________

City ____________________________________________________ State _______________ Zip __________

V. MISCELLANEOUS

Do you have any other legal issues which I should be aware of? _____ Yes _____ No

If yes, please explain ________________________________________________________________________

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7

Have you ever made gifts to any one person in excess of $10,000 in any one calendar year?

_____Yes _____No

Have you ever filed a Federal Gift Tax Return? _____ Yes _____ No

Where is the location of your important papers? ___________________________________________________

VI. FINANCIAL SUMMARY ASSETS LIABILITIES Spouse A Spouse B Joint

Bank Accounts (attach copies of statements) $__________ $__________ $___________ $___________

Real Estate (residence) (attach copy of deed) $__________ $__________ $___________ $___________

Real Estate (other) (attach copies of all deeds) $__________ $__________ $___________ $___________

Savings Certificates (CDS) $__________ $__________ $___________ $___________

(attach copies of statements)

Stocks – (Not Held by Broker) $__________ $__________ $___________ $___________

(attach copies of all certificates)

Stocks – (Held by Broker) $__________ $__________ $___________ $___________

(attach copies of brokerage statements)

Bonds – (Not Held by Broker) $_________ $_________ $__________ $__________

(attach copies of all bonds)

Bonds – (Held by Broker) $_________ $_________ $__________ $__________

(attach copies of brokerage statements)

Mutual Funds (attach copies of statements) $_________ $_________ $__________ $__________

Note and Mortgages Receivables $_________ $_________ $__________ $__________

(attach copies of Notes & Mortgages)

Business Interests (attach copies of stock $_________ $_________ $__________ $__________

certificates, partnership agreement and/or

other documentation)

Automobiles $_________ $_________ $__________ $__________

Jewelry & Collections $_________ $_________ $__________ $__________

IRAs (attach copies of statements) $_________ $_________ $__________ $__________

Non-IRA Tax Qualified Retirement Plans $_________ $_________ $__________ $__________

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(attach copies of statements)

Life Insurance (attach copies of all policies) $_________ $_________ $__________ $__________

Annuities (attach copies of all policies) $_________ $_________ $__________ $__________

Other Assets (attach copies of documentation $_________ $_________ $__________ $__________

pertaining to such assets)

TOTALS $_________ $_________ $__________ $__________

Personal Residence:

Tax Block #___________________, Lot #_________________ (Can be obtained from Tax Bill)

Addresses of real property other than personal residence:

(1) Street ________________________________City _____________________State ______ Zip _______

Tax Block #___________________, Lot #________________ (Can be obtained from Tax Bill)

(2) Street ________________________________ City _____________________State ______ Zip ________

Tax Block #___________________, Lot # _______________ (Can be obtained from Tax Bill)

Are any of your assets above jointly titled with, or payable on death to, anyone other than your spouse?

_____Yes ______No

If so, please indicate which account(s) and the person who has an interest in that account below:

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Are either of you the beneficiary of any trusts? If yes, describe_______________________________________

Do either of you anticipate an inheritance in the near future? ________________________________________

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9

Do either of you have long-term care disability insurance? ________

VII. CERTIFICATION

The undersigned hereby represents to the law offices of McNeely McGuigan & Esmi, LLC, that the information

contained in this intake form is accurate and complete. The undersigned is aware that the law firm will rely on

this information and further understands that the information contained herein is inaccurate or incomplete, the

recommendations made by the law firm may not be appropriate.

Signature of Client or Client Representative

Date:

___________________________________________________

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About the Panelists… Robert I. Aufseeser is an associate with Ansell Grimm & Aaron, P.C. in Ocean, New Jersey. His practice includes estate and trust planning, taxation, closely-held business, probate and related litigation matters. Mr. Aufseeser is admitted to practice in New Jersey and New York, and before the United States District Court for the District of New Jersey and the United States Tax Court. He is a member of the New Jersey State and New York State Bar Associations as well as the Middlesex County Bar Association. Mr. Aufseeser received his B.A. from Rutgers University, his J.D. from Syracuse University College of Law and his LL.M. in Taxation from New York Law School. Elaine M. Cohen is an associate with Witman Stadtmauer, P.A. in Florham Park, New Jersey, where she concentrates her practice in counseling businesses on transactional matters, formations, business acquisitions, executive employment agreements, contracts, shareholder and operating agreements; and estate planning in connection with family businesses. Ms. Cohen is admitted to practice in New Jersey and Florida, and before the United States District Court for the District of New Jersey. She is a member of the American and New Jersey State Bar Associations, and authored "Fed and State Law May Apply to transfer of Firearm to a Beneficiary” and “The Dangers of Unpaid Interns: Employers Beware!” which appeared in the New Jersey Law Journal. Ms. Cohen received her B.A., cum laude, from George Mason University and her J.D., cum laude, from Seton Hall University School of Law. She was a judicial law clerk to the Honorable Leonard N. Arnold, former Presiding Judge, Criminal Division, Somerset County. Andrew J. DeMaio is a Member of Neff Aguilar, LLC in Red Bank, New Jersey, where he concentrates his practice in estate planning and administration, the litigation of estate and trust matters, federal and state taxation, and charitable giving. Admitted to practice in New Jersey and New York, Mr. DeMaio is a Fellow of the American College of Trust and Estate Counsel (ACTEC), Past Chair of ACTEC’s Technology in the Practice Committee and a member of the American Bar Association and its Sections on Taxation and Real Property, Trust and Estate Law. He is a member of the New Jersey State and Monmouth Bar Associations, and a member and Past Chair of the Board of Consultors of the New Jersey State Bar Association Real Property, Trust and Estate Law Section. Mr. DeMaio frequently lectures on estate and tax planning topics and on lawyers’ use of technology. He is an author and editor for Leimberg Information Services, Inc., an online current events publication for lawyers and other estate planning professionals. In 2003 and 2016 Mr. DeMaio received the New Jersey State Bar Association’s Legislative Service Award, most recently for his work on the study and enactment of the New Jersey Uniform Trust Code. He is also the recipient of the NJSBA Real Property, Trust and Estate Law Section’s Dorothy G. Black Distinguished Service Award.

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Mr. DeMaio received his undergraduate degree from Rutgers College and his law degree from Cornell Law School. He received his LL.M. in Taxation from New York University School of Law. Mark R. Friedman practices estate planning, elder law and special needs law with FriedmanLaw in Bridgewater, New Jersey. His work includes creating special needs trusts for disabled clients so litigation proceedings, child support and other payments will not disrupt public benefits; helping seniors plan to prevent long-term care costs from wiping out their savings; and estate planning in first marriages, second marriages and for unmarried clients. Admitted to practice in New Jersey and New York, Mr. Friedman is a member of the New Jersey State Bar Association Elder and Disability Law Section and Young Lawyers Division, and serves on the Leadership Committee. Prior to joining the firm he was a Contributing Editor for The FCPA Blog in Singapore, ROS, where he provided analysis on compliance, corruption and the Foreign Corrupt Practices Act (FCPA). He is the author of “Modern Estate Planning for Same-Sex Couples,” New Jersey Law Journal, October 14, 2013. Mr. Friedman received his B.A. from Binghamton University, State University of New York, and his J.D. from New York University Law School, where he was selected as an inaugural Fellow with Fellowships at Auschwitz for the Study of Professional Ethics, which sends law and medical students to Germany and Poland to study their profession’s role in the Nazi genocide. He also created the Darfur Victims Project at NYU, leading a team of law students in support of litigation before the International Criminal Court. Richard H. Greenberg is Senior Partner in Greenberg & Schulman in Woodbridge, New Jersey, where he focuses on tax matters, business and corporate matters, estate planning and estate administration. Admitted to practice in New Jersey, New York and Georgia, and before the United States Tax Court, Mr. Greenberg is a Fellow of the American College of Trust and Estate Counsel (ACTEC); Past Chair of the New Jersey State Bar Association’s Taxation Law and Real Property, Trust and Estate Law Sections; Past Chair of the Association’s Corporate Tax Committee; and a member of the Estate and Inheritance Tax and Partnership Tax Committees. Mr. Greenberg is a member and former President of the Tri-County Estate Planning Council, Past Chair of the Essex County Bar Association Tax Committee and a member of the New York State Bar Association Tax, Trusts and Probate Committees and the Middlesex County Bar Association Tax Committee. He is a frequent lecturer and author on numerous estate planning and estate administration topics as well as the 2011 recipient of the Alfred C. Clapp Award bestowed by ICLE. Mr. Greenberg received his B.B.A. from Case Western Reserve University, his J.D. from St. John’s University and his LL.M. in Taxation from New York University. Martin D. Hauptman is a Partner in the Trusts & Estates, Tax and Corporate Practice Groups of Mandelbaum Salsburg in West Orange, New Jersey. He concentrates his practice primarily in ERISA, pension planning and administration, estate planning and administration, business succession planning, entity formations and planning (including corporations, LLCs and

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partnerships), mergers and acquisitions, IRS and state tax representation, and tax and probate litigation as well as federal and state tax matters. Admitted to practice in New Jersey and before the United States District Court for the District of New Jersey and the United States Tax Court, Mr. Hauptman is a Certified Public Accountant and has been a member of the American and Essex County Bar Associations, the New Jersey State Bar Association’s Section on Taxation, the Estate Planning Council of Northern New Jersey, the New Jersey Society of Certified Public Accountants and the Union County Society of Certified Public Accountants. He is a former member of the New Jersey State Bar Association’s Taxation Section’s Executive Council, Past Vice Chair of the Death Tax Committee and Past Chair of the Employee Benefits Committee. He has been listed in Who’s Who and is the author of an article which appeared in the Matrimonial Strategist. Mr. Hauptman received his J.D. from Rutgers University Law School, where he was a member of the Rutgers University Law Review. Bruce E. Mantell is a Shareholder in Mantell, Prince & Reynolds, P.C. in Murray Hill, New Jersey. The firm limits its practice to tax and business planning, estate planning, estate administration, trust and estate litigation, mergers and acquisitions, tax controversy matters, ERISA and serving as expert and expert witness in tax and trust and estate-related litigation. Mr. Mantell is a member of the Essex and Union County Bar Associations and the New Jersey State Bar Association Taxation Section, where he is Past Chair and a member of the Section’s Executive Council. He is a member of the NJSBA Probate and Trust Section and has served on the Ad Hoc Committee on Multidisciplinary Practices and the New Jersey Supreme Court Committee on the Skills and Methods Course. A Fellow of the American College of Trust and Estate Counsel (ACTEC), Mr. Mantell is a member of the American Bar Association’s Taxation Section, the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. He is a former member of the Board of Directors of ICLE and The New Jersey Lawyer Newspaper. Mr. Mantell is a frequent lecturer and author on tax, business, estate and pension-related topics for professional associations. In 2004 he was the recipient of ICLE’s Distinguished Service Award for his many years of contributions to the field of continuing legal education and in 2017 was the recipient of the Award for Outstanding Contribution to the Taxation Law Section of the New Jersey State Bar Association. Mr. Mantell received his B.S. from Lehigh University, his J.D. from Rutgers University School of Law and his LL.M. in Taxation from New York University School of Law. Lori M. McNeely is a Partner in McNeely McGuigan & Esmi, LLC in Moorestown, New Jersey, where she concentrates her practice in estate planning and administration, probate, guardianships, Will contests and related litigation, residential real estate and small business formation. Ms. McNeely frequently receives appointments from the Courts and private clients to serve as trustee, administrator of estates, guardian for incapacitated persons, and counsel for alleged incapacitated persons. She is also on the roster of certified foreclosure mediators with the Administrative Office of Courts in New Jersey and provided pro bono real estate representation to residents impacted by the Mount Holly Gardens litigation.

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Admitted to practice in New Jersey and before the United States District Court for the District of New Jersey, the Third Circuit Court of Appeals and the United States Supreme Court, Ms. McNeely is a member of the New Jersey State, Mercer County and Burlington County Bar Associations, the National Academy of Elder Law Attorneys (NAELA) and the Guardianship Association of New Jersey. She has been Co-Chair of the Real Property and Probate Committee of the Burlington County Bar Association. She has been a lecturer for CLE seminars sponsored by the Mercer and Burlington County Bar associations and lectured at the Guardianship Association of New Jersey’s Annual Conference in 2011. Ms. McNeely received her B.S. from Duke University and her J.D. from Rutgers University School of Law-Camden, where she won the 1995 Hunter Moot Court Competition and represented Rutgers in the National Moot Court Competition in Washington, D.C. She was also the recipient of the Excellence in Litigation, Women’s Law Caucus and Hunter Moot Court Awards. Jack F. Meola, an attorney and CPA, is a Tax Partner with EisnerAmper, LLP in Bridgewater, New Jersey. He has dealt extensively with tax issues concerning both private and publicly-held companies, and his experience as a tax advisor emphasizes corporate and partnership tax planning, environmental tax issues and estate tax planning matters. Mr. Meola is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants, and has served as President of the Tax Committee of the Middlesex County Bar Association. He has also been a member of the New Jersey State Bar Association and its Tax Committee, as well as the Federal Tax Committee of the American Bar Association. Mr. Meola lectures before professional organizations, universities and civic groups; is the author of numerous articles in the field of taxation; and was a contributing author to Year End Tax Planning, a comprehensive publication explaining tax issues and their ramifications. He lectures for ICLE on partnership and estate planning. An accounting graduate of the University of Connecticut, Mr. Meola received his J.D. from Seton Hall Law School and his LL.M. in Taxation from Villanova Law School. John J. Miesowitz, a Shareholder in Ventura, Miesowitz, Keough & Warner, P.C. in Summit, New Jersey, concentrates his practice in estate planning, estate administration, elder law, taxation and corporate law, with a particular emphasis on designing estate plans for high-net-worth individuals. Mr. Miesowitz is Past Chair of the New Jersey State Bar Association’s Taxation Section, where he twice served as Chair of its Transfer Taxes Committee and is a member of the Executive Council. He is a member of the Association’s Real Property, Probate and Trust Law and Elder Law Sections, the American Bar Association and the National Association of Elder Law Attorneys (NAELA). He is also a member of the Union County and Summit Bar Associations. Mr. Miesowitz is an author and frequent lecturer to professional and business groups and civic organizations on estate planning and elder law. In 2012 he was the recipient of ICLE’s Distinguished Service Award.

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Mr. Miesowitz is a graduate of Trinity College and Seton Hall University School of Law. He received his LL.M. in Taxation from New York University. Christine H. O’Donnell is a sole practitioner of the Law Office of Christine H. O’Donnell in Jackson, New Jersey, where she provides legal counsel in all aspects of estate planning and administration. She represents individuals and nursing facilities petitioning for guardianship of elderly and disabled individuals, and also represents alleged incapacitated persons as appointed by the court. She served as guardian of the person and property for elderly and disabled individuals throughout the State. Ms. O’Donnell is admitted to practice in New Jersey and Pennsylvania. She is a Trustee of the Guardianship Association of New Jersey, Inc. Ms. O’Donnell received her A.B. from Bryn Mawr College, her J.D., cum laude, from Temple University School of Law, where she was the recipient of the Joseph Gross Memorial Award for Outstanding Performance in Trusts and Estates, and her LL.M. in Taxation from New York University School of Law. She served as a law clerk to the Presiding Judge of New Jersey Tax Court and to the Presiding Judge of the Family Division, Superior Court of New Jersey, 15th Vicinage. John L. Pritchard maintains a private practice in Union, New Jersey, where he concentrates in taxation, estate planning, estate litigation and business transactions. Mr. Pritchard has served as an adjunct faculty member at Seton Hall University Law School and has appeared as a speaker for numerous professional education programs. In 2012 he was the recipient of ICLE’s Distinguished Service Award. Mr. Pritchard received his undergraduate degree from the University of Maryland, his J.D. from Rutgers Law School and his LL.M. in Taxation from New York University School of Law.

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ETHICS TWO:

The Tenuous Role of an Attorney representing an Agent Under a Power

of Attorney and Other Issues of Possible Elder Exploitation

Lori M. McNeely, Esq.

I. WHAT IS AN ATTORNEY’S OBLIGATION WHEN DRAFTING A POWER

OF ATTORNEY, AND IS THERE A HEIGHTENED RESPONSIBILITY WHEN

THE PRINCIPAL IS ELDERLY?

The Court in Matter of Wallace, 104 N.J. 589,593(1986) explains an attorney’s role when

preparing a power of attorney – in this case, for an elderly client:

It is undisputed that an attorney owes his client a duty to pursue

diligently the matters entrusted to him and to exercise the highest

degree of fidelity and good faith. Matter of Schwartz, 99 N.J. 510

(1985); Matter of Stein, 97 N.J. 550 (1984); Matter of Dolan, 76 N.J.

1 (1978); Matter of Loring, 73 N.J. 282 (1977). It is not enough

simply to follow a client's instructions, for a client cannot foresee or

be expected to foresee the great variety of legal problems that may

arise. In re Lanza, 65 N.J. 347, 352 (1974). This is especially true

where, as here, the client is elderly and infirm and particularly

dependent on her attorney's judgment.

Thus, an attorney has a duty to provide his client with the information needed to

understand the risks of the transaction. Estate of Spencer v. Gavin, 400 N.J. Super. 220, 242–43

(App. Div. 2008). “Inherent in that trust [between attorney and client] is the duty to advise the

client fully, frankly, and truthfully of all material and significant information.” In re Loring, 73 NJ

282, 290 (1977). When the principal is elderly, the attorney should be mindful of issues relating

to capacity, undue influence and exploitation. Be aware that the capacity required to create a

power of attorney is essentially the capacity to contract, which is a higher standard than

testamentary capacity - which is the capacity required to make a Will.

The act of appointing an agent as power of attorney is, fundamentally, a contractual

undertaking. “A person who is not in a mental condition to contract and conduct business is not

competent to appoint an agent for that purpose. A mentally incompetent person cannot effect the

https://casetext.com/case/in-re-loring-1?passage=5woQYehy_RtPqmkh0HfsBg

https://casetext.com/case/in-re-loring-1?passage=5woQYehy_RtPqmkh0HfsBg

appointment of an agent, and the acts of an agent in such conditions are voidable.” 3 Am.Jur. 2d

Agency § 11. On the other hand, “a competent person has the right to appoint another person to

act on his or her behalf as an ‘attorney-in-fact’ under a written POA. This right is embodied in

New Jersey’s ‘Revised Durable Power of Attorney Act,’ N.J.S.A. 46:2B-8.1.” Marsico v. Marsico,

436 N.J. Super 483 (App. Div. 2013).

The Court in In re Estate of Zaolino, 1998 WL 34001287 (N.J. Super. Ct. App. Div. 1998),

in an unpublished opinion, held at p. 1:

In order to have the competency to appoint an attorney-in-fact, the

principal must be “capable of understanding in a reasonable manner,

the nature and effect of his act.” Golleher v. Horton, 715 P.2d 1225,

1228 (Ariz.Ct.App.1985). He or she must have the “ability … to

understand the nature, scope and extent of the business [he or] she

is about to transact.” Testa v. Roberts, 542 N.E.2d 654, 658 (Ohio

App.Ct.1988); see Wolkoff v. Villane, 288 N.J.Super. 282, 287

(App.Div.1996) (“‘The test of capacity to make an agreement … is,

that a man shall have the ability to understand the nature and effect

of the act in which he is engaged, and the business he is transacting

….’ ”) (citation omitted); Kisselbach v. County of Camden, 271

N.J.Super. 558, 564 (App.Div.1994) (“[Powers of attorney] should

be construed in accordance with the rules for interpreting written

instruments generally.”) (citation omitted).

45 N.J. Prac., Elder Law--Guard. & Conserv. § 23:4

New Jersey’s Revised Durable Power of Attorney Act adopts the Uniform Durable Power

of Attorney Act (“Act”), also adopted in a number of jurisdictions, including South Carolina.

Applying the Act, South Carolina’s Supreme Court reached the same result:

In order to execute or revoke a valid power of attorney, the principal

must possess contractual capacity. Contractual capacity is generally

defined as a person’s ability to understand in a meaningful way, at

the time the contract is executed, the nature, scope and effect of the

contract.

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http://www.westlaw.com/Link/Document/FullText?findType=Y&serNum=1986114349&pubNum=0000661&originatingDoc=Ibac47a003c1111da94599a3d094aba0f&refType=RP&fi=co_pp_sp_661_1228&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.Search)#co_pp_sp_661_1228








Gaddy v. Douglass, 359 S.C. 329, 345-6 (S.C. Ct. App. 2004), citing, 53 Am.Jur.2d Mentally

Impaired Persons § 157 (1996). Also applying the provisions of the Act, the Court in Rawlings

v. John Hancock, 78 S.W. 3d 291, 297 (Ten. Ct. App. 2001), held that the ability to enter into a

power of attorney is a determination as to whether the principal had “mental capacity to enter into

a contract.” Thus, the principal would be excused from the power of attorney, and the transaction

voidable, if she was “unable to understand in a reasonable manner the nature and consequences of

the transaction or was unable to act in a reasonable manner in relation to the transaction, and the

other party had reason to know of that condition.” Id., citing Restatement (Second) of Contracts

§ 15(1) (1981). Similarly, the Court in Beaucar v. Bristol Fed. Sav. & Loan Ass’n, 6 Conn. Cit.

Ct. 148, 157-8 (1969), held that “a person who is not in a mental condition to contract and conduct

his business is not in a condition to appoint an agent for that purpose. One who is non compos

mentis is incapable of executing a valid power.” The Court relied upon in Zaolino, Testa v.

Roberts, 44 Ohio App. 3d 161, 164 (1988), reaches the same conclusion:

The creation of a power of attorney requires that the principal be

mentally competent at the time the power is executed. 3 American

Jurisprudence 2d (1986), Agency, Section 24. Derived from

contracts law, the test to be used to determine mental capacity is the

ability of the principal to understand the nature, scope and the extent

of the business she is about to transact. Vnerakraft, Inc. v.

Arcaro (1959), 110 Ohio App. 62, 64, 12 O.O.2d 229, 230, 168

N.E.2d 623, 625.

The Gaddy Court also goes on to explain the manner in which the test for contractual

capacity should be applied, where the principal is subject to chronic dementia. “Where, as here

the mental condition of the principal is of a chronic nature, evidence of the principal’s prior or

subsequent condition is admissible as bearing upon his or her condition at the time the contract is

executed.” Gaddy, 78 S.C. at 345-6. Recognizing the fact that although an individual with

dementia “may at time appear normal…such a patient could not make rational decisions,

understand the nature of his or her actions, or handle their business or legal affairs.” Id. As a

result, rather than limiting the inquiry to capacity as of the date of execution of the power of

attorney, the Court looked to the mental abilities of the principal both before and after the time of

execution.

The transfer of powers by way of a power of attorney is, in a very basic sense, a contract

allowing one to act for the other. Such contract is subject to the well settled requirement, in New

Jersey and elsewhere, that “where there is not the mental capacity to comprehend and

understand, there is not the capacity to make a valid contract in general.” Hillsdale Nat. Bank v.

Sansone, 11 N.J. Super. 390, 399 (App. Div. 1951).

II. AN ATTORNEY’S ROLE IN REPRESENTING AN AGENT UNDER A

POWER OF ATTORNEY FOR AN ELDERLY PRINCIPAL.

For the same reasons that an attorney should take care to properly advise the elderly

client in drafting a power of attorney, the attorney must be mindful of the potential liability to a

principal when representing the agent under a power of attorney.

In the case of Albright v. Burns, 206 N.J. Super. 265 (App. Div. 1986), the Appellate

Court gives attorneys representing agents under powers of attorneys some food for thought.

Although an old case, it is nevertheless still good law. In that case, Albright, the daughter and

co-executor of her mother’s estate filed suit against her brother, Burns, who was the co-executor

of their maternal Uncle’s estate. Their mother’s estate was the residuary beneficiary of their

Uncle’s estate. The parties were to share their mother’s estate equally, and consequently

ultimately had an equal share of their Uncle’s estate. The suit also named Burns’ attorney as a

defendant. The claims against both included fraud, conversion, breach of fiduciary duty and

negligence arising out of alleged mismanagement of the Uncle’s personal assets before and after

his death.

The Uncle was elderly, had declining health, and had been hospitalized on five separate

occasions during the two years leading up to his death. He had difficulty communicating,

memory loss, and would at times lose touch with reality. During one of these hospitalizations,

Uncle executed a general power of attorney appointing nephew Burns as his agent. Uncle owned

AT&T stock, which nephew Burns wanted to sell and use the proceeds to assist in nephew’s

business. Uncle resisted. Uncle was concerned that he if he lent nephew this money, he might

run out of money for Uncle’s care. Nephew assured his Uncle that he would take care of him

because he was making $800 a week when, in fact, nephew had no income at that time. Uncle

reluctantly agreed to a short-term loan.

Nephew consulted his attorney about the transaction, in which nephew would sell the

stock using his power of attorney and then lend the sales proceeds to himself. The attorney

recognized the conflict of interest and advised nephew against it. Nephew insisted that the

power of attorney was valid and that the Uncle had consented to make the loan. Nephew went

ahead and liquidated the stock with instructions to the transfer agent to make the proceeds check

payable to Uncle and to send it to attorney. Attorney and nephew endorsed the check, and

attorney deposited the check to his attorney trust account. Attorney prepared a promissory note,

which nephew signed. No collateral was required to secure the loan, although Nephew had

collateral he could have pledged. Attorney did not notify Uncle of the receipt of funds or deposit

to his attorney trust account. Two days after the deposit, attorney disbursed the funds to

Nephew.

After Uncle’s death, nephew (as co-executor) retained Attorney to represent the estate,

although a different attorney was specified in Uncle’s will. The promissory note was included in

the gross estate for tax purposes and in the calculation of Nephew’s executor commission. Niece

Albright filed exceptions to these items against Nephew’s final account, and the law suit ensued.

Plaintiff sought compensatory and punitive damages against Nephew and Attorney.

Plaintiff claimed that Attorney owed a fiduciary duty to Uncle and his estate and committed

malpractice by failing to properly advise Uncle concerning the loan or by failing to properly

protect the stock sale proceeds. The trial Court granted summary judgment to Attorney,

dismissing both the compensatory and punitive damage claims. The Appellate Court upheld the

dismissal of the punitive damage claims but reversed (and remanded) the dismissal of the

compensatory damage claims. Notably, the Court made the following findings:

1. The Attorney’s accepting of the stock sale proceeds and preparation of the

promissory note were acts evidencing his acceptance of professional engagement on behalf of

Uncle. Id.at 632.

2. Privity of contract is not required between Attorney and one harmed by

Attorney’s breach of duty where that harm is reasonably foreseeable. Id.at 633.

3. A member of the bar owes a fiduciary duty to third parties who he knows or

should know rely on him in his professional capacity. Id.

4. While violations of ethical standards do not per se give rise to tortious claims, the

standards set the minimum level of competency which must be displayed by all attorneys.

Where an attorney fails to meet the minimum standard of competence governing the profession,

such failure can be considered evidence of malpractice. Id.at 634.

5. While the burden of proving proximate causation between breach of duty and loss

is upon plaintiffs, the Court opined that it was clear that Attorney’s conduct aided in divesting

Uncle’s estate of its most important asset. Id.at 636.

III. ADDITIONAL AUTHORITY

1. Saffer v. Willoughby, 143 N.J. 256, 272 (1996) – an attorney may not

retain fees for services negligently performed.

2. In re Palmieri, 76 N.J. 51, 58-59 (1978) – an attorney’s acceptance of

representation need not be articulated and may be inferred from the conduct of the parties.

3. RPC 1.5- requires a written retainer agreement when lawyer has not

regularly represented client.

4. RPC 1:15 (b)- Upon receiving funds or other property in which a client or

third person has an interest, a lawyer shall promptly notify the client or third person.

5. RPC 1:21-6(c)(1)(C) – requires retention of written retainer agreement for

7 years.

Documents

77th SEMI-ANNUAL TAX & ESTATE PLANNING FORUM...Requests for such permission should be sent to NJICLE, a Division of the New Jersey State Bar Association, New Jersey Law Center, One