Blended Family Not Like the Brady Bunch – At Least in Probate Court

By October 18, 2011

An informative article from Forbes regarding estate taxes. Read the full article (with clips from The Brady Bunch) here.
Peter J Reilly, Contributor
Pre-nuptial agreements are fairly common in second marriages (third, fourth etc marriages also). They are particularly important when each spouse has children. Everybody remembers how the blended Brady bunch got along.
Then there is real life. Albert Stark and his sister Joan Foster, the children of Sydney Stark and Thelia Taytelbaum daughter of Syndney’s wife Sylvia did not the Brady bunch make. Somehow a reunion movie set in a New Jersey probate court with an appellate sequel like In the Matter of The Estate Of Sydney Stark Deceased was never produced. There is no question who the sponsor would have been – Unilever maker of Q-Tips.
Sylvia and Sidney executed a prenuptial agreement in which Sidney agreed to provide for Sylvia in the event of his death. Specifically, she would be permitted to reside in a New Jersey condominium, the expenses for which would be paid by his estate. Sylvia and Sidney agreed to waive their respective interests in the event of the other’s death, including any elective share.
In his provision for Sylvia, Sidney went a little above and beyond the requirements of the pre-nuptial agreement:
Sidney also chose to utilize a QTIP trust, funded with $400,000 plus a Florida condominium he owned, which was worth $107,000. New Jersey National Bank, which later became Corestates Bank, was designated as trustee. The trust terms required that all net trust income must be distributed to Sylvia in quarterly installments up to the date of her death. Further, the trustee was to pay for the maintenance expenses of the Florida condominium and was given sole discretion to distribute principal sums to Sylvia for her health, maintenance and support. At Sylvia’s death, the residue of the QTIP trust was distributed to defendants.
Then things got a little complicated. A QTIP is, of course, not the one thing smaller than your elbow that it is permissible to stick into your ear. QTIP stands for Qualified Terminable Interest Property. It means an interest other than an outright bequest that still qualifies for the unlimited marital deduction. The income of the QTIP would go to Sylvia during her lifetime and principal, if the trustee thought she needed it, but on her death the balance goes to his kids not her kid. Counting those assets as qualifying for the marital deduction lowered the estate tax in Sidney’s estate.
There may, in fact, be a free lunch somewhere, but a QTIP is not one. The assets in the QTIP will be considered part of the taxable estate of the beneficiary spouse. The beneficiary spouse might have no control over where the assets are going. That is one of the points of having a QTIP. The problem with that, in a case like this, is that you could end up having Sylvia’s kid bearing the cost of the estate tax incurred on assets that went to Sidney’s kids. That’s what the argument in probate court was about. Albert Stark and Joan Foster thought that that was an excellent arrangement and just the thing that Sidney had intended and Sylvia had consented to. Thelia Taytelbaum, on the other hand, did not like it one little bit. Absent the QTIP assets, there would have been no federal estate tax at all in her mother’s estate.
There is a Code Section that addresses this. Code Section 2207A creates a “right of recovery” for the beneficiary spouse’s estate to effectively charge the QTIP with the extra estate tax. The beneficiary can waive the right of recovery. The Stark documents provided that Sylvia’s estate had the right to recover the estate tax on QTIP assets if she died within three years of Sidney. She died seven years after he did. Sidney’s children argued that since she accepted the benefits of the QTIP, which were more than her rights under the pre-nuptial agreement, her estate was bound by the three year limitation in the documents, even though her will did not mention anything about waiving the right of recovery. The problem with that argument is that the waiver is supposed to be “specifically indicated”.
Did anybody explain why something that could have been clear got so hazy ? Yes. The purpose of the haziness was to protect the marital deduction in Sidney’s estate:
When asked by Judge Sypek for the rationale behind the clause and why it did not directly express Sylvia’s obligation to pay all taxes from her estate and waive the right of reimbursement after three years, defendants’ counsel explained the ambiguity was purposeful to assure the trust qualified for the marital deduction. Conceding Sylvia’s acceptance of the tax obligation was not directly set forth, counsel justified the description of Sidney’s intent as a means to “take advantage of what the IRS allowed, which is to take money and get a deduction for it in the first estate that had a tax in the second estate.” An additional tax benefit allowed the deferral of the estate tax, “in this case by seven years.” Counsel advised that if the language used in the tax clause directed “that Sylvia — in order to accept the trust — must, in her will leave back to my children whatever the amount is that the [§ ] 2207A reimbursement would be” then “there would be no question that the trust would have to pay the [estate] tax[.]” However, that would trigger a reduction in the marital deduction and increase the estate tax at Sidney’s death.
Oh what a tangled web we weave, when first we practice to deceive.
The appeals court upheld the determination of the probate court that Sylvia’s estate was entitled to reimbursement from the trust:
Contrary to defendants’ suggestion, we do not determine the tax provision in Sidney’s will presented a choice to Sylvia such that her acceptance of the benefits under the QTIP trust signaled agreement that plaintiff would carry the burden to pay the full estate tax upon Sylvia’s death. We find no support for the suggestion that Sylvia is presumed to have consented to such a condition. See Olsen, supra, 119 N.J. Eq. at 106-07 (stating there is a rebuttable presumption that if a legatee or devisee does not reject a gift or devise he or she is deemed to accept it). Sidney was an attorney and familiar with will-drafting and the tax provisions at issue here. He opted to create an ambiguity to assure a marital deduction. The estate elected and was approved to receive a marital deduction, shielding the entirety of the assets comprising the QTIP trust, despite the fact that the gifts were not given to Sylvia outright. The desired tax benefits were achieved. Nothing in the language confirms the assertion of waiver, belying the necessity for “the direction against apportionment” whether explicit or implicit, that it “must be clear and unequivocal.” Adair, supra, 149 N.J. at 601 . After reading Sidney’s will, we do not agree it is unmistakably clear that he considered the issue and made a deliberate decision about the burden of taxation, which was accepted by Sylvia.