NJ Court Affirms Inheritance Tax Assessments Are Immune From Settlements
Joseph Rendeiro died on December 3, 2006. His Last Will and Testament, dated June 2, 2006, left a specific bequest of $10,000 to his granddaughter, Jessica Fagin, a $25,000 bequest to his sister, Mary Pereira, and the rest of his $2,218,733.66 estate to his son-in-law, Peter De Rosa who was also named Executor of the estate.
Jessica Fagin filed an action in the probate court seeking to set aside the Will on the grounds that the Will was the product of undue influence exerted by De Rosa and that her grandfather was not mentally competent when he signed the Will. In 2008, the matter was mediated and the parties reached an agreement whereby Jessica would receive $400,000 rather than $10,000.
In June 2009, De Rosa filed a New Jersey Inheritance Tax return and paid $178,925.57 plus interest. The return was rejected by the State which assessed the tax at $239,279.22. De Rosa had asserted that the tax due to the State should be calculated in a manner which incorporated the settlement with Fagin.
Fagin, as a granddaughter, was a Class A beneficiary and exempt from the inheritance tax. De Rosa, was a Class C beneficiary, who was subject to a tax calculated at rates ranging from 11% to 16%. De Rosa argued that the tax should be assessed in a manner reflecting the actual distribution. The State maintained that the tax to be assessed is calculated solely by the terms of the Will and shall not be altered by a settlement.
The Appellate Court agreed with the State. In De Rosa v. State of New Jersey (Docket No.: A-2995-14T1, Decided July 19, 2016), the Court maintained the standard set forth in Pope v. Kingsley, 40 N.J. 168, 174 (1963), that held that the inheritance tax must be calculated in accordance with the distribution made in a Will and not by the terms of a settlement.
The takeaway from this case is that settlements of contested probate matters should be undertaken with the knowledge that taxes will be assessed at the rates imposed as a result of the Will and that cannot be negotiated away. Thus, in determining whether a settlement is appropriate, a calculation of tax liabilities should be undertaken prior to reaching an agreement.
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