Taxes First: Specific Bequest Cannot Be Used to Offset Promissory Note

Christopher C. Economaki, a widower, died on September 28, 2012. He was survived by his two daughters, Christine and Corinne. Christine was named as Executor of his estate.

Christopher’s Will poured over into a Trust. The Trust left a $215,000 bequest to Christine to adjust for a comparable annuity distribution to Corinne. The balance was to be divided in proportions among his daughters and Christine’s two children.

However, Christopher left virtually no distributable estate in probate estate or trust. Although he amassed millions of dollars of assets over his life, he made substantial gifts to his family after his wife died in 2008. Upon his death, his assets consisted primarily of an annuity worth $4,292,800 as well as several life insurance policies and an IRA of modest values. These assets passed to his daughters and Christine’s two children. The only significant asset to pass through his estate and trust was the obligation under a promissory note, with a 5 year term, executed by Christine and delivered to Christopher in April 2010 – coincidentally in the amount of $215,000.

Per Christine’s accountant, the various federal and state estate and gift taxes totaled $1,895,955. Because there was no liquid asset to pay the taxes, Christine proposed that the she and her sister contribute $731,982 each, and that her daughters contribute $192,995.50 each to pay these obligations. Corinne contributed $649,858 and Christine sued her for the balance of $82,024.

Corinne contended that estate assets should be the first source of funds to pay the taxes owed by the estate, and that repayment of the $215,000 loan by Christine would be this source. Christine argued that she forgave or canceled the note by waiving the specific bequest of $215,000 in the Trust. Both sides moved for summary judgment. The trial court agreed with Corinne and its decision was upheld by the Appellate Court (Riedl v. Economaki, 2016 N.J. Super. Unpub. LEXIS 2169 (App. Div. Sept. 30, 2016)).

In making its decision, the Court cited the language in the Trust which mandated that all taxes and debts be paid from the trust estate. The Court rejected Christine’s argument that such taxes should be apportioned, as the language of the trust prevails. The Court further held that if Christine had repaid the Note, $215,000 would be available to pay taxes prior to seeking contributions from other beneficiaries.

In making its decision, the Court rejected Christine’s argument that she could offset her debt to her father by waiving her specific bequest. As it strongly stated, the taxes, debts and administrative expenses of an estate must be paid before the enjoyment of any bequest. To try to offset the two was deemed an unacceptable manner of handling these obligations.

In all the Court’s decision is significant in two regards. First, it affirms that a will or trust containing language that mandates the manner in which estate taxes are paid can supersede the state statute that prorates these obligations in the absence of such language. Second, debts of estate beneficiaries are clearly assets of an estate, and they cannot be forgiven especially when such forbearance would thwart the rights of taxing authorities or creditors.

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Thomas D. Begley, III

About the Author

Thomas D. Begley, III is the co-chair of the Trusts & Estates Group at Capehart Scatchard. He is a Certified Elder Law Attorney (CELA) who earned both his undergraduate and law degrees from Georgetown University, located in Washington, D.C. He concentrates his practice in the areas of estate and tax planning, estate administration, small business representation, elder law, and probate litigation. He is an accomplished author and lecturer who has frequently spoken on behalf of the National Academy of Elder Law Attorneys and the New Jersey Institute for Continuing Legal Education as well as other professional organizations. He has been named a “Super Lawyer” as voted by his peers and facilitated by New Jersey Monthly in the area of Trusts and Estate Litigation on numerous occasions. He has attained the prestigious AV rating by Martindale-Hubbell.

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