Family Member Considerations in the Estate Planning Process
Your life story could be a book. Therefore, your estate plan can only be effective if the planner understands and appreciates what keeps you up at night, what makes you tick, the nuances of your family structure, the needs of your heirs, and your goals. To that end, you must be able to develop a rapport with your planner, and talk frankly about family conflicts, struggles, jealousies, special needs, or special situations as a condition precedent to effective estate planning. Understanding the family dynamic, your goals, asset base, and titling of assets is a terrific start.
Documenting your wishes in a will, health care proxy, power of attorney, and if appropriate, trusts, is surely important. When it comes to drafting your will, you should take a step back and think about how your fiduciary would interact with the beneficiaries of the estate. Would they work well together? Do they get along, or is there a history of animosity? Are there family issues that have been suppressed by your presence that might bubble over after you are gone? Next, think about the skill set that that an executor or trustee should have, such as diplomacy, fairness, reasonableness, and a comfort level working with attorneys, accountants, financial planners, and bankers. If you are going to name co-executors or co-trustees, will the decision making be shared equally, or would one executor or trustee antagonize the other, or be domineering?
By way of background, executors are individuals or institutions nominated in a will and appointed by a court to settle the estate of the testator: i.e., to execute the provisions of the will. Once appointed by a court, the executor has the responsibility of collecting the estate assets, paying its debts and taxes, maintaining accurate books and records, and ultimately distributing the estate’s assets as provided in the will. Being an executor is a thankless job, and can entail a lot of work. You may choose as your executor a spouse, child or children, an accountant, lawyer, trust company, trusted family member, advisor, or any combination of them.
Every family has different needs. If you have been married a long time to your first and only spouse, and you trust each other, each spouse may appropriately be named as each other’s executor. If it is a second or third marriage, and there are children from prior marriages, or prior relationships, choosing a spouse as executor or in many cases, co-executor, is not a good idea. Once you introduce that spouse as a fiduciary who is supposed to work for the benefit of others, children from prior marriages tend to resent the situation and react to it with skepticism.
If you think your estate may be complicated or involves a business, or if you own assets that are difficult to value, wish to leave assets to heirs unequally, or involve a second spouse and children from prior marriages in your estate plan, think about hiring an independent individual executor or corporate executor. Appointing a corporate executor with an independent neutral third party co-executor who understands the family dynamic typically prevents your heirs from fighting amongst themselves, or second guessing the actions of their step-parent. Some are reluctant to appoint a bank as a corporate executor or trustee and cite as their reasoning the fees involved or the institutional feel of such an appointment. The reality is corporate executor fees could, in the long run, save the estate money, because a smoother estate administration is much more cost-effective than the costs of an estate in litigation.
Trinkets, bric-a-brac, and heirlooms provide yet more fertile ground for family disputes. Upon hearing that her mother passed, one daughter dropped everything, boarded a plane, and hours later, entered Mom’s home to discuss arrangements with her sister, who was already in the home … “organizing things.” After a quick look around the home, and a peek inside the mother’s china closet and jewelry box, the questions started: “Where’s the candelabra, and grandma’s china, and mom’s engagement ring?” “What do you mean?” responded the organizing daughter, who by the way, provided her mom’s care for the past two years. “Mom gave me that stuff years ago, she said she wanted me to have it.” Another fuse lit.
Inheriting money is one thing, and it is important. But heirlooms can define a legacy. And when an engagement ring, china, or photo albums are missing in action, emotions heat up quickly. The will has not even seen the light of day, at least for the daughter who just arrived, but you can see the steam coming out the ears of the surprised daughter. The visit may be brief, but the emails will be long and emotionally charged. So whether the heirlooms are jewelry, candelabras, china, photo albums, or an invitation to the White House signed by a President, do not leave the disposition of prized possessions to chance. Most wills have a clause which governs the distribution of tangible personal property, and it is up to the executor to divide that property amongst the beneficiaries as equally as is practicable. When families are tight and get along well, this is usually not a problem. But when there is friction and all the heirs are not on the same page, this standard clause is an invitation for litigation. When it comes to drafting a will, you should spend time on the distribution of personalities—a stitch in time saves nine.
You spend a lifetime building your reputation, your asset base, and your legacy. Your estate plan should be a natural extension of your life by providing appropriately for those you love, for causes near and dear to you, and it should be executed by those you deem most capable. The absence of a properly implemented estate plan is a prescription for chaos, bitterness, and dispute. Life is not stagnant. Changes in the law, your wealth, your health, your intentions, or your family structure will require your plan to be periodically reviewed by a team of advisors who embrace your priorities on an ongoing basis. Maintaining the plan’s integrity, keeping it current, and considering the good advice of your trusted advisors is the key often misplaced.
Business Succession Planning
A well-designed business succession plan that transfers the value of the business to the next generation in a tax-efficient manner will appoint a successor leadership team, structure gifts or sales of business interests to the next generation, preserve your income stream, establish your children’s post-transfer income stream to meet their needs and obligations, all while maximizing income, estate, and gift tax efficiencies and promoting family harmony. A tall order indeed, but once completed, such a plan protects and preserves your life’s work.
Once the need for a business succession plan has been established and your needs assessed, a detailed proposal letter with a understandable flowchart should be circulated to you, your accountant, life insurance professional, financial planner, attorney, banker, and other trusted advisors, and, if appropriate, shared with your heirs. A vetting of the plan can be an enlightening experience, one that sometimes reopens wounds and sometimes heals wounds.
Typically, business succession planning requires a valuation of an existing entity and the execution of a buy-sell agreement that will govern that entity. Sometimes the legal structure of the business merits the creation of new entities such as limited liability companies (LLCs) or a family limited partnership that may serve as the springboard for planned sales or gifts of all, or a portion, of the underlying business interest. Passing value to loved ones is one thing, passing control is quite another. To strike that delicate balance you must protect the golden goose first, and then divide the eggs equally. Nominating the successor manager should be a decision based on what is in the best interests of the business, and thereafter, the benefits of ownership should be apportioned equitably.
After a thorough analysis of all business succession planning options, making a commitment to a detailed blueprint, followed by execution of documents edited for your needs, you can take comfort that you have done your level best. Selling or gifting your prized possession is an emotional act, and hopefully, your children will appreciate the significance of the moment, embrace the process, and thereafter preserve the burning torch for the next generation. Such is the “American Dream.”
The Value of Careful Decision Making in the Estate Planning Process
Not until it was too late did King Lear realize his plan for bequeathing England’s riches to only two of his three daughters was ill-conceived. Not until it was too late did Esau regret selling his birthright to his brother Jacob for a cup of hot soup. Themes of hasty decisions and ill-conceived gifts make for a fascinating read, but in our profession, we find that such themes cause agita and families to fall apart.
Where there is smoke there is fire, and it generally does not take long after one’s demise for the smolder to burst into flames. It may start with a disagreement over the planning of the funeral service, the location of the burial, whether to have an open or closed casket, the wording of the obituary, or a missing goblet, but make no mistake, such disagreements stand as a beacon of things to come. Expect thereafter, a newly inked will, a surprise codicil, or an outdated will being offered for probate. Sometimes the issue is not the will at all, but rather a beneficiary designation form that was changed shortly before death, or odd financial transactions re-characterized as “gifts” by the donee. Allegations of promises made and promises broken are often lodged as a new lawyer enters the scene, and family members scramble to fight fire with fire. A caveat blocking the will from being admitted into probate may be filed, and the appropriate response may be an order to show cause seeking to vacate the caveat then docketed. Ultimately, a life’s journey ends up on trial, subject to a discovery schedule, expert reports, motion practice, briefs, mediation and a trial, all seeking to find the truth which now lies buried—a treasure never to be found but instead judicially constructed.
Too often the will is vague, the decedent’s intentions are unclear, and the survivors all have expectations. Multiple marriages often involve children from both prior and current marriages. Once one parent dies and the surviving spouse and children find themselves on different pages, the fuse is lit. It should come as no surprise that estate litigation cases are on the rise, and once filed, the gloves come off. Though a prenuptial agreement would have been helpful, even without such an agreement, a well-designed estate plan could provide equitably for children from a prior marriage and a subsequent spouse. The amount left to each, the timing of the distributions, and the estate tax implications require thoughtful consideration of the following factors:
- The financial needs of the children and the second spouse;
- The ages of the children and the age of the spouse;
- The estate tax implications of leaving money to a spouse or children;
- The terms of a prenuptial agreement;
- The length of the marriage and whether children were born to the marriage;
- The relationship between the parent and the children from a prior marriage;
- The need to hold the assets in a spousal trust or distribute outright to spouse and the need to hold assets in a discretionary trust or age terminating trust for children or distribute outright;
- The titling of assets to make sure they are consistent with the terms of the will;
- The health of the spouse and children; and
- Their respective abilities to manage money.
If an estate plan is created by an attorney who balances these needs such that the plan provides reasonably for each beneficiary class, then the likelihood of adequately protecting both your loved ones and your legacy goes up. But if the will is silent as to any class, perceived as overly generous to any one class, or harsh as to any one beneficiary, then the likelihood of probate litigation goes up dramatically.
Omitting a Child from a Will
Sometimes a child has chosen not to be part of their family, or has been a thorn in the side of his or her parents for too long, has shown no love or respect, or is simply out of favor. Alternatively, as is often the case, a child has married a spouse who is not up to snuff or appears to be the cause of a divide. Though a child does not by law have rights to inherit the riches of their parents, simply omitting the child from a will is a mistake. Such an omission may leave the omitted child with nothing to lose and all to gain by contesting the will. Why? Because a will contest burdens the other surviving beneficiaries and the estate with the costs associated with litigation, will cause the executor or administrator to delay distributions to the heirs until the litigation is concluded, and will increase the tensions and anxieties for those who now need to fight the omitted child. Even if the omitted child has a weak case, the prospect of a long and costly litigation could force a settlement, particularly if the other heirs have no stomach to battle or resources to fund the war.
Simply omitting a child from your will, or providing the sum of $1 is not prudent planning. The better course of action is to name the child in the will and specifically address why the child is not to be included as a beneficiary. The goal is to let all who read the will, including potentially a judge, know that your decision was deliberate and intentional. Sometimes, in addition to the language in the will, a handwritten letter is helpful if it details your reasoning, as it could be introduced into evidence and quickly quash the antagonist’s ill-conceived efforts.
For those who have meaningful assets, it may be prudent to include a modest bequest for the child, but not include him or her in the residuary or balance of the estate. In addition to the bequest, the inclusion of a no-contest clause, or in terrorem clause, adds teeth and gives the antagonist cause for concern. This clause provides that in the event any beneficiary contests the will, their interest lapses and is distributable to the residuary beneficiaries. Even the most adversarial beneficiary would think twice before contesting the will, for to do so would put their bequest at risk. The combination of language specifically omitting the beneficiary from the residuary, providing a small but not inconsequential fixed bequest, an in terrorem clause, and possibly a handwritten letter of explanation and a videotaped will signing, all but disarm the antagonist from contesting a will.
Whether a second spouse, child, friend, relative, neighbor, or health care provider, an antagonist caregiver typically has a false sense of entitlement, and a righteous justification for exerting his will over the will of the weakened prey. Any of these actors may dutifully attend to the daily needs of one so ill or dependent, but alas, the doer of good deeds may be a wolf in sheep’s clothing. Perhaps the caregiver is thought to be so loving and thoughtful by one so dependent, that after traveling to the doctor, pharmacy, and post office, a stop at the bank or lawyer’s office seems in keeping with what their priorities should be. The antagonist may make a reasonable suggestion to visit a new, much better estate planning lawyer, offer a timely reminder of the estate owner’s children’s irresponsible tendencies, suggest that changes to a will are “required” to save estate taxes, or they may make a host of other prompts, all at a time when one is fragile, dependent, or weak—and as a result, fortunes are diverted. Taken together, these prompts may cause a new will to be executed, or a new beneficiary form filed just days, weeks, or months before the estate owner’s death, and surprise: the “doer of good deeds” has surfaced as a primary beneficiary and executor.
In some cases, however, the decedent is the antagonist, the last minute change is their final dig/last word; and the intended consequence is anguish. Those bearing the brunt of the message typically claim that the decedent was not of sound mind, lacked the requisite mental capacity to execute the proffered will or more likely, that a sister, brother, or spouse influenced the antagonist to act so irrationally.
Beneficiary Designation Naming Corporation Effective After Corporate Buy-Out of Decedent’s Share in Business
IVF Investment Company, LLC v. Estate of Jeryl G. Natofsky, MD and US Financial Life Insurance Co., 2012 N.J. Super. Unpub. ____ (Docket No.: A-4136-10T1) (App. Div. 2012). On appeal from the Superior Court of New Jersey, Law Division, Somerset County. Before Judges Carchman, Baxter and Maven.
Defendant appeals from the trial Court’s decision to award the proceeds of insurance to Plaintiff Corporation, claiming the Court failed to properly conduct a summary proceeding under Rule 4:67, incorrectly determined the identity of the insurance policy beneficiary, and improperly excluded witness testimony before making a decision.
Dr. Natofsky joined FGC, a corporation providing medical services, as a shareholder, and entered into a shareholder’s agreement with the other shareholders. The shareholders of FGC created an LLC, IVF Investment, which was the beneficiary of insurance policies held on the lives of the shareholders, intended to fund a buy-out of their shares upon death. The Shareholder’s Agreement authorized FGC to purchase life insurance on the lives of each shareholder. In 2005, FGC and IVF Investment purchased a $3.0 million policy on the life of Dr. Natofsky, and paid all premiums. The designated beneficiary, which was never changed, was IVF Investment.
In February of 2010, Dr. Natofsky withdrew as a shareholder of FGC, negotiating a buy-out and severance package, and signed a mutual release. At the time, FGC inquired as to whether Dr. Natofsky wanted to continue the policy and pay the premiums, he did not. The parties then entered into the buy-out agreement and exchanged mutual releases. Dr. Natofsky agreed that he was not entitled to any other compensation or benefits other than the money which he was to receive under the agreement. Dr. Natofsky died soon thereafter and IVF Investment attempted to collect the insurance proceeds. So did the Estate. The insurance company refused to pay until the dispute was litigated, so IVF Investment filed suit and the Estate answered, seeking a jury trial.
IVF Investment filed a motion to proceed in a summary manner on the issue of the owner and beneficiary of the policy, and the trial Court agreed. After reviewing the matter on the papers, the Court ruled that IVF Investment was the beneficiary of the policy and ordered the proceeds paid to IVF. The Estate appealed.
The Appellate Division upheld the lower Court’s decision, finding it was proper to proceed summarily and that the only beneficiary designated was IVF Investment, that IVF had an insurable interest at the time the policy was created, and that their was no error in excluding certain testimony which was hearsay or not relevant to the issue as only a change in beneficiary filed in accordance with the insurance company’s procedures would have effectuated a change in beneficiary. The insurance policy was never intended to benefit Dr. Natofsky, and the buy-out agreement did not alter the beneficiary status on the policy.
Judicial Dissolution of Partnership Held for Decedent’s Heirs Upheld in Light of Well Documented Partnership Discord
Debaron Associates (a Partnership) and Ronald A. Durante v. Barbara R. Van Slooten and Debra S. Scheibel, 2012 N.J. Super. Unpub. ____ (Docket No.: A-6209-10T4) (App. Div. 2012). On appeal from the Superior Court of New Jersey, Law Division, Bergen County. Before Judges Reisner and Simonelli.
Plaintiff appeals from the August 4, 2011 order of the law division appointing a receiver for the partnership and ordering its dissolution.
The parties’ father, John Durante (“Durante”), a successful builder and real estate investor established a partnership in 1977 for estate planning purposes to avoid negative tax consequences. He transferred title to substantial real estate assets to the partnership and made his children, Plaintiff and Defendants, Van Slooten and Scheibel, equal one-third partners. Although not a named partner, Durante controlled the partnership until his death in 1999. One of the assets in the partnership were vacant lots abutting the Durante family home, which the parties equally inherited at Durante’s death. Durante wanted Defendant Scheibel and her husband to have the building lots and tried to assist them in their application for a building permit with the zoning board prior to his death.
In October, 1984, the parties signed an Amended and Restated Partnership Agreement which provided that the partnership may be dissolved upon the vote of all of the partners. After Durante’s death, Defendant Scheibel advised Plaintiff and Van Slooten that she wanted to withdraw as a partner and have her partnership interest purchased by them. The partnership’s accountant advised that they had to wait five years to avoid negative tax consequences, and the parties agreed to dissolve the partnership in five years. Plaintiff later refused to dissolve the partnership and also refused to conduct any partnership business unless the other partners gave him the docks and the Durante’s Lake George home. Plaintiff also refused to attend any partnership meetings. In May 2006, Defendants advised Plaintiff that they would seek judicial dissolution of the partnership.
At a partnership meeting in October of 2007, the parties agreed that Scheibel would submit an application for approval to build a house adjacent to the Durante’s family home on one of the building lots owned by the partnership and that she would purchase the lot from the partnership once she obtained approval. She incurred costs regarding same. Plaintiff later refused to sell the lot to Scheibel. Plaintiff also filed suit against Defendants seeking contributions from them to equalize their capital accounts. Scheibel filed a counterclaim seeking declaration that the partnership was an at-will partnership subject to dissolution or otherwise subject to judicial dissolution. Scheibel eventually obtained a building permit for the lot and asked Plaintiff to consent to her purchase of the lot from the partnership, which he refused to grant. Scheibel then completed construction and expended $600,000 of her own funds to build a house on the lot.
Plaintiff agreed to a bench trial on the issue of dissolution. On July 6, 2011, the trial Court rendered an oral decision finding it necessary to appoint a receiver because the partnership needed someone to take control since the parties could not agree on anything, and also ordered the partnership dissolved, permitting Scheibel to purchase the building lot where she built her house and ordered the sale or division of the remaining properties among the partners. Plaintiff appealed, arguing that the Court erred in appointing a receiver and ordering the dissolution of the partnership as unanimous consent by all partners was required to dissolve the partnership.
The Appellate Division affirmed, finding that the partnership was an at-will partnership subject to dissolution upon notice by any partner that they intend to withdraw because it did not have a fixed term and no longer had a particular undertaking. Durante formed the partnership for estate planning purposes to transfer the properties to his children without negative tax consequences. After his death, there was no further need for the partnership. As a result, Scheibel’s intent to withdraw would cause the partnership to be dissolved by operation of law. The Court also believed that a judicial dissolution was proper as partner discord rendered it impracticable to carry on partnership business.
Parties Ordered to Submit Shareholder’s Claim to Arbitration
Anthony L. Gatta v. Joseph L. Gatta, and Joseph Gatta & Sons, Inc., 2012 N.J. Super. Unpub. ____ (Docket No.: A-3161-11T2) (App. Div. 2012). On appeal from the Superior Court of New Jersey, Chancery Division, Camden County. Before Judges Graves, Espinosa and Guadagno.
Defendants appeal from the trial Court’s denial of their motion seeking to compel arbitration of a claim filed by a shareholder of a closely held corporation seeking a buyout of his shares.
The shareholders of Joseph Gatta & Sons, a father, his two sons and a daughter, entered into a shareholder’s agreement seeking to restrict the transfer of shares. The agreement also provided that all disputes be submitted to arbitration.
The employment of Plaintiff shareholder was terminated and he filed suit, seeking access to the books and records and a purchase of his shares. His complaint was amended to include counts for damages as an oppressed minority shareholder and breach of fiduciary duty. Defendants sought to compel arbitration and their motion was denied by the trial court, which found that plaintiff’s underlying claims did not arise under the agreement. Defendants appealed.
On appeal, the Appellate Division reversed, finding that the genesis of Plaintiff’s claim amounted to a request for a buyout of his shares, a claim clearly within the ambit of the arbitration provision of the shareholder’s agreement. The matter was governed by Pennsylvania law requiring the Court to broadly construe the arbitration provision of the agreement. Once a court finds that the dispute falls within the arbitration provision, then the court must order the parties to arbitration. The parties were therefore ordered to arbitration.
Validity of Mortgage Created by Decedent as Part of his Estate Plan Subject to Review by Bona Fide Purchaser for Value of Decedent’s Interest in an LLC
Sea Village Marina, LLC and Baywatch Marina, LLC v. Patricia Ann Best, 2012 N.J. Super. Unpub. ____ (Docket No.: A-0193-11T2) (App. Div. 2012). On appeal from the Superior Court of New Jersey, Chancery Division, Atlantic County. Before Judges Lihotz, Waugh and St. John.
Plaintiff, Baywatch Marina, LLC (“Baywatch”) appeals from the Chancery Division’s grant of summary judgment against Baywatch’s attempt to review the validity of a mortgage established for Decedent’s wife pertaining to his interest in an LLC.
Prior to 1994, Decedent, John Best (“Decedent”) and his wife, Patricia Ann Best (“Patricia”) created Sea Village Marina, a community of floating homes and a boatyard. In April 1994, Patricia and John transferred a 25% interest in the LLC to their son, Mark. Patricia owned 75%.
In 2003, John was diagnosed with a terminal illness and began working on an estate plan. John intended to acquire Mark’s interest in the LLC for a $200,00 mortgage, which would be subordinate to a $1.6 million mortgage that the LLC would give to Patricia and John with rights of survivorship. In October of 2003, Patricia assigned her 75% interest in the LLC to John in exchange for a $1.6 million note and mortgage. The mortgage stated it was given in exchange for loans to the LLC made by Patricia and John. According to John, they had lent over $1.9 million over the years. John signed his Will and directed that his interest in the LLC be held until the two mortgages were paid.
John died on December 22, 2003 and his Will was probated. Although John sought a transfer of Mark’s 25% interest prior to his death, Mark refused, so Mark and the Estate became owners of the LLC at John’s death. Patricia recorded the mortgage on December 30, 2003.
While Patricia was initially appointed as Executor of the Estate and as managing member of the LLC, she applied to the Court for a third party administrator, which was granted, with the Court appointing a third party, Barbara Lieberman (“Lieberman”).
In July 2007, Lieberman field an application in the probate part to determine the validity of the mortgage. Instead of deciding the issue, the Judge ordered John’s heirs to file objections by October 15, 2007, and when no objections were filed, the Judge observed that since there were no objections, that the mortgage is valid “in a general sense”, but did not issue an Order.
Lieberman then applied to the Court for directions on the sale of the LLC. Bids were taken and one of the bids, submitted by Baywatch, was accepted by the Court. Baywatch specifically excluded from the purchase price the $1.6 million mortgage which Baywatch intended to challenge.
After Baywatch closed on the sale, it filed a Complaint seeking to set aside the $1.6 million mortgage as invalid. In response, Patricia filed a motion for summary judgment claiming that Baywatch could not challenge the mortgage as the Estate’s heirs did not challenge the validity. The trial Court agreed and granted summary judgment to Patricia. This appeal followed.
On appeal, the matter was reversed for further proceedings on the validity of the mortgage, holding that the trial Court erred in light of its failure to rule on the validity of the mortgage, especially in light of Baywatch’s clear offer and its intention to challenge the mortgage in the first instance.
Collection of Judgment Against Limited Partnership
Adams Associates, LLC v. Frank Pasquale Limited Partnership, et al., 2011 N.J. Super. Unpub. ____ (Docket No.: A-5724-08T1) (App. Div. 2011). On appeal from the Superior Court of New Jersey, Chancery Division, Hudson County. Before Judges Lisa, Reisner and Alvarez.
This appeal was taken by Plaintiff from the trial court’s refusal to enter a judgment against Defendant, Frank F. Pasquale, and the Frank Pasquale Limited Partnership, for the loan given to his son, Frank A. Pasquale, who misrepresented to be acting on behalf of the Partnership in obtaining a loan from Eastern Savings Bank.
The mortgage went into default and when the father found out about the default judgment entered against him, he moved to vacate the judgment, which was granted. In the other action, brought by the assignee of the underlying mortgage, a judgment was entered against the son, but the father and the Partnership were granted summary judgment. Plaintiff – assignee, appealed, and the lower court’s decision was upheld on appeal.
Factually, the father and his wife purchased a property in Hoboken in which he operated his business. In 1994, the property was placed into a limited partnership. A separate company was formed to act as general partner, and father appointed himself individually as limited partner. Father assigned a portion of the capital and profits to trusts in the name of his children, but none of the children were designated as partners or employees. Under the partnership agreement, only the father had the right to mortgage the property or to borrow money on behalf of the partnership. The son was also not appointed as agent to act on behalf of the partnership.
In 1996, father semi-retired, still coming in once a week. His son, Frank A. Pasquale, took over the operations of the business which substantially declined until the business was closed in 2005. Frank A. Pasquale applied for a mortgage to start a similar business. He applied for a mortgage forging documents showing that he owned the property which was actually owned by the partnership. The loan was approved and the underlying property was used as collateral. The loan entered default in 2005. A foreclosure complaint was filed but the father was never served. When he found out about it, he moved to vacate the default judgment entered against his son, and the Court agreed. Frank A. Pasquale had nothing to do with the partnership and did not own the underlying property. The mortgage against the property was removed of record and the default judgment vacated. A judgment was entered against Frank A. Pasquale individually.
Payment of Estate Taxes From QTIP Trust Denied
In the Matter of the Estate of Sidney Stark, Deceased, 2011 N.J. Super. Unpub. ____ (Docket No.: A-3913-09T4) (App. Div. 2011). On appeal from the Superior Court of New Jersey, Chancery Division, Mercer County. Before Judges R.B. Coleman and Lihotz.
Plaintiff, as executor of Sylvia Stark’s estate, sought reimbursement from the Estate of Sidney Stark for estate taxes imposed on Sylvia’s interest in a QTIP trust established by Sidney for her benefit. The Defendants, children of Sidney’s first marriage who were the remainder beneficiaries of the QTIP trust, opposed the application. The trial court entered summary judgment in favor of plaintiff ordering defendants to reimburse plaintiff for all of the federal and a portion of the New Jersey estate taxes attributable to the QTIP trust’s assets. On appeal, defendants’ argue that the trial court misinterpreted the tax clause of Sidney’s will.
Under Sidney’s will, he directed that “unlessSylviadirects otherwise byWill, ifSylviadies within three (3) years after the date of my death”, his executor is to reimburse Sylvia’s estate for the estate taxes attributable to the assets of the QTIP trust. Sidney passed away n 1994 and the transfers to the QTIP trust qualified for the marital deduction. When Sylvia died in 2001, estate taxes were due on the assets of the QTIP trust from her estate. Under IRC §2207A(a)(1), the executor may recover the amount of estate tax attributable to the inclusion of the QTIP property in the surviving spouse’s estate from a person receiving the property. This right to reimbursement can only be waived if the QTIP trust beneficiary specifically indicates a clear and unequivocal intent to waive it in her will. Defendants claimed the estate tax clause of Sidney’s will and his probable intent required Sylvia’s estate to pay the tax. Based on IRC §2207A(a)(1), the trial court disagreed, and this was affirmed on appeal, with the court finding thatSylviadid not waive her right to reimbursement.
Beneficiary Designation – Second Wife
In the Matter of Nathaniel Pallone, 2010 N.J. Super. Unpub. ____ (Docket No.: A-0968-09T3) (App. Div. 2010). On appeal from a Final Decision of the Department of the Treasury, Division of Pensions and Benefits. Before Judges Cuff and Simonelli.
This appeal concerns the life insurance benefit payable on the death of a member of the faculty at Rutgers University. Upon Decedent’s death, the death benefit was paid to Decedent’s first wife, who was the designated beneficiary. Decedent’s second wife argued that the death benefit should have been paid to her pursuant to a Change of Beneficiary Form which was signed by the Decedent prior to his death and filed with the Division of Pensions several days after his death.
The form submitted by Decedent’s second wife named her as primary beneficiary, and had “white-out” over the contingent beneficiary portion of the form. Due to the white-out, the form was rejected by Division personnel. There were also inconsistencies in the underlying facts presented by counsel for Decedent’s second wife. Based on the foregoing, the appellate court found that the Division properly rejected the change, authorizing payment to Decedent’s first wife.
Life Insurance – Beneficiary Designation (Divorce)
In re Estate of Paul Brown, deceased, 2010 N.J. Super. Unpub. LEXIS 681 (Docket No. A-5069-08T3) (App. Div. 2010). On appeal from the Superior Court of New Jersey, Chancery Division, Probate Part, Gloucester County. Before Judges Lisa and Baxter.
This matter involved the court’s apportionment of the proceeds of a life insurance policy among the Decedent’s children and his third wife based on the terms of a Property Settlement Agreement (“PSA”) which was upheld on appeal.
This appeal involved a dispute over the right to certain life insurance proceeds on Decedent’s life between Decedent’s third and final wife and Decedent’s children from his first marriage. Decedent entered into a PSA requiring him to maintain life insurance for his 2 minor children. Over the years, Decedent increased the policy amounts payable by his employer, each time, deleting the names of his sons as beneficiaries, in violation of the PSA, and naming his third wife as beneficiary. The increases were done on 3 separate occasions, only the last of which was done while Decedent was married to his third wife. Recognizing that Decedent had violated the PSA, the court was required to equitably apportion the proceeds.
The court concluded that the most equitable distribution was one that recognized both Decedent’s obligations under the PSA and Decedent’s desire to provide financial security for his third wife. Upon balancing the equities, the court determined that Decedent’s children should receive an amount up to the second increase, before Decedent met his third wife, with the remainder being distributed to his third wife.
The appellate court upheld the lower court’s decision, and also held that the matter was properly adjudicated on summary judgment as a matter of law, without the necessity of a plenary hearing.
Life Insurance – Beneficiary Designation (Divorce)
Provident Life & Casualty Insurance Company v. The Estate of ConsuelaHoward, et al., 2010 U.S. Dist. LEXIS 95153 (Docket No. 06-4482) (U.S.D.C. 2010).
The Estate filed a motion seeking summary judgment declaring the proceeds of life insurance on the Decedent’s life, which named the Decedent’s husband, as estate property in light of husband’s conviction of the murder of Decedent. The Court granted the motion based on N.J.S.A. 3B:7-1.1(a), wherein an individual forfeits all benefits of the estate if found to be responsible for the intentional killing of the Decedent. The court also remanded the matter to the Chancery Division on the issue of whether a constructive trust should be established for the minor children of the Decedent until they reach 21 years of age.
Life Insurance – Beneficiary Designation (Divorce)
American General Life Insurance Company v. Mi Ja Jae, et al., 2010 U.S. Dist. LEXIS 75857 (U.S.D.C. 2010).
This matter involved a dispute over the proceeds of a life insurance policy on Decedent’s life. Decedent purchased the policy and named his then fiancée as primary beneficiary, with his brother and sister as contingent beneficiary. Decedent broke off his relationship with his fiancée, and married someone else. Decedent made hand written changes to the beneficiary designation prior to his death naming his wife as beneficiary, but failed to send a copy of a new beneficiary designation form to the insurance company. The Court granted summary judgment directing the life insurance payable to the beneficiaries contained on the original form in the insurance company’s possession, thereby disregarding the handwritten change by the Decedent.
Annuities – Assets Passing by Operation of Law
Lincoln Benefit Life Company v. Linda Occhipinti, et al., 2009 N.J. Super. Unpub. LEXIS 535 (Docket No. A-2973-07T2) (App. Div. 2009). Before Judges Reisner and Sapp-Peterson.
Issue: Does a provision in Decedent’s Will expressly disinheriting a child control the disposition of an annuity contract which by its terms is distributable to the “Decedent’s surviving children”?
Holding: No. The terms of the annuity contract control, and the proceeds are distributable to each of the Decedent’s surviving children, including the one child specifically disinherited under Decedent’s Will. The annuity contract specifically provided that in the absence of a designated beneficiary, the annuitant’s remainder passed to the Decedent’s surviving children. The document falls outside of the Will and is a separate contract which controls the disposition of the annuity. The lower Court found that the contract was clear and unambiguous, and is therefore enforceable.
Business Succession Planning – Buy-out of Decedent’s Interest
Reutter v. Michael E. Dalsey, D.O., Reutter-Dalsey Associates, P.A., et al., 2009 N.J. Super. Unpub. LEXIS 1577 (Docket No. A-2610-07T3) (App. Div. 2009). Before Judges Winkelstein, Fuentes and Gilroy.
Issue: Was the trial Court’s grant of summary judgment proper in light of it’s refusal to allow extrinsic evidence to construe the terms of the Shareholder’s Agreement entered into by the Decedent governing the buy-out of his interest in a medical practice?
Holding: No. The trial Court erred by not allowing the parties to introduce extrinsic evidence as to their intentions when entering into the Shareholder’s Agreement pertaining to the utilization of life insurance to fund the buy-out of Decedent’s interest in the medical practice.
The trial Court refused to allow the plaintiff to introduce testimony of the attorney who drafted the Shareholders’ Agreement and Deferred Compensation Agreement and the contemporaneous letter written by the attorney which emphasized the purpose behind the agreements. On appeal, the Court found that Defendant should be given sufficient opportunity to present relevant extrinsic evidence to assist the trier of fact in determining what the parties intended when they signed the agreements in question governing the buy-out of Decedent’s shares in the medical practice.
Business Succession Planning – Life Insurance – Buy-Out
Banco Popular North America v. Pepe Sneakers, et al., 2009 N.J. Super. Unpub. LEXIS 2028 (Docket No. A-1717-07T1) (App. Div. 2009). Before Judges Fuentes, Gilroy and Chambers.
Issue: Is the Court’s grant of summary judgment and denial of a constructive trust over a life insurance policy intended to fund the buy-out of the shares of Decedent’s partner proper in light of the extrinsic evidence presented to the Court?
Holding: No. Two brothers, who were shareholders of a sneaker company, purchased individual life insurance policies on their own lives pursuant to the terms of a Shareholder Agreement entered into between them. The life insurance was required to be used as a buy-out of a deceased brother’s share in the company. Instead of complying with the shareholders’ agreement, each brother named their spouse as beneficiary and did not deposit the life insurance with the trustee, as provided for by the agreement. One brother died, and his life insurance was paid to his wife as designated beneficiary. The surviving brother stopped making payments under a loan with Banco Popular. Suit was filed by Banco Popular seeking to recover the amount due on the promissory notes signed by the brothers. A cross-claim was filed by the surviving brother against the deceased brother’s estate seeking to recover the proceeds of the life insurance policy. Motion for summary judgment requesting a constructive trust over the proceeds of the life insurance was denied as the lower Court found that the terms of the Shareholder’s Agreement governing the life insurance was abandoned. The Appellate Court reversed and remanded the matter for further proceedings as the trial Court failed to properly consider the intentions of the parties as to the abandonment of the agreement between them.
Business Succession Planning – Transfer of Decedent’s Interest in LLC –Operating Agreements
Brick Professional, LLC, et al. v. Anthony Napoleon, Jr., 2009 N.J. Super. Unpub. LEXIS 3194 (Docket No.: A-1283-08T3) (App. Div. 2009). Before Judges Axelrad and Winkelstein.
Issue: Are the notice, election and valuation procedures set forth in an LLC’s Operating Agreement unenforceable as contrary to the LLC statute?
Holding: No; the terms of the Operating Agreement control the admission into the LLC upon the death of a member.
The terms of the Operating Agreement provided that upon the death of a member, his interest must first be offered to a named designee for a period of 30 days. If the designee does not act, the remaining members are compelled to buy out the deceased member’s interest in the company.
The trial Court found that the election procedure set forth in the Operating Agreement violated the statute, and instead, what was intended under the agreement was to affect assignee status on the member’s designee. The trial Court held that upon the death of the member, the member’s designee became an “assignee” under the statute entitled to allocations and distributions in the company. The trial Court therefore rejected plaintiff’s contention that the member’s interest should be bought out at date of death.
On appeal, the Court held that members of an LLC can adopt election procedures that differ from the statutory scheme. The LLC statute governs only in the absence of an operating agreement. As a general matter, the terms of an operating agreement for which the members expressly bargained will be upheld. The matter was therefore remanded for a determination as to whether an election was made and if not, as to the appropriate valuation procedure to be engaged pursuant to the terms of the Operating Agreement.
Business Succession Planning – Valuation
W.R. Huff Asset Management Co., LLC, et al. v. The WilliamSoroka 1989 Trust, et al., 2009 U.S. Dist. LEXIS 17940 (2009). Before Judge Hayden.
Issue: Is the interest of a member in a limited liability company terminated when, as part of his estate planning, he makes an invalid attempt to transfer his interest in the company to a trust containing a non-member beneficiary without first offering his interest to the rest of the membership, in violation of the Operating Agreement?
Holding: No. The attempted transfer was not effectuated and was therefore not in violation of the Operating Agreement.
Declaratory judgment was sought seeking to declare the attempted transfer by a member to his revocable trust as a violation of the Operating Agreement. A counterclaim sought payments through the end of the company’s existence, which expired after 10 years.
The Operating Agreement, governed by Delaware law, gave the company a right of first refusal on the sale or transfer of shares before they could be offered to a third party. A trust was created by one of the members and a letter sent to the manager to transfer the member’s interest to the trust. Pursuant to the terms of the Operating Agreement, this attempted transfer was void as it did not meet the requirements of the Operating Agreement. The Operating Agreement also did not give the company automatic redemption rights upon an attempted, but invalid transfer, it merely gave the company the right to override an attempted transfer to a non-member by purchasing for itself the interest to be transferred.
The Court therefore found that based on the terms of the Operating Agreement, and past practices, that the Decedent’s estate is entitled to continue in the member’s shoes and receive ongoing distributions until the end of the company’s existence.
Estate Planning – Beneficiary Designation – Divorce
Hadfield v. Prudential Ins. Co., 408 N.J. Super. 48 (App. Div. 2009), certif. denied, — N.J. – (N.J. Oct. 1, 2009). Before Judges Wefing, Parker and Lewinn.
Issue: Is a life insurance beneficiary designation naming Decedent’s ex-wife as beneficiary voided pursuant to N.J.S.A. 3B:3-14?
The parents of a Decedent filed suit seeking to void the beneficiary designation of Decedent’s life insurance policy naming his ex-wife as beneficiary.
The provisions of N.J.S.A. 3B:3-14, although changed after Decedent’s initial designation of his ex-wife as beneficiary, controlled the disposition of his life insurance policy. Under the statute, a divorce or annulment revokes any revocable dispositions made by a divorced individual to his former spouse in a “governing instrument”, which includes a life insurance policy.
Affirming the trial Court, the Appellate Division held that the proceeds of the life insurance should pass as if the ex-wife predeceased the Decedent.
Estate Planning – Beneficiary Designation – ERISA
The Prudential Insurance Company of America v. Giacobbe, 2009 U.S. Dist. LEXIS 101202; 48 Employee Benefits Cas. (BNA) 2016 (U.S. Dist. Ct. 2009). Before Judge Thompson.
Issue: Is Decedent’s wife the proper beneficiary of Decedent’s group term life insurance policy as named beneficiary even though the Decedent submitted a change of beneficiary forms naming his parents and brother as beneficiaries to his employer, Prudential Insurance Company of America, who failed to process the change prior to Decedent’s death due to missing information on the form?
Holding: Yes, Decedent’s wife is the proper beneficiary. The change form submitted by Decedent was properly rejected, and the Court did not find that Decedent substantially complied with the requirements set out by Prudential to effectuate the change in beneficiary.
On March 6, 2007, Decedent submitted forms to change the beneficiary of his life insurance policy from his wife to his parents and brother. On March 21, 2007, the beneficiary change form was sent back by Prudential unprocessed as the form lacked the requisite social security numbers. Decedent died on March 22, 2007 without having responded to Prudential’s letter.
Decedent’s wife claimed that the change in beneficiary was governed by ERISA and required her consent to make a change. This was rejected as the plan was a welfare benefit plan which did not require consent, as opposed to a pension benefit plan, which does. A pension benefit plan provides retirement income whereas a welfare benefit plan provides benefits after the occurrence of a specific contingency.
The change form failed to meet Prudential’s requirements for making such a change. Failure to administer the plan in accordance with the beneficiary rules established by Prudential would be a violation of ERISA. Defendants claimed that Decedent substantially complied with Prudential’s requirements and the change should be enforced. If the insured substantially complied with the process required for a change of beneficiary (made every reasonable effort to effect the change in beneficiary), it may be enforced under New Jersey law. This is narrowly construed.
The Court held that Decedent failed to make every reasonable effort to comply with the change in beneficiary designation and his actions are therefore not sufficient to establish substantial compliance. He completed the forms himself and was in contact with the Defendants. He could have asked them for their social security numbers and placed them on the form, but failed to do so. Prudential properly rejected the change form and the Decedent’s wife is therefore entitled to the life insurance proceeds.
Estate Planning – Malpractice
Joseph DeVino, Jr. v. Gerald R. Della Torre, Esq., 2009 N.J. Super. Unpub. LEXIS 256 (Docket No.: A-2569-07T2) (App. Div. 2009). Before Judges Fuentes and Chambers.
Issue: Was Decedent’s child entitled to sue the scrivener of Decedent’s estate plan after a full trial in probate Court and after reaching a settlement with his siblings on the distribution of Decedent’s estate?
Holding: No. The matter was dismissed on summary judgment.
The scrivener prepared an estate plan for the Decedent whereby he left his residuary estate in equal shares to his 3 children. A Codicil was then executed disinheriting Plaintiff, Decedent’s son. At Decedent’s death, Plaintiff filed suit seeking to challenge his disinheritance. The matter was settled with plaintiff receiving $265,000. Plaintiff then filed suit against the scrivener of Decedent’s estate plan for malpractice claiming that he received less than 1/3 of the Decedent’s estate in settlement, and that the scrivener was liable for the remainder. The matter was dismissed on summary judgment by the trial Court which rendered a 23 page written opinion, and was affirmed on appeal. The Court held that Plaintiff failed to articulate a viable legal malpractice claim against the defendant – scrivener.
Irrevocable Trusts – Transfer of Assets to Trustee
Koste v. Turski, et al., 2009 N.J. Super. Unpub. LEXIS 2218 (Docket No.: A-1068-08T2) (App. Div. 2009). Before Judges Fisher and Gilroy.
Issue: Is it proper for the trustee of an irrevocable grantor trust which was established by the trustee pursuant to a general Power of Attorney given to her by the grantor, to transfer to herself by Deed real property out of the trust pursuant to the terms of the trust?
Holding: Yes. The trust was properly established pursuant to the power of attorney and that trust provided adequate authority for the transfer to be made.
Decedent’s daughter, pursuant to a Power of Attorney, created an irrevocable grantor trust in the Decedent’s name, with daughter as Trustee. Daughter had full discretion to distribute the principal and income of the trust to the daughter, and upon Decedent’s death, to daughter outright, and in default, in equal shares to daughter’s children. The Decedent conveyed real estate to the trust by Deed, reserving a life estate. A subsequent Deed was made by Decedent and daughter, as Trustee, conveying the property to daughter, individually. Suit was brought by a child of the daughter, after her death, seeking to void the transfer out of the trust to daughter, individually. Plaintiff argued that the daughter was the settlor of the trust and the trustee, and in violation of her duty to the residuary beneficiaries, liquidated the trust. The Court found that the daughter was not the grantor, she merely acted with authority under the Power of Attorney, and the terms of the trust gave her the authority to make the Deed transfer. Dismissal of the complaint was therefore affirmed.
Spendthrift Trusts – Child Support
Lerman v. Lerman, et al., 2009 N.J. Super. Unpub. LEXIS 2093 (Docket No.: A-1953-07T3) (App. Div. 2009). Before Judges Winkelstein and Gilroy.
Issue: Did the trial Court have the authority to order the payment of child support arrearages owed by a beneficiary of a spendthrift trust established in Florida?
Holding: No; the spendthrift provisions set forth in the trust agreement giving the trustees absolute discretion as to how much income and principal is to be distributed to the beneficiary prevents the Court from issuing an order requiring payment of child support owed by that beneficiary. The trust also provided for restriction on alienation and standard spendthrift provisions, and consisted of an account held in the State of Florida.
Factually, a judgment of divorce was entered and the beneficiary of the trust was ordered to pay alimony and child support. The beneficiary was eventually incarcerated, and a New Jersey Court issued a writ of execution to freeze all funds in the name of the beneficiary to secure the payment of child support arrearages. This included the account held by the spendthrift trust for his benefit. A restraining order was entered in Florida and the within appeal was filed.
A writ of execution may not be issued against the trust assets, it may only be issued against assets held in the beneficiary’s individual name. The Court upheld the spendthrift provisions, holding that the right of a third party to levy on assets of a beneficiary of a spendthrift trust are limited to disbursements from the trust, and if disbursements are wholly within the trustees’ discretion, the Court may not order the trustee to make such disbursements.