Executor’s Failure to Repay Note Before Making Distributions Constituted A Breach of Fiduciary Duty
Riedl v. Economaki, 2016 N.J. Super. Unpub. LEXIS 2169 (App. Div. Sept. 30, 2016).
Plaintiff, Christine Riedl, a daughter and executor of the Estate of Christopher C. Economaki, appealed from an order granting summary judgment to decedent’s other daughter, defendant Corinne Economaki. Decedent died testate and the dispute arose over the payment of estate, inheritance, and gift taxes. The assets in the estate were worth millions of dollars, including an IRA, annuity, various life insurance policies and death benefits.
The will gifted monies to decedent’s four beneficiaries: Christine, Christine’s two children, and Corrine; the remainder poured over into a trust. The trust granted $215,000 to Christine and the balance as follows: 40% to Christine, 40% to Corrine, and 10% to each of Christine’s two children. The non-probate assets did not pass through the estate, but were included for tax purposes. The estate, gift, and inheritance taxes owed on the gross estate equaled $1,829,955.00.
Because of illiquidity, Christine determined that each beneficiary should pay a proportionate share of taxes. Corrine rejected Christine’s estimate. Christine then filed suit seeking $82,024 as an underpayment. In response, Corrine alleged that Christine canceled a $215,000 debt that she owed to the decedent and Christine’s self-dealing contributed to the estate’s illiquidity. Although Christine paid interest due into the estate, she claimed the note’s principal balance was paid in full because she waived a $215,000 bequest made to her in the Trust agreement.
The issue before the court was whether Christine should have repaid the Note’s principal balance into the Estate. The trial court found that Christine’s decision to satisfy the debt through a waiver was contrary to the trust provisions. Had Christine repaid the note, the court explained the money could then have been utilized to pay the $36,404 gift tax out of the trust as intended. Notably, the court stated that the IRS’s statutory right to collect an unpaid gift tax from a done should not be interpreted to grant an executor that same right to reimbursement, especially when the controlling testamentary instruments state otherwise.
The Appellate Division affirmed noting that Christine mistakenly assumed an executor has a right or duty to collect money from estate beneficiaries. The appeals court explained that the tax code and regulations do not grant such authority to an executor; that authority rests with the IRS.
In addition, the Appellate Division referenced N.J.S.A. §3B:24-2, noting the statute directs apportionment of estate tax liability among transferees, except in a case where a testator otherwise directs in his or her will. Here, the appeals court found the decedent’s will and trust directed payment of all taxes out of the trust without apportionment or proration.
Finally, the appeals court found that Christine’s failure to repay the Note constituted a breach of fiduciary duty that contributed to the estate’s illiquidity. Thus, Appellate Division determined that the trial court appropriately found Christine’s method of calculating the estate property that poured over into the trust was improper as she had a fiduciary duty to collect the Note first, and then pay the claims against the estate – including taxes – before making distributions.