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Brooklyn judge blocks heir’s attempt to avoid N.Y. tax on $6M estate

February 20, 2015 By Charisma L. Troiano, Esq. Brooklyn Daily Eagle
Judge Diana Johnson. Eagle photo by Mario Belluomo

A Brooklyn Surrogate judge rejected a petition of an heir who sought to disclaim her infant daughter’s interest in a deceased grandparent’s estate for the purpose of avoiding a large estate tax liability.  

While New York courts have on occasion granted the renunciation of an infant’s right to an inheritance, the Brooklyn court held earlier this month that the best interest of the child must be a determining factor. 

Sharon Lindsay died without a will in May 2014, leaving behind three distributees of her large estate: her husband, son and daughter, Kimberly Friedman. Upon her death, Lindsay left a large estate — approximately $6.25 million — to be shared among her immediate loved ones. Due to New York Estate Tax law, Friedman’s and her brother’s share would be subject to a $200,000 tax liability. The share allotted to Lindsay’s husband (Friedman’s father), would, however, be free from tax liability thanks to a martial exception. 

Friedman and her brother concocted a plan that would allow their father to inherit the entire $6 million estate tax free: by renouncing their share of the estate. If Friedman and her brother were no longer deemed beneficiaries, they reasoned, the full amount of the late Lindsay’s estate would vest in her husband, and he could take advantage of the tax liability exception.  The legal glitch in the tax avoidance plan was Friedman’s infant daughter, who would inherit Friedman’s share of the estate if Friedman disclaimed her own interest.

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As Brooklyn Surrogate Judge Diana Johnson explained in her ruling in the case, in order for the “desired tax effect” to occur, Friedman would have to renounce her share of the estate as well as her daughter’s interest in Friedman’s disclaimed inheritance.

“If [Friedman renounces interest], then under the provisions of EPTL 4-1.1(c) her daughter, the infant herein, instead of [Lindsay’s] spouse, would be entitled to the renounced interest. Thus a renunciation on behalf of [Friedman’s child] must be procured for the plan to have the desired tax effect.”

New York courts have allowed parents to renounce their child’s interest in an inheritance, and Friedman petitioned that it would be in the “best interest” of her father and brother to avoid a high estate tax. The rationale behind parental renouncement of a child’s rights in this context rests on the idea that a child inherits through the parent and not the grandparent.

In other words, because Friedman’s daughter would inherit directly from Friedman, if Friedman were to disclaim her inheritance in Lindsay’s $6 million estate, Friedman’s daughter would also inherit nothing, since Friedman would receive nothing.

“Thus the infant was not giving up anything which he/she would otherwise possess,” the Brooklyn Surrogate’s Court noted.
The Brooklyn Surrogate’s Court, however, turned to New Jersey for applicable precedent. Citing a 1987 case from the New Jersey Superior Court, Johnson held that the best interest of the child — and not solely the immediate inheritors — must be taken into consideration when reviewing infant renouncement petitions.  

According to Johnson, “if [Lindsay’s] entire estate… were to go to the infant’s grandparent, there is no guarantee that this infant would ever receive any benefit.” 

It is unclear from the court record if Friedman and her brother had an agreement with their father to share in the $6 million after all parties renounced their share for the purposes of avoiding the tax liability. But Johnson was unwilling to take chances with the young child’s future inheritance.

“The assets could be significantly reduced by the grandfather during his lifetime; the grandfather could remarry sharing the assets with his spouse; family relations could become strained such that the grandfather favors his son and/or his son’s children over [Friedman] and/or her children et cetera.”

The possibilities of the Friedmans’ daughter obtaining no inheritance on account of her mother renunciation, Johnson ruled, could not be ignored in order to receive a tax benefit.

“Any taxes saved by the estate cannot serve to overcome the effect of making it more remote and improbable that this infant will ever receive a benefit by allowing [Friedman] to renounce [her daughter’s] interest,” Johnson wrote. 

The court also took notice of the presumption that Lindsay could have, if she so wanted, created a will giving her husband the full estate. “Clearly [Lindsay] who had the financial sophistication to amass over $6 million in assets, had she wished to, could have executed a will leaving everything to her husband,” said the Brooklyn judge. 

Friedman was represented by the Manhattan firm Greenfield, Stein & Senior; calls to the firm were not returned by press time

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