Gifts by incapacitated person ordered to be repaid here
IN THE MATTER OF
KATHLEEN M. HOURIHAN,
An Incapacitated Person.
____________________________
Argued October 3, 2019 – Decided August 27, 2020
Before Judges Fuentes, Mayer, and Enright.
On appeal from the Superior Court of New Jersey,
Chancery Division, Monmouth County, Docket No. P-
000322-18.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-1289-18T4
unpublished
Respondents have not filed briefs.
PER CURIAM
In an order of judgment dated December 13, 2013, the Chancery Division,
General Equity Part in the Monmouth County Vicinage declared Kathleen
Hourihan an incapacitated person and appointed her nieces, plaintiff Marianne
Phillips and her sister Kathleen Gunyan, as co-Guardians of her estate. At the
time the court made this decision, Hourihan was seventy-nine years old and had
been diagnosed with Alzheimer's, psychosis, depression, mood disorder, and
coronary heart disease. She resided at an assisted-living facility; she never
married and did not have any children.
Hourihan's estate was valued at approximately $3,000,000, and her annual
income exceeded her living expenses. Thus, the court ordered plaintiff and
Gunyan each to post a surety bond in the amount of $3,000,000 as a condition
of their guardianship. On May 2, 2014, the court amended the judgment and
appointed plaintiff as sole Guardian due to Gunyan's inability to post the
required $3,000,000 surety bond.
On February 13, 2008, Hourihan executed a Last Will and Testament
(Will) naming her nieces, plaintiff and Gunyan, and Elizabeth Daly, a sister-in-
law of the nieces, residual heirs of her estate in equal parts. Plaintiff and Gunyan
were designated co-executors of her estate. On September 18, 2018, plaintiff
filed a verified complaint in the Monmouth County Chancery Division, General
Equity Part seeking nunc pro tunc approval of monetary gifts she made from
Hourihan's estate between 2015 and 2017 to the direct beneficiaries of the Will,
including herself; Gunyan; and Daly, and other family members who were only
considered contingent beneficiaries to the Will, including her husband, two
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daughters, and son-in-law. The total amount gifted from the Will during this
three-year period was $450,000.
Plaintiff's complaint came before the court unopposed. After hearing oral
argument and reviewing the record, the General Equity judge granted plaintiff's
application in part and denied it in part. The judge held that pursuant to a power
of attorney, which Hourihan executed before she was declared legally
incapacitated, plaintiff was authorized to gift $14,000 per year to each of the
individuals Hourihan identified as direct beneficiaries in her will. This amount
is the maximum per person yearly tax-free monetary gift permitted by the
Internal Revenue Service (IRS). The judge disallowed the gifts plaintiff made
to individuals who were identified in the Will only as contingent beneficiaries.
Those individuals who received gifts based on their status as contingent
beneficiaries in Hourihan's Will were ordered to repay to the estate the entire
amount of the gift. Those recipients who were identified in the Will as direct
beneficiaries were ordered to repay the estate the amount of the gifts that
exceeded the yearly maximum per person tax-free gift limit established by the
IRS. The judge granted plaintiff's motion to stay the execution of her order
requiring the repayment of the gifts pending the outcome of this appeal.
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In this appeal, plaintiff argues the General Equity Part erred when it: (1)
restricted her ability to make gifts only to those individuals expressly named as
direct beneficiaries of Hourihan's Will; (2) limited the gifts to those entitled to
receive it to the maximum tax-free gift amount per year established by the IRS;
and (3) required repayment of any gifts made to the direct beneficiaries in excess
of the $14,000 tax-free gift limit established by the IRS. We reject these
arguments and affirm.
I.
Hourihan was eighty-four years old at the time plaintiff brought this
matter before the General Equity Part. In June 2006, Hourihan signed a power
of attorney appointing plaintiff as her Attorney-in-Fact. The power of attorney
permitted plaintiff to make gifts to the "natural objects of [Hourihan's] bounty,"
so long as "the total gifts to any one individual in any one calendar year [do not]
exceed the federal gift tax annual exclusion in effect at the time of such gift[.]"
On February 13, 2008, Hourihan signed her Will and named Gunyan, plaintiff,
and Daly as direct beneficiaries of her residual estate "in equal shares, share and
share alike." If either of the named beneficiaries were to predecease Hourihan,
the beneficiary's share would pass per stirpes to the beneficiary's heirs.
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Hourihan's investment assets estate consisted of wealth management and
checking accounts held in PNC and Wells Fargo Wealth Management Accounts.
These assets amounted to approximately $3,000,000. In the three years at issue
here, Hourihan's income substantially exceeded her living expenses. Her net
income in 2015 exceeded expenses by $125,042; her income exceeded her
expenses in 2016 by $85,587; and her income exceeded her expenses in 2017 by
$124,072. On September 18, 2018, plaintiff submitted a sworn certification to
the General Equity Part in support of her application for judicial approval of the
gifts. The certification provides, in relevant part:
For Estate Planning purposes, gifts were made for
2015-2017, in the amount of $150,000.00 in total, per
year, with each of the beneficiaries of Kathleen's Estate
receiving $50,000.00, net, per year, as follows:
2015
a) $50,000.00 to Marianne Phillips, by and through her
designated donees
b) $50,000.00 to Kathleen Gunyan
c) $50,000.00 to Elizabeth Daly
2016
a) $50,000.00 to Marianne Phillips, by and through
herself and her husband, Stephen Phillips
b) $50,000.00 to Kathleen Gunyan
c) $50,000.00 to Elizabeth Daly
2017
a) $50,000.00 to Marianne Phillips, by and through
herself and her husband, Stephen Phillips
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b) $50,000.00 to Kathleen Gunyan
c) $50,000.00 to Elizabeth Daly
These gifts totaled $450,000 over this three-year period. Plaintiff averred
that before she engaged in this gifting campaign, she consulted with Hourihan's
certified public accountant, attorney, and investment advisors. She specifically
noted that she sought the advice of her own attorney who told her she "possessed
the requisite authority to proceed to gift without court approval." She also
emphasized that based on this legal guidance and having "previously been
vested with the authority to gift . . . by my Aunt's Power of Attorney, my reliance
upon this advice was reasonable under the circumstances."
II.
Whether a court appointed guardian may distribute gifts to a ward's
intended beneficiaries is a question of law. Thus, we are not bound by the trial
court's interpretation of the law and the legal consequences that flow from
established facts. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995). We review the General Equity Part's decision de novo.
Johnson v. Roselle EZ Quick LLC, 226 N.J. 370, 386 (2016).
The outcome of this appeal turns on the application of N.J.S.A. 3B:12-58,
which provides:
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[i]f the estate is ample to provide for the purposes
implicit in the distributions authorized by this article, a
guardian for the estate of an incapacitated person may
apply to the court for authority to make gifts to charity
and other objects as the ward might have been expected
to make.
Also included in this statutory scheme is N.J.S.A. 3B:12-50, which provides:
[t]he court may exercise, or direct the exercise of, or
release the powers of appointment of which the ward is
donee, to renounce interests, to make gifts in trust or
otherwise, or to change beneficiaries under insurance
and annuity policies, only if satisfied, after notice and
hearing, that it is in the best interests of the ward.
The Supreme Court construed the application of these statutes in In re
Keri, in which Chief Justice Poritz, writing for the Court, explained:
[i]n short, when managing the estates of incompetent
persons, including the exercise of the power to make
gifts, our courts must find that the proposed action is in
"the best interests of the ward," N.J.S.A. 3B:12-50, and
that any gifts proposed are such "as the ward might
have been expected to make," N.J.S.A. 3B:12-58.
Together, those statutory provisions incorporate and
reconcile the best interests standard with the common
law equitable doctrine of substituted judgment. Only
when the estate contains the resources necessary for the
benefit of the ward (best interests), may the guardian
make gifts "in the same manner as the incompetent
would if able to function at full capacity" (substituted
judgment).
[ 181 N.J. 50, 57-58 (2004) (quoting In re Labis, 314
N.J. Super. 140, 146 (App. Div. 1998)).]
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To determine whether the statutory mandates of N.J.S.A. 3B:12-50 and
N.J.S.A. 3B:12-58 have been satisfied, our courts have applied the five-factor
test, first articulated by then Chancery Division Judge Samuel Allcorn, Jr., 1 in
In re Trott, 118 N.J. Super. 436, 442-44 (Ch. Div. 1972), and later adopted by
our Supreme Court in Keri, 181 N.J. at 59. That test requires the guardian to
consider the following five factors:
(1) the mental and physical condition of the
incompetent are such that the possibility of her
restoration to competency is virtually nonexistent; (2)
the assets of the estate of the incompetent remaining
after the consummation of the proposed gifts are such
that, in the light of her life expectancy and her present
condition of health, they are more than adequate to meet
all of her needs in the style and comfort in which she
now is (and since the onset of her incompetency has
been) maintained, giving due consideration to all
normal contingencies; (3) the donees constitute the
natural objects of the bounty of the incompetent by any
standard . . . ; (4) the transfer will benefit and advantage
the estate of the incompetent by a reduction of death
taxes; (5) there is no substantial evidence that the
incompetent, as a reasonably prudent person, would, if
competent, not make the gifts proposed in order to
effectuate a saving of death taxes.
[Keri, 181 N.J. at 59 (alteration in original) (quoting
Trott, 118 N.J. Super. at 442-44).]
1
Chief Justice Weintraub assigned Judge Allcorn to the Appellate Division in
1972. Judge Allcorn was Presiding Judge of the Appellate Division from 1977
until he retired in 1982.
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In Keri, the petitioner sought guardianship of his mother and her estate
and approval of his proposed Medicaid spend-down plan. Id. at 55. This estate
planning technique transfers the assets of the incapacitated person so that she
becomes eligible for Medicaid prior to exhausting all of her monetary resources.
The petitioner's mother in Keri suffered from a form of irreversible dementia.
Id. at 54. When the petitioner sought guardianship, his mother's net worth was
$170,000, which was the approximate value of her home. Id. at 54-55. Her
monthly nursing home expenses were $6,500, while her monthly income was
$1,575.45. Id. at 55.
Based on this negative disparity between assets and expenses, the
petitioner determined his mother would need $4,924.55 per month to pay for the
nursing home. Ibid. Taking into account the sixteen-month period of Medicaid
ineligibility that would be triggered by the transfer, the petitioner concluded his
mother would need approximately $78,000 to pay her nursing home bills and he
proposed to transfer $46,000 to himself and his brother. Ibid.; see 42 U.S.C §
1396p(c); N.J.A.C. 10:71-4.10(a). Both the trial court and the Appellate
Division rejected the petitioner's proposal. 181 N.J. at 56.
The Supreme Court reversed. Id. at 69. Acknowledging the statutory
scheme adopted by the Legislature in N.J.S.A. 3B:12-36 to -64, the Court held:
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There is no reason why an individual, simply because
he happens to be a ward, should be deprived of the
privilege of making an intelligent commonsense
decision in the area of estate planning, and in that way
forced into favoring the taxing authorities over the best
interests of his estate.
[Id. at 58 (quoting Strange v. Powers, 358 Mass. 126,
133 (1970)).]
The approach the Court approved in Keri applies with equal force here.
The first Trott criterion is satisfied here because it is indisputable that Hourihan
suffers from Alzheimer's and other neurological impediments which are
irreversible. The second Trott criterion is likewise satisfied because the record
shows Hourihan's assets are more than sufficient to maintain her accustomed
and necessary level of care.
The third Trott criterion requires that the gifts plaintiff made go to
Hourihan's natural bounty. Keri, 181 N.J. at 59. Gunyan and Daly are named
in Hourihan's Will, and they are her niece and niece-in-law, respectively.
Black's Law Dictionary defines a natural object as "[a] person likely to receive
a portion of another person's estate based on the nature and circumstances of
their relationship." Black's Law Dictionary 1049 (7th ed. 1999). Thus, the gifts
to Gunyan and Daly were to Hourihan's natural bounty.
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However, as the General Equity judge correctly recognized here, the gifts
plaintiff made to her daughters, her son-in-law, and her husband do not satisfy
the third Trott criterion. A plain application of the legal definition of natural
object makes clear that these individuals do not qualify as Hourihan's natural
bounty because they would only receive a share of the estate if plaintiff
predeceased them.
The fourth Trott criterion is satisfied because the gifts will reduce the
payment of estate taxes upon Hourihan's death. The transfers will save $72,000,
provided Hourihan survives the three-year look back period. N.J.S.A. 54:34-1.
The fifth Trott criterion is also satisfied because there is no substantial evidence
that Hourihan would rather have her assets go to the government in the form of
taxes than her heirs. Indeed, there is a presumption that a reasonable person
would rather leave money to her heirs, than to see it go to the government. Keri,
181 N.J. at 63. Finally, in our view, the General Equity judge correctly relied
on Hourihan's power of attorney to limit plaintiff's gifts to $14,000.
Affirmed.
