A Chancery Court judge determined that the administrator of an insolvent estate in New Jersey must first exhaust all efforts to satisfy creditors from probate assets before the attachment of non-probate assets should be considered. Matter of the Estate of Turco, Chancery Div., Probate Part-Essex County (Koprowski, J.S.C., July 22, 2013)

Jerry Turco died testate on March 1, 2005 leaving a net taxable estate of approximately $30,637,394 with federal tax liability of $15,100,286. As a result of a will contest, a Substitute Administrator, C.T.A. was appointed. The estate consisted primarily of closely-held corporations holding various properties. At his death, decedent also owned an annuity and 2 life insurance policies. The decedent’s 9 grandchildren were designated beneficiaries of the policies, with the funds payable directly to each grandchild. The court ordered the creation of separate trusts (“the grandchildren trusts”) to hold the life insurance proceeds. Each trust held approximately $572,315; the total value of the assets in all grandchildren trusts totaled $4,718,048. Capital One, N.A. acted as trustee for the grandchildren trusts.

The values of the properties in the probate estate plummeted in the years since the decedent’s death. As a result, the Substitute Administrator filed for a declaration of insolvency. The value of estate assets was estimated at $7,568,241.49, with total liabilities, including tax liability, of $21,647,630.79. The Substitute Administrator also sought the court’s determination that he had the authority and duty to “claw-back” funds from the grandchildrens’ trusts to satisfy the estate’s tax liability. The Administrator argued that, since the probate assets would not satisfy the total liabilities, the estate must look to non-probate assets, specifically the court-ordered grandchildren trusts, for proportionate contributions to satisfy the tax obligation. Capital One, N.A., the trustee of the grandchildren trusts, filed a motion to dismiss the Administrator’s application to the extent it related to the grandchildren trusts and any claim seeking the return of the assets from the trusts. The trustee argued that the Administrator had no authority under federal or state law to pursue the non-probate assets because the testator directed in Article Sixth of his will that all taxes should be paid out of the residuary estate. The trustee also argued that the relief requested was premature prior to a 0complete liquidation of the probate assets and a submission of a revised offer in compromise to the Internal Revenue Service (IRS) utilizing the funds gained therefrom.

The court denied the application to recover funds from the grandchildren trusts without prejudice. With regard to state law, the court found no statutory authority permitting the Administrator to access non-probate assets, such as the grandchildren trusts, to satisfy the debts and obligations of the decedent’s estate. Similarly, the court found that, although the IRS and other unpaid creditors had a right under federal law to pursue non-probate assets to satisfy the outstanding liabilities, the Administrator had no right or duty under federal law to pursue the non-probate assets in the grandchildren trusts to satisfy the outstanding tax liability. The court held that the probate estate must be fully liquidated, the tax issues resolved, and all efforts to satisfy creditors exhausted before any claw-back of the non-probate assets should be considered. Since the estate might receive funds from the liquidation of probate assets and the potential abatement of specific and general bequests, and since the estate could negotiate with the IRS to resolve the outstanding tax obligation for a substantially lower amount, the court held that permitting a claw-back would be premature and detrimental to the interests of the beneficiaries.

The case is annexed here – Matter of the Estate of Turco