I just read a new case and wanted to share it with you. The issue involved executor’s commission and whether the commission under NJ law is calculated as a percentage of the gross fair market value, or the net value, after subtracting the outstanding mortgages payable at the time the administrator sold the real estate.
In this case, a bank became the Administrator of the estate and sold the property for $172,500. After paying off the principal mortgage and interest of $132,017.94, the net value of the property was $40,482.06.
The bank filed the Estate’s transfer inheritance tax return, which included an administration expense deduction of $8,625. The bank calculated the deduction by taking 5% of the Estate’s gross value, of $172,500. After examining the return, the Director issued a Notice of Assessment on August 17, 2002, denying the full value of the Estate’s administration expense deduction. The director allowed an administration expense deduction of only $2,004, which was calculated by taking 5% of the net value of the property (i.e., $40,482.06)
The Estate filed a protest with the Transfer Inheritance Tax Branch challenging the Director’s Notice of Assessment.
The Director of Taxation argued that the term “ordinary expenses of administration” and “ordinary fees allowed executors and administrators,” did not allow a gross value calculation under the law. The director cited his authority to promulgate regulations to help determine what the Legislature meant by allowing the deduction for the “ordinary expenses of administration, including the ordinary fees allowed executors and administrators,” in determining the clear market value of the property. Pursuant to that authority, the Director argued that these regulations only allow the estate to deduct “ordinary expenses of administration” based on the net value of the Estate’s assets, after all encumbrances are deducted.
Moreover, the Director contended that it has construed the “ordinary expenses of administration” deduction pursuant to NJ laws consistently for nearly thirty years. The Director argued that since this long-standing administrative construction of NJ laws has remained undisturbed by the Legislature, it must be accorded substantial weight as evidence of conformity with the legislative intent of the statue.
The Judge ruled that the New Jersey Transfer Inheritance Tax Act imposes a tax on the transfer of real and personal property by a decedent as a result of his or her death. Those taxes are based on the “clear fair market value of the property transferred”. In determining the clear market value of the property, the Act clearly specifies what may be deducted. The Act provides:
In determining the clear market value of the property the following deductions and no others shall be allowed:
- The property for which the debt is owing or for which it is secured is subject to the death tax.
- A foreign debt exceeds the value of New Jersey property securing it or for which it was contracted.
- Funeral and last illness expenses – A reasonable sum for funeral expenses and last illness.
- Administration expenses; fee of executors and attorneys – The ordinary expenses of administration, including the ordinary fees allowed executors and administrators and the ordinary fees of their attorneys.
- Payment of state, county and local taxes upon the property for the current fiscal year.
- Transfer taxes of other states or the United States – Transfer taxes paid or payable to other states or territories or the District of Columbia or foreign countries on any property the transfer of which is taxable.
New Jersey Transfer Inheritance Tax
The New Jersey Transfer Inheritance Tax is imposed upon the transfer of property based upon the clear market value of such property. Clear market value is ascertained by deducting from the market value of any property, the debts, expenses and taxes which constitute an encumbrance upon the property of a decedent. No deductions are allowed, however, against any property which is exempt or not subject to the New Jersey Inheritance Tax.
The Court held that the balance of a mortgage owing on the date of death is allowed as a deduction from the value of any real property securing such mortgage, except that in the case of realty held by a decedent and a surviving spouse as tenants by the entirety, the amount of any mortgage owing on such realty at the decedent’s death is not allowable as a deduction since such property is exempt from the New Jersey Inheritance Tax.
- The deduction for executor’s or administrator’s commissions shall be determined in accordance with NJ law, as of the date of death of decedent as follows:
- 5% on the first $200,000 of all corpus received by the fiduciary;
- 3.5% on the excess over $200,000 up to $1,000,000;
- 2% on the excess over $1,000,000; and
- 1% of all corpus for each additional fiduciary provided that no one fiduciary shall be entitled to any greater commission than that which would be allowed if there were but one fiduciary involved.
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