The Tax Court of New Jersey issued a ruling on June 5 in Estate of Frappolli v. Director, Division of Taxation, 2014 Westlaw 2567138, with a strong cautionary note for same-sex couples who jointly own their homes. Formalize your status if you can!
Marie Frappolli and Dorothea Angelou became partners as students and considered themselves partners for many decades until Frappolli died in 2009. Frappolli bought a house in Avalon, NJ, in her own name in 1966. Although the women were already a couple then, Angelou lived with her father until his death in 1980. Then she moved into Frappolli’s house. In 1993, in a little burst of legal action, Frappolli executed a document conveying a half interest in the house to Angelou, “each undivided fifty percent interest being held as joint tenants with rights of survivorship and not as tenants in common.” She didn’t ask Angelou to pay her anything for the half interest, but the new deed to the property listed “consideration” for the transaction as $1.00.
In 2004, New Jersey passed a domestic partnership statute for same-sex couples. Registered domestic partners would be exempted from inheritance taxes on property transfers. But Frappolli and Angelou did not register as domestic partners. In 2007, responding to the New Jersey Supreme Court’s decision in Lewis v. Harris, the state passed a civil union law, which similarly would exempt civil union partners from inheritance taxes, but Frappolli and Angelou did not register as civil union partners. Today same-sex couples can marry in New Jersey, and can benefit from the marital exemption from inheritance taxes. Unfortunately, when Frappolli died in 2009, the women had no legal relationship with each other.
After Frappolli died, her estate submitted a tax return claiming the benefit of the domestic partnership inheritance tax exemption, and apportioning the ownership interest in the estimated value of the house at 50% for each of the women. The return claimed that the estate owed no tax, since it was all being inherited by Angelou, who was characterized as Frappolli’s domestic partner.
But when state tax auditors looked into this and discovered that the women had never filed an affidavit of domestic partnership or civil union, the Tax Division decided to treat Angelou as a legal stranger and to tax the estate for the value of the inheritance. Indeed, noting that Angelou had never paid for her share of the house, which was thus a gift, the Tax Division levied the tax on the complete estimated value of the house. The Director’s final determination, taking account of some money that Angelou had paid in during the course of the proceedings and accumulated interest on what was deemed due to the state, was that transfer inheritance tax liability of the Estate was $179,787.84. The Estate sued the Division of Taxation, seeking to avoid this liability.
Presiding Judge Patrick De Lameida of the Tax Court upheld the Division’s position in all respects.
Angelou had argued that since the women met all the requirements to be domestic partners, the Division should treat them as such and exempt her inheritance from taxation, but the court rejected this argument. After noting the passage of the Domestic Partnership Act and the Civil Union Act, Judge De Lameida wrote, “Under either statute, the couple could have entered into government-sanctioned relationships that would have insulated Ms. Angelou’s inheritance from transfer inheritance tax. The couple elected not to take advantage of the benefits offered by those statutes.” He also noted that they could have married out of state or formed a civil union or domestic partnership out of state and enjoyed this tax benefit as well, since New Jersey has recognized out-of-state legal unions for these purposes since 2004.
The Tax Court found that the requirement to formalize the relationship through filing an affidavit was clear, and it was not enough that the evidence showed that the women had lived as partners and merged their finances for decades. The exemption from tax is a matter of statute, and the statute requires that the relationship have been formalized.
The statute was equally clear on the matter of putting a value on the inheritance. Angelou argued that because she had a 50% ownership, her inheritance should be valued at the 50% that she inherited from Frappolli, but the Court found that this would be inconsistent with the statute, which provides that a surviving joint tenant’s inheritance shall “be deemed a transfer taxable in the same manner as though such property had belonged absolutely to the deceased joint tenant and had been devised or bequeathed by his will to the surviving joint tenant excepting therefrom such part of the property as such survivor or survivors may prove to the satisfaction of the Director of Taxation to have originally belonged to him or them and never to have belonged to the decedent.” According to the Director and the Tax Court, this meant that since the entire property originally belonged to Frappelli, the estate would be taxed on the entire value of the property. Had the two women bought the property together at the outset, with Angelou contributing half, perhaps it would have come out differently.
Same-sex couples who jointly own property should be sure to take whatever legal steps are necessary to protect the interest of whoever survives. Getting married, domestically partnered or civilly unionized may result in other legal obligations, perhaps even higher annual income taxes as a result of the feared “marriage penalty,” but could be an important step to avoiding the situation faced by Angelou. Consulting a lawyer and an accountant would be prudent if significant amounts of money are at stake.