Originally published on Forbes.com.
A sad story is behind the recent New Jersey Tax Court decision – Rucksapol Jiwungkul, as Executor of the Estate of Maurice R. Connolly, Jr. v. Director, Division of Taxation. The case also ends up being something of a recap of the struggle over same-sex marriage and its tax implications. At issue was $101,041 in estate tax that would be avoided if Mr. Connolly and Mr. Jiwungkul, who were registered domestic partners, were treated as spouses for purposes of the New Jersey estate tax. The court ruled against the estate on a sort of “almost doesn’t count” theory.
First Step Toward Same-Sex Marriage
The couple had been together 31 years when Mr. Connolly died in 2014. The New Jersey legislature authorized domestic partnerships in 2004. They were available to couples of the same sex and couple of different sexes over 62.
According to the DPA, domestic partners are “entitled to certain rights and benefits that are accorded to married couples under the laws of New Jersey, including …. an additional exemption from the personal income tax and the transfer inheritance tax on the same basis as a spouse.” N.J.S.A. 26: 8A-2d. The statute does not list among the “certain rights and benefits” accorded to registered domestic partners treatment as a spouse for purposes of calculating the New Jersey estate tax.
In an interview with Leslie Pappas of BNA , Douglas Frederick explained the way domestic partnership interacts with NJ estate and inheritance tax.
New Jersey has both an estate tax and an inheritance tax, and taxpayers must pay the higher of the two, Douglas A. Fendrick, a certified public accountant and estate planning specialist at Fendrick & Morgan LLC in Voorhees, N.J., told BNA May 16. The estate tax kicks in for estates of more than $675,000, so a $100,000 estate tax bill would mean the estate was valued at between $1.8 million and $1.9 million, Fendrick estimated.
The DPA was always fairly “clear cut” that domestic partners got a break only on inheritance taxes, Fendrick said.
“It got you around the inheritance tax but not the estate tax. It wasn’t a gray area,” said Fendrick, who has given talks around New Jersey about estate planning for same-sex couples.
Connolly and Jiwungkul became domestic partners on July 10, 2004, the day the act went into effect. When the next step became available, though, they thought differently
Scorning The Half Loaf
On February 19, 2007 the Civil Union Act went into effect.
Pursuant to this statute, same-sex couples were authorized to enter into government-recognized civil unions with all of the rights and obligations afforded to married couples under State law. N.J.S.A. 37: 1-33. Among the rights accorded to civil union partners is the right to be treated as a surviving spouse for purposes of calculating the New Jersey estate tax.
The couple did not run out and get civilly unified or whatever the verb might be on February 19, 2007. Their reaction to civil union was on the negative side.
Plaintiff and decedent made a deliberate, and public, decision not to enter into a civil union. Decedent was quoted in the press as being “furious” about the passage of the Civil Union Act because he believed the law to be a perpetuation of discriminatory treatment of same-sex couples. New Jersey Civil-Union Bill Passes Committee. Neither Foes Nor Advocates Are Wholly Satisfied, The Philadelphia Inquirer, Dec. 8, 2006. Plaintiff confirmed in a certification filed with his motion that the couple “decided not to enter into a civil union because it was not equivalent to a marriage.”
The civil union legislation was in response to a court decision that indicated that the legislature had to do something, so you can appreciate their frustration. The principled stand ended up having a cost, as the court noted.
The decision not to enter into a civil union was a legitimate expression of the couple’s disagreement with a political decision. One could hardly fault a same-sex couple for refusing to enter into any State-sanctioned relationship they believed to be discriminatory. However, this decision, like many principled decisions, had consequences. One consequence was that plaintiff and decedent effectively elected not to take advantage of the many rights and benefits available to same-sex couples under the Civil Union Act. Had plaintiff and decedent entered into a civil union, as they had done with a domestic partnership, plaintiff would be entitled to the marital deduction he seeks before this court and his partner’s estate would owe no New Jersey estate tax.
Wedding Bells
I remember when same-sex marriage was legalized in Massachusetts. Driving into work that morning, I heard James Dobson indicate that civilization was coming to an end or something like that. Then as I sat in my office in the big glass building on Main Street in Worcester, I saw the line forming outside City Hall.
For whatever reason Jiwungkul and Connolly did not rush to get in line when same-sex marriage was legalized in New Jersey. They did, however, decide to take the plunge. Same-sex marriage became available in New Jersey effective October 21, 2013. The couple completed an application for a marriage license on May 27, 2014 with a June 8, 2014 marriage date. Less than a week before the intended wedding day Mr. Connolly unexpectedly died.
Reilly’s First Law
My First Law of tax planning is “It is what it is. Deal with it.” So much as I was rooting for the estate, I was pretty sure it would lose.
Without question, same-sex couples have a State and federal Constitutional right to access all of the rights and benefits of marriage, including the right to be treated as a surviving spouse for purposes of calculating the New Jersey estate tax. However, as is the case with any couple in New Jersey, whether they are of the same sex or different sexes, the rights and benefits of marriage are afforded only to those people who enter into a State-sanctioned relationship affording those rights and benefits. Plaintiff and his partner did not take the steps necessary to be recognized in New Jersey as a couple with the rights of marriage. This is an unfortunate, but undeniable, fact.
Plaintiff’s claim that the DPA is unconstitutional because it does not treat same-sex registered domestic partners as spouses for purposes of the New Jersey estate tax is groundless. New Jersey satisfied the State and federal Constitutions by making marriage available to plaintiff and his partner in October 2013. Having opened marriage to same-sex couples, the State is not precluded from maintaining existing domestic partnerships that provide some, but not all, of the rights of marriage to same-sex couples. It is the ability to marry that is enshrined in the State and federal Constitutions. Plaintiff and decedent had the ability to terminate their domestic partnership by getting married prior to decedent’s death.
It is worth noting that domestic partnership had been open to some opposite sex couples, so it is understandable that domestic partnerships were not automatically converted.
Other Coverage
I would have expected Patricia Cain’s Same Sex Tax to have picked this up, but it appears she has slowed down a bit. During the years of controversy, she provided the best coverage of the issue. As noted BNA had a piece which I quoted. Art Leonard covered this case and another in a piece titled Retroactivity of Marriage Rights Continues to Occupy Courts. The piece was picked up by Gay City News.