New Jersey Supreme Court Clarifies Transfer Inheritance Tax

In Estate of Mary Van Riper v. Director, Division of Taxation (A-51-18/082000) (Decided February 5, 2020), the Supreme Court of New Jersey addressed the application of New Jersey’s transfer inheritance tax statute. It held that the New Jersey Division of Taxation (Division) properly taxed the full value of the home placed in a single, irrevocable trust.

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New Jersey’s Inheritance Tax Statute

New Jersey’s inheritance tax statute, N.J.S.A. 54:34-1, presumptively imposes a transfer inheritance tax on all completed transfers of property worth $500 or more made within three years of the transferor’s death, where the property “is transferred by deed, grant, bargain, sale or gift made in contemplation of the death of the grantor, vendor or donor, or intended to take effect in possession or enjoyment at or after such death.”

Under New Jersey Supreme Court precedent, the transfer of property to a trust for the duration of the transferor’s lifetime is treated as a transfer “at or after death” when the person creating the trust “retained income or some benefit for his life with remainder over on his death.” In re Estate of Lichtenstein, 52 N.J. 553, 576 (1968). Accordingly, for a transfer to be taxable under the “at or after death” provision of N.J.S.A. 54:34-1, it is necessary “that the settlor retain in himself some realistic interest, power or control or some other ‘string’ during his lifetime, or his death must be the determinative and indispensable event in the shifting of economic benefits and burdens.”

Under N.J.S.A. 54:34-1.1, if the grantor completely and irrevocably severs ties to the trust more than three years before death, then no transfer inheritance tax will be assessed even if the grantor’s death triggers a change in the beneficiary of the trust.

Facts of Estate of Mary Van Riper v. Director, Division of Taxation

Walter and Mary Van Riper transferred ownership of their marital home to a single irrevocable trust. As noted by the New Jersey Supreme, the more common estate-planning strategy is for a married couple to deed property into two trusts, which are taxed in two phases upon the death of each spouse. Pursuant to the Van Riper Residence Trust (Trust), Walter and Mary each retained a life interest and directed that any remainder in the Trust pass to their niece, Marita, upon the death of the surviving spouse.

Walter passed away shortly after transfer of the property to the trust. Six years later, after Mary passed away, the trustee distributed the property to the couple’s niece. Mary’s inheritance tax return reported one-half of the date-of-death value of the marital residence as taxable. However, the Division conducted an audit and imposed a transfer inheritance tax assessment based upon the entire value of the residence at the time of Mary’s death.

The Estate of Mary Van Riper (the Estate) paid the tax assessed but filed an administrative protest challenging the transfer inheritance tax assessment. The Division issued its final determination that the full fair market value of the marital residence held by the Trust should be included in Mary’s taxable estate for transfer inheritance tax purposes. The Estate argued that despite the differences between the estate-planning measures taken by the Van Ripers and the more common two-trust method, the result should be the same. The Estate further maintained that transfer inheritance tax should only be assessed on one-half of the value of the home and, because the Division failed to tax Walter’s undivided one-half interest at the time of his death, his interest can no longer be taxed. The Tax Court held that the entire value of the residence was subject to transfer inheritance tax and granted summary judgment for the Division. The Appellate Division affirmed.

NJ Supreme Court’s Decision in Estate of Mary Van Riper v. Director, Division of Taxation

The New Jersey Supreme Court affirmed. “Like the Tax Court and the Appellate Division, we agree with the Division’s interpretation of the language of the trust used in this case and application of the transfer inheritance tax statute, N.J.S.A. 54:34-1,” the court held. “The Division’s view also accords with prior case law and advances the vital policy goals of clarity, simplicity, and ease of implementation.”

The New Jersey Supreme Court first held that Walter and Mary’s transfer “falls squarely within the ambit of section (c) of the transfer inheritance tax statute, N.J.S.A. 54:34-1.” It further found that they failed to satisfy the condition necessary for the exception to the transfer inheritance tax set forth in N.J.S.A. 54:34-1.1 to apply. “[T]hey never ‘executed an irrevocable and complete disposition of all reserved income, rights, interests and powers in and over the property transferred’ three years prior to death,” the court wrote. “It is therefore clear that the transfer inheritance tax is properly applicable to the remainder conveyed through the Trust.”

The court next turned to whether Marita inherited the entirety of the marital residence or only a one-half interest upon Mary’s death, concluding that there was no basis to conclude that the inheritance occurred in two stages. In support, it noted that New Jersey has no law specifying that the joint conveyance of real property into a single trust destroys a tenancy by the entirety. It further cited that “New Jersey law permits both real and personal property to be held by spouses and civil union partners as tenants by the entirety when the spouses or partners obtain that property under conditions satisfied by the trust instrument here.”

The court also concluded that it would be impractical to adopt the Estate’s position, writing:

Not only is there no reason or legal basis to value Walter and Mary’s interests in the residence as though they had partitioned the property by transferring it to the Trust, but there are strong practical reasons not to do so. Our tax law’s goals of clarity, simplicity, and ease of implementation would be subverted by requiring the Division to engage in such speculation.

According to the court, the more common vehicle of creating separate trusts with life estates “makes it easy to value property in two 50% increments.” Meanwhile, “where there is a single trust that allows for the total depletion of the entrusted property, that property can be taxed with certainty only after both spouses have died and the trust has satisfied its obligations.”

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