On appeal from the transfer inheritance tax assessment made by the State Tax Commissioner, State Tax Department (now Division of Taxation in the Department of the Treasury).
For modification -- Chief Justice Vanderbilt, and Justices Heher, Wachenfeld, Burling, Jacobs and Brennan. Opposed -- None. The opinion of the court was delivered by Burling, J.
[20 NJ Page 486] This cause stems from an assessment made in 1946 by the State Tax Commissioner under the provisions of the Transfer Inheritance Tax Act in effect at that time, R.S. 54:33-1 et seq. Petitioners thereafter sought a review in the Prerogative Court, R.S. 54:34-13, but by virtue of the subsequent abolition of that court, Constitution 1947, Art. XI, Sec. IV(3), the matter has recently been moved for review in the Superior Court, Appellate Division. L.
1948, c. 367, sec. 12. We have brought the case here prior to a disposition below. R.R. 1:10-1.
In 1934 the decedent, Myrtle H. Newberry, and her husband, John J. Newberry, each created two inter vivos trusts, identical in content except for the designation of the life beneficiaries. Both settlors were independently wealthy and one of their desires was to provide their two children with an independent income. The son, John J. Newberry, Jr., was 19 years old at the time and Myrtle Virginia, 16 years of age. The former was named as life beneficiary under two of the trusts, one created by his mother, the decedent, and the other created by his father. The daughter was similarly favored under the other two trusts created by the respective parents.
In 1935 the decedent and her husband each created two additional trusts which were substantially similar to the 1934 trusts.
The John J. Newberry Trust No. 1, dated July 6, 1934, named John J. Newberry as grantor and John J. Newberry and his wife as trustees. 2,500 shares of the common stock of the J.J. Newberry Company constituted the res. Income thereby realized was to be devoted to certain life insurance policies and the excess accumulated until Myrtle Virginia attained the age of 30 years. Thereafter the design was to make quarterly annual payments of income to Myrtle Virginia for life. Termination of the trust was initially geared to the death of the survivor of mother and daughter but was later amended to exclude the mother's life as a factor in this regard. The gift over was complete upon termination of the trust.
By paragraph Fourteenth of the instrument broad powers were bestowed upon the decedent by her husband:
"The Trustee Myrtle H. Newberry shall have the power at any time during her life by instrument in writing delivered by her to the Trustees to modify, alter, amend or revoke this instrument in whole or in part including the right to change the beneficiaries herein, provided, however, she shall not have power to revest the securities deposited herein, or which may be hereafter deposited herein or the
Trust Fund in John J. Newberry, the Grantor, and provided, further, that she may not revest the principal or income in the Grantor John J. Newberry."
In terms of parental desire we may look to the words of the settlor John J. Newberry to explain the reason for this paragraph:
"Q. I think it was testified by you that the purpose of the use of the power was to provide against unforeseen contingencies? A. That is true.
Q. What were those? A. At the time these trusts were made, our children were very young -- they were in their teens -- we were looking forward to the time when they might be married, and we wanted to be able to protect our interest in the event that they might marry some schemer or some ne'er-do-well, and that was the purpose of wanting to control the trusts."
Concerning the legal implications of the manifestation of this desire, counsel for petitioners states "they were advised that if such a power were reserved by each, the property in trust would be part of their taxable estate at death, due to the technicalities of the Federal estate tax act. There was apparently no obstacle in the statutes, Federal and State, in casting the power as a donated power, and quite naturally each selected the other as the recipient of the donated power, for they were the father and mother of the two beneficiaries."
Paragraph Fourteenth, the power provision of the trust under examination, was subsequently amended by Myrtle H. Newberry on May 31, 1943, approximately one year before her death. The amended paragraph reads:
"Fourteenth, Myrtle H. Newberry shall have the power at any time during her life, by instrument in writing delivered by her to the Trustees, to change the beneficiaries herein, provided, however, that such beneficiaries shall be either the descendants of Myrtle H. Newberry, spouses of such descendants or donees described in Section 812(d) of the U.S. Internal Revenue Act of 1939. Said Myrtle H. Newberry shall not have power to vest the securities deposited herein or which may be hereafter deposited herein or the trust fund in John J. Newberry, the Grantor, and provided further that she may not revest the principal or income in the Grantor John J. Newberry." (Emphasis supplied)
At her death the decedent thus possessed the power to designate beneficiaries of the trust within a limited class. This power extended to all four trusts created by her husband, and he possessed a similar discretion in the four inter vivos transfers of her creation.
The State Tax Commissioner included the value of the principal of the four trusts created by John J. Newberry in the decedent's estate for inheritance tax purposes. The report of the examiner reveals that the power residing in the decedent was considered sufficient to bring the trusts "within the class of transfers taking effect at death." The principal of each trust was composed primarily of ...