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In re Transfer Inheritance Tax Assessment

Decided: November 4, 1968.

IN THE MATTER OF THE TRANSFER INHERITANCE TAX ASSESSMENT IN THE ESTATE OF ANNE BOYD LICHTENSTEIN, DECEASED. LOUISE BOYD DALE AND BANKERS TRUST COMPANY, SURVIVING EXECUTORS OF THE WILL OF ANNE BOYD LICHTENSTEIN, DECEASED, APPELLANTS,
v.
WILLIAM KINGSLEY, ACTING DIRECTOR OF THE DIVISION OF TAXATION, DEPARTMENT OF THE TREASURY, STATE OF NEW JERSEY, RESPONDENT



For modification -- Chief Justice Weintraub and Justices Jacobs, Francis, Proctor, Hall, Schettino and Haneman. Opposed -- None. The opinion of the court was delivered by Hall, J.

Hall

This case challenges the assessment of transfer inheritance taxes with respect to three inter vivos trusts created by the decedent, Anne Boyd Lichtenstein ("the settlor"). The first trust took effect on December 30, 1935 ("the 1935 trust"), the second on January 20, 1954 ("the 1954 trust"), and the third on February 7, 1959 ("the 1959 trust"). Her executors' appeal to the Appellate Division from the determination of the Transfer Inheritance Tax Bureau ("the Bureau") was certified on their application prior to argument in that court. R.R. 1:10-1 A.

The settlor died on April 1, 1959, at the age of 82, domiciled in New Jersey as she had been at all pertinent times. She left a very substantial testamentary estate, the taxation of which is not involved here. Her survivors -- mentioned because they are the principal beneficiaries of the trusts -- were her only child, Louise Boyd Dale ("Louise"), born March 30, 1913, Louise's husband, John Denny Dale, then 42 years old (they were married some time after 1935), and the two children of that marriage, Anne Boyd Dale, born January

4, 1941, and John Denny Dale, Jr., born October 23, 1947.*fn1

At the outset brief reference should be made to some fundamentals, including the taxability provisions of the statute. The New Jersey transfer inheritance tax, N.J.S.A. 54:33-1, et seq., is not a property or estate tax, but a privilege levy on the right of succession to property transferred by "decedents", levied on the transferee, "in certain cases" specified by the legislation (to use the language of the title of L. 1909, c. 228, which is the basis of the present law). Howell v. Edwards, 88 N.J.L. 134 (Sup. Ct. 1915), affirmed o.b. 89 N.J.L. 713 (E. & A. 1916); Maxwell v. Edwards, 89 N.J.L. 446 (Sup. Ct. 1916), affirmed 90 N.J.L. 707 (E. & A. 1917), affirmed sub nom. Maxwell v. Bugbee, 250 U.S. 525, 40 S. Ct. 2, 63 L. Ed. 1124 (1919); In re Roebling's Estate, 89 N.J. Eq. 163 (Prerog. 1918), appeal dismissed, 91 N.J. Eq. 72 (E. & A. 1919); Rogers, New Jersey Transfer Inheritance Tax, § 37-44, pp. 12-17 (1940). It should be kept in mind that a transfer inheritance tax is not and was never intended to be a general gift tax. Symposium on State Inheritance and Estate Taxation, Rottschaefer, Taxation of Transfers Taking Effect in Possession at Grantor's Death, 26 Iowa Law Review 514 (1941). See Swain v. Neeld, 28 N.J. 60, 69 (1958); Montclair Trust Co. v. Zink, 141 N.J. Eq. 401, 405 (Prerog. 1948). New Jersey, unlike a dozen or so other states and the federal government, has no such levy.

The taxability section is N.J.S.A. 54:34-1. It begins, so far as here pertinent: "* * * a tax shall be and is hereby

imposed * * * upon the transfer of property, real or personal, * * * or of any interest therein or income therefrom, in trust or otherwise, to or for the use of any transferee, distributee or beneficiary in the following cases:".

Since the tax is keyed to the transfer of property by one deceased and his death is the triggering event, the first "cases" specified are transfers where real or tangible personal property situated in this state or intangible personal property wherever situated is transferred by a resident decedent and where real or tangible personal property within this state is transferred by a non-resident decedent, by intestacy or testamentary disposition. N.J.S.A. 54:34-1, pars. a and b.

The next "cases", set forth in paragraph c of the section, are two categories of pre-death transfers of the same property made by the same classes of decedents:

1. "Where * * * made in contemplation of the death of the grantor, vendor or donor", if, since the amendment of L. 1951, c. 250, made within three years of his death.

2. "Where * * * intended to take effect in possession or enjoyment at or after such death." These provisions, found in the 1909 law and common to state transfer inheritance tax statutes, are, of course, designed to preclude avoidance of the tax by these two particular means because they are substitutes for or substantial equivalents of testate or intestate distributions. Swain v. Neeld, supra (28 N.J., at 68-69). The applicability of both provisions is involved in this case; the former in a conventional situation relating to one of the trusts, the latter on a somewhat novel thesis not passed upon previously by this court.

Paragraph d(1) of the section, also derived from the 1909 law, follows, now reading:

"d. Where by transfer of a resident decedent of real or tangible personal property within this State or intangible property wherever situate, or by transfer of a non-resident decedent of real or tangible personal property within this State, a transferee, distributee or beneficiary comes into the possession or enjoyment therein of:

"(1) An estate in expectancy of any kind or character which is contingent or defeasible, transferred by an instrument taking effect on or after July fourth, one thousand nine hundred and nine [hereinafter referred to as 'paragraph d(1)'];

The Bureau applied paragraph d(1) as a basis of taxability of all three of the trusts, contending for the first time in the history of the statute that a separate category, i.e., another "case", of taxable inter vivos transfers, beyond those made in contemplation of death or intended to take effect in possession or enjoyment at or after death, was thereby created.*fn2

As to common incidents of the trusts, all were at inception and still are composed of marketable securities. All were expressly stated to be irrevocable and in fact are. The settlor retained no power to alter, amend or terminate or to change the beneficiaries designated therein. The Bureau does not contend to the contrary and does not argue that at inception she retained any realistic beneficial interest in any of them which would pass upon or after her death. None provides that the extent or termination of the income interest or the devolution of the remainder is anywise dependent upon or connected with the death of the settlor. Each completely disposes of the remainder and leaves no unprovided for contingencies. Each instrument recites in substance that the validity, construction and effect of the trust shall be governed by the laws of the State of New York, where all assets apparently have always been kept. Such a

provision does not, of course, determine transfer inheritance taxability, which is controlled in this case by the law of New Jersey, the decedent's domicile.

Turning to the particular terms and the Bureau's conclusions as to the taxability of each trust, that created in 1935, before Louise's marriage, provided that she receive the income for life and, upon her death, that the principal be paid over as she should appoint by will. She released this power of appointment in 1942. In default of appointment, the trustees (a New York City bank and two individuals recited as of that city) are directed then "to pay over the same to her issue her surviving, in equal shares, per stirpes and not per capita, or if none be then living, to distribute the same as though said LOUISE BOYD LICHTENSTEIN had died intestate while domiciled in the State of New York and owning such principal and accumulated income". (Her death in 1967, subsequent to that of the settlor, has terminated this trust, the remainder interest thereby becoming immediately payable to her two children in equal shares).

The Bureau's determination (which, for some reason undisclosed by the record, was not made until late 1965), found the life estate became indefeasibly vested and immediately effective at the time of the creation of the trust, which was more than three years prior to the settlor's death, and not taxable under any provision of the statute. It held the remainder to be contingent, as of the date of the settlor's death, "not only as to the identity of the persons who will ultimately take, but also as to the event of their survivorship".

The remainder was determined to be taxable under two theories. The first was pursuant to N.J.S.A. 54:34-1, par. c, on the basis of a transfer intended to take effect in possession or enjoyment at or after the settlor's death. The thesis is that where a remainder in fee simple, after a vested life estate, is contingent, the settlor is left with a common law estate in reversion in title arising by operation of law, which passed on her death under her will to the residuary beneficiaries

named there, where it will repose until the death of the life tenant, when it will desert the residuary beneficiaries and vest in the ultimate remaindermen under the trust (or probably more properly stated, it will then be extinguished). It is said that, at the death of the settlor, the transfer of the remainder interest was incomplete in title because "there can be no permanent vesting in full beneficial 'possession' and 'enjoyment'" in any of the contingent remaindermen until the extinguishment of this reversionary interest in title upon the death of the life tenant, and the transfer of the remainder interest is therefore taxable as taking effect in possession or enjoyment after the settlor's death.

The second theory held to ground taxability was paragraph d(1), on the basis of a transfer said to fall within the four corners of that paragraph, assuming that it was intended thereby to create a separate and distinct category of taxable inter vivos transfers.*fn3

The remainder was valued, as of the date of the settlor's death, at almost $900,000 (after deduction of the commuted value of the life estate, N.J.S.A. 54:36-2 and 3). The statute provides that taxes with respect to interests still contingent, although to be based on the value of the property involved as of the date of death, may not be levied or assessed until the person entitled comes into beneficial enjoyment or possession, N.J.S.A. 54:36-3, but does authorize an agreement of compromise to effect an immediate settlement of such taxes, N.J.S.A. 54:36-6. Pursuant thereto, the Bureau offered to accept $35,893 in present payment for that purpose.

The 1954 trust was created for the benefit of Louise's two children, the settlor's grandchildren. The trustees, who are Louise and her husband, were directed to divide the corpus into two equal parts, to be administered as separate trusts for each child. Until each attained the age of 21 years, application of so much of the income as the trustees may deem necessary or advisable for the beneficiary's maintenance, support and education is authorized. At age 21 each is to receive any accumulated income and all the income thereafter. One-half of the principal is payable to the beneficiary at age 30 and the balance at age 35. In the event a beneficiary dies before age 35, that beneficiary's part of the trust is to be paid to his or her issue in equal shares per stirpes and, absent such issue, is to be added to the fund, if still in existence, being administered for the other beneficiary or be paid over to such beneficiary or his or her issue. In default of such issue, the share is to be paid to the mother and father in equal shares or to the survivor of them. If both parents had predeceased, the share is directed to go "to the persons then living who would have been entitled to [the settlor's] property in accordance with the law of the State of New Jersey if [the settlor] had died intestate at that time possessed of said property". By an express provision, the settlor "renounces, relinquishes and disclaims any reversionary or remainder interest in the property now or hereinafter constituting said trust funds".

The Bureau determined the value of the principal of both parts of the trust as of the date of the settlor's death at approximately $2,650,000. It held the whole corpus liable to tax, but only under paragraph d(1) as a transfer wholly contingent or defeasible, both as of the date of the creation of the trust and the date of the settlor's death, on the same thesis as the second basis of taxation with respect to the 1935 trust.*fn4 It assessed taxes of $4,169.38, immediately payable,

on the present value commuted to the date of death, of the income payments made to, and which had thereby vested indefeasibly in, the beneficiaries between the settlor's death and the date of assessment, and offered a compromise settlement of $97,209.43 with respect to the contingent balance of the total corpus.

The 1959 trust was created less than two months before the settlor died, with assets valued at $290,500 as of the date of her death. The trustees are Louise and her husband. The husband is given the income for life. Upon his death, the principal goes to Louise's issue then living in equal shares per stirpes, with provisions for a pour over into the 1954 trust if either of Louise's present children is entitled and is under the age of 35. In default of such issue, the principal goes to Louise, if living, and if not, "to the persons then living who would have been entitled to [the settlor's] property in accordance with the law of the State of New Jersey if [the settlor] had died intestate at that time possessed of said property". Authority is given to the trustee other than the husband to loan the latter out of principal a sum not exceeding $100,000 in any calendar year. The instrument contains the same provision as the 1954 trust of relinquishment, renunciation and disclaimer by the settlor of any reversionary or remainder interest.

The Bureau determined the whole corpus (both life and remainder interests) subject to tax as a transfer made in contemplation of death, the trust having been created within three years of the settlor's death. An immediately payable tax of $9,706.53 was assessed on the commuted value of the life estate as indefeasibly vested and immediately effective at the date of creation. The remainder interest, after deduction of the life estate value, was found to be contingent and

also liable to tax, either as a transfer intended to take effect at death on the same reversionary thesis advanced in the case of the 1935 trust or under paragraph d(1) on the thesis projected with respect to the 1935 and 1954 trusts. A compromise tax of $3,854.77 was offered to settle the taxes on the remainder under any of the three theses.

I

Taxability of the Entire Corpus of the 1959 Trust as a Transfer in Contemplation of Death

The second subparagraph of N.J.S.A. 54:34-1, par. c, as amended by L. 1951, c. 250, sets forth the statutory prerequisites of a transfer made in contemplation of death, without, however, defining "in contemplation":

"A transfer by deed, grant, bargain, sale or gift made without adequate valuable consideration and within three years prior to the death of the grantor, vendor or donor of a material part of his estate or in the nature of a final disposition or distribution thereof, shall, in the absence of proof to the contrary, be deemed to have been made in contemplation of death within the meaning of paragraph 'c' of this section; but no such transfer made prior to such three-year period shall be deemed or held to have been made in contemplation of death."

The so-called presumptive period was introduced in the statute by L. 1922, c. 174, § 1, p. 294. Until 1951 it stood at two instead of three years and there was no time limitation on transfers which could be considered as made in contemplation of death. The purpose of the 1951 amendment, which was not sponsored by the taxing authority was, according to the statement attached to the bill (1951 Assembly No. 624), to conform the state act in these respects to the federal estate tax law, now 26 U.S.C.A. § 2035 (b), which had been similarly amended the previous year. The thinking behind the federal change, which is equally applicable to the New Jersey amendment, is stated in the Senate Finance Committee report (S. Rept. No. 2375, 81st Cong., 2d Sess., 1950-2 C.B. 524-5) as follows:

"While the inclusion in the gross estate of transfers in contemplation of death has long been regarded as necessary to prevent avoidance of the estate tax, the administration of this feature of the estate tax law has always proved difficult. Principally this is due to the fact that contemplation of death deals with the intent of the transferor. Intent is extremely difficult to establish in any case and becomes increasingly so with the passage of time. Undoubtedly many gifts in contemplation of death have escaped the estate tax because of the difficulty which the Government encounters in reconstructing the motives of the deceased. On the other hand, complaints have been received that the Bureau of Internal Revenue has in some cases asserted that gifts made many years before death were in contemplation of death without having much basis for the assertion. As a result executors of estates are confronted with an unpleasant choice between compromising the asserted tax liability or engaging in expensive and difficult litigation. At the present time this problem hangs over any person who makes a gift, even though he expects to live for many years, unless he can prepare evidence demonstrating that the gift was made primarily for nontax reasons.

"Section [2035(b)] removes from the scope of the contemplation of death clause all transfers made more than 3 years prior to the date of death. On the other hand, the burden of showing that the transfer was not in contemplation of death will be borne by the estate in all cases where the transfer was made within a period of 3 years ending with the date of death. This will strengthen the position of the Government in cases where the transfer occurred between 2 and 3 years prior to the date of death."

It is now firmly settled by the leading modern case of Swain v. Neeld, supra (28 N.J. 60) that the presumption in the statute places the obligation upon the taxpayer to establish by a preponderance of the evidence that a transfer, made within the three-year period and meeting the other specified requisites, was not made in contemplation of death. As Justice Burling put it:

"* * * the language utilized, the introducer's statement [to L. 1922, c. 174], and the fact that the presumption is grounded not only in probability but in fairness and policy as well, cumulatively compel the result that the Legislature intended to shift the burden of ultimate persuasion from the State to the taxpayer where the transfer was made within the specified period." (28 N.J., at 67-68).

The statutory phrase "in contemplation of death" has never been limited in this state to its literal meaning of a gift

causa mortis -- one made with the known imminence of death. It early came to encompass inter vivos transfers which were, in substance, substitutes for testamentary disposition. Prior to 1951, and especially before the advent of our new judicial system in 1948, a voluminous body of case law had been built up dealing with what amounted to such substitutes, principally in the Prerogative Court to which such matters went in the first instance under the old practice. (Since 1948, determinations of the Bureau are reviewed in the first instance by the Appellate Division (or in this court, as in this case, if certified before argument there) as appeals from a state administrative agency. R.R. 4:88-8(a). So far as we can determine, that tribunal has not had occasion to review any contemplation of death levies governed by the 1951 amendment in the handful of cases that have come before it).

Swain v. Neeld, supra (28 N.J. 60) is the only contemplation case until the present appeal to reach this court since 1948. The case was quite a clear one for taxability, involving an 87 year old decedent in poor health who gave about one-third of her estate outright to natural objects of her bounty approximately two months before death and then, three weeks prior to her demise, made a new will which took the inter vivos transfers into account and clearly indicated they were part of a general testamentary scheme, which the court found to be "the dispositive fact". The occasion was taken, nonetheless, to write comprehensively concerning the test of a transfer in contemplation of death, its obvious purpose being to distill viable guidelines from what it called "the plethora of judicial decisions" and "the contrariety of phraseology of judicial opinions" on the subject for the future use of the Bureau and the courts in administering the current statute with its three-year limitation. This decision therefore became the accepted base for the future, with all the underbrush of earlier opinions cleared away. While Swain dealt with an outright transfer rather than one in trust, the principles laid down are equally applicable and need only be carried forward a bit more specifically to cover

the instant situation. In doing so, we ought briefly to recapitulate the essence of that holding.

Whether a particular transfer is, in substance, a substitute for a testamentary disposition depends on the subjective state of mind of the transferor at the time -- his intent or motivation in making the transfer. This is a question of fact, as to which the taxpayer bears the burden of persuasion, to be determined through reconstruction of that state of mind as best one can through objective indicia, always having in mind that taxation is a practical matter and never losing sight of common understanding and experience.

As Justice Burling said in Swain with respect to this fact finding process:

"The task of the fact finder is to carefully consider and weigh all of the surrounding circumstances shedding light on the decedent's intent, bearing in mind that quite often the only available witnesses are interested parties. Relevant factors to be considered, as attested by the cases, include, but are not limited to: the age and general condition of health of the donor at the time of making the gift; the time interval between the inter vivos transfer and death; the existence of a desire to evade inheritance taxes; whether or not the inter vivos transfer was part of a testamentary scheme or plan; past history of substantial gifts by the donor; whether or not the gift was made to the natural objects of ...


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