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Matter of Estate of James F. Lillis

Decided: March 28, 1973.

IN THE MATTER OF THE ESTATE OF JAMES F. LILLIS, DECEASED, LATE OF MONMOUTH COUNTY, NEW JERSEY. MANUFACTURERS HANOVER TRUST COMPANY, EXECUTORS, ETC., APPELLANT,
v.
SIDNEY GLASER, DIRECTOR, DIVISION OF TAXATION, ETC., RESPONDENT



Carton, Mintz and O'Brien. The opinion of the court was delivered by Carton, P.J.A.D.

Carton

The issue involved in this appeal is whether the proceeds of certain life insurance policies on the life of decedent James F. Lillis are subject to New Jersey inheritance taxes.

Lillis died in July 1963. About a year earlier he had changed the beneficiary provisions on three life insurance policies he then owned. The change consisted of a direction that the proceeds of the policies should be paid to the trustee under the Last Will and Testament of the insured.

In his will testator placed all his property in two trusts under which Manufacturers Hanover Trust Company was designated trustee. Under the first, or marital trust, the trustee was authorized and directed to pay the income to testator's widow, Amanda, for her life, the principal to be distributed upon her death to such person as she by will appointed. Under the second trust the trustee was directed to pay the income to the widow for life, and upon her death, to testator's daughter for life, the principal to be distributed upon the daughter's death to her living descendants. The trustee was given power under both trusts to invade the principal for the benefit of the widow under certain conditions.

When Lillis died the proceeds of the three policies, totalling some $280,000, were turned over to Manufacturers in accordance with the trust and the policy provision. The Division of Taxation ruled that the proceeds were taxable under

N.J.S.A. 54:34-1 et seq. It took the position that these monies came within the definition of taxable transfers under N.J.S.A. 54:34-1. Manufacturers appealed that decision, contending that this sum was exempt pursuant to N.J.S.A. 54:34-4.

N.J.S.A. 54:34-1(a) imposes a transfer inheritance tax

Where real or tangible personal property situated in this State or intangible personal property wherever situated is transferred by will or by the intestate laws of this State from a resident of this State dying seized or possessed thereof. [Emphasis added]

It seems clear from this statutory language that the proceeds of decedent's life insurance policies come within the description of property "transferred by will" since such proceeds were transferred according to the terms of trusts established in his will. Thus, the transfers of such proceeds are subject to inheritance tax under this section unless they are elsewhere exempted.

Manufacturers contends that life insurance proceeds indeed are exempt from taxation by virtue of N.J.S.A. 54:34-4 (b), (c) and (f). Before examining these sections, we are mindful of the general principle that exemptions from taxation are strictly construed and the burden of proving tax exempt status rests upon the taxpayer. Bloomfield v. Academy of Medicine of N.J. , 47 N.J. 358 (1966).

Subsections (b) and (c) of N.J.S.A. 54:34-4 pertain to the movement of life insurance proceeds from a decedent named in a trust instrument. N.J.S.A. 54:34-4(c) exempts life insurance proceeds passing from a decedent to the trustee:

Property passing to a trustee or trustees of any trust deed or agreement heretofore or hereafter executed, by virtue of any contract of insurance heretofore or hereafter in force insuring the life of a resident or nonresident decedent and the proceeds of which are paid or payable at or after the death of such decedent to such trustee or trustees for the benefit of a beneficiary or beneficiaries having ...


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