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In re Transfer Inheritance Tax Assessment

Decided: July 24, 1973.

IN THE MATTER OF THE TRANSFER INHERITANCE TAX ASSESSMENT IN THE ESTATE OF GERARD BARNES LAMBERT, DECEASED. JOHN W. DRYE, JR., J. RICHARDSON DILWORTH AND BANKERS TRUST COMPANY, EXECUTORS OF THE LAST WILL AND TESTAMENT OF GERARD BARNES LAMBERT, DECEASED, APPELLANTS,
v.
SIDNEY GLASER, ACTING DIRECTOR, DIVISION OF TAXATION, DEPARTMENT OF THE TREASURY, STATE OF NEW JERSEY, RESPONDENT



For reversal -- Chief Justice Weintraub, Justices Jacobs, Hall and Mountain and Judges Conford and Sullivan. For affirmance -- None. The opinion of the Court was delivered by Hall, J. Conford, P.J.A.D., Temporarily Assigned (concurring). Conford, P.J.A.D., Temporarily Assigned, concurs in result.

Hall

This transfer inheritance tax case involves the taxability of the proceeds of single premium life insurance policies on the life of the decedent, purchased in conjunction with a like number of non-refundable annuity contracts, as to all of which the decedent completely divested himself of income, interest and power more than three years before his death. The Division of Taxation (Division) held the proceeds taxable as a transfer "intended to take effect in possession or enjoyment at or after death" (N.J.S.A. 54:34-1(c)) and the Appellate Division affirmed. 118 N.J. Super. 121 (1972). We granted certification on the executors' petition. 60 N.J. 469 (1972).

The facts are not in dispute. In December 1934, the decedent, then 48 years of age, purchased 22 single premium life insurance policies on his own life. The face amount of the policies was $1,800,000 and the total premiums paid therefor amounted to $996,422.75. At the same time he purchased a like number of single premium non-refundable annuity contracts from the same insurers at a cost of $936,227.25, producing an annuity, payable to him, of $60,443.74 yearly for the remainder of his life, which represented a return of between 3% and 3 1/2% on the total cost. It is agreed that the insurance policies would not have been issued without the conjunctive purchase of the annuity contracts.

The decedent immediately assigned all his right, title and interest in the insurance policies to the trustees of an

irrevocable inter vivos trust to collect the proceeds and all increments and income thereon at his death and to distribute the same among his children and their issue in accordance with the trust provisions. He retained no reversionary interest.

The annuity payments were made to the decedent until, commencing in 1941, he executed various absolute and irrevocable assignments thereof to charitable organizations. By May 1952, all the annuities had been so assigned and he retained no interest whatever in the contracts. He died in 1967, following which the insurance companies paid to the trustees the face amount of the policies, plus accumulated dividends and paid-up additions, the whole totalling $2,021,956.56. It is this sum which the Division found taxable.

There is no doubt that if the decedent had continued to receive the annuity payments until his death, the life insurance proceeds would have been taxable, as this court held in Tilney v. Kingsley, 43 N.J. 289 (1964), where that was the case. The thesis was that the insurance policies were tied to the annuity contracts, so that there was not the usual risk to a life insurer, but rather, as here, simply an integrated investment transaction with the face amount of the policies representing the corpus and the annuity payments the income. The policy proceeds therefore did not come within the statutory exemption of life insurance proceeds, N.J.S.A. 54:34-4, and their payment to the policy beneficiaries upon death, since the decedent had retained the annuity benefits for his life, constituted a taxable transfer intended to take effect in possession or enjoyment at death.

Neither Tilney nor any other case to date involved the question presented here, which arises by reason of the decedent's divestment of all interest in or personal benefit from the life insurance-annuity transaction at least 15 years before his death and of the passage of L. 1955, c. 135, N.J.S.A. 54:34-1.1 thereafter. No case has considered this

statute and references to the scope of the "at or after death" provision in Tilney (43 N.J. at 296) and In re Lichtenstein, 52 N.J. 553, 578 (1968), must be read with this in mind.

The 1955 statute provides as follows:

A transfer of property by deed, grant, bargain, sale, or gift wherein the transferor is entitled to some income, right, interest or power, either expressly or by operation of law, shall not be deemed a transfer intended to take effect at or after transferor's death if the transferor, more than 3 years prior to death, shall have executed an irrevocable and complete disposition of all reserved income, rights, interests and powers in and over the property transferred.

The statement annexed to the bill reads:

This bill is designed to cure a discrepancy between the New Jersey Transfer Inheritance Tax Law and the Federal Estate Tax Law and the Estate Tax Laws of many of our sister states; notably New York and Pennsylvania. New Jersey now taxes trusts merely because the death of a grantor causes a shift in beneficial interest from one person to another. The tax is asserted even though the grantor has retained no beneficial interest in, and no power over, the property. Such trusts are exempt under Federal and New York statutes and under the Pennsylvania Statute as ...


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