For reversal and remandment -- Chief Justice Hughes, Justices Mountain, Sullivan, Pashman, Clifford and Schreiber and Judge Conford. For affirmance -- None. The opinion of the court was delivered by Mountain, J.
This is an inheritance tax case. The decedent left his entire estate to his second wife. This testamentary deposition was in breach of a separation agreement entered into between him and his first wife, wherein he had promised to leave one-half his estate to his two daughters by the first marriage. Following probate of the will and after considerable negotiation, a settlement was reached, payment of certain sums was made to each of the two daughters and the other terms of settlement were carried out. At issue is the question as to the taxability of the assets disposed of by way of settlement.
The Transfer Inheritance Tax Bureau calculated and assessed the tax strictly in accordance with the terms of the will, taking no account of the settlement arrangements. The Appellate Division, in an unreported opinion, reversed. It held that the sums paid the daughters, being in response to valid contractual demands, should be considered as debts and hence fully deductible. We granted certification on application of the Division of Taxation. 68 N.J. 490 (1975).
The facts have been stipulated. Decedent, Eustace E. Lingle, married Nancy L. Lingle in 1930. Two daughters were born of this marriage. During the minority of the
children, the couple separated and entered into a property settlement agreement on November 14, 1945. By the terms of this instrument, Nancy surrendered all claims against Eustace or his estate, except such rights as accrued to her under the agreement. Provision was made for Nancy's support and for that of the children. Eustace also agreed to make and keep effective a will which would leave at least one-fourth of his estate to Nancy and a like share to be divided between his two daughters; should Nancy remarry, then one-half of his estate was to pass to their children. Following the making of the agreement, Eustace and Nancy were divorced and thereafter each remarried. Decedent died domiciled in New Jersey on January 21, 1970. His will left his entire estate to his second wife, Anita E. Lingle, who was also named as executrix. The two daughters promptly asserted a claim to one-half the estate and threatened suit. By the terms of the negotiated settlement which followed, the daughters received somewhat less than one-half the estate and agreed that a portion of their shares should be held in trust, the income to be paid their stepmother during her life and the remainder to pass to them equally upon her death.
In the transfer inheritance tax return filed by the executrix she claimed as a deduction the entire value of the shares set apart for her stepdaughters by the terms of the settlement agreement, taking the position that they were deductible debts. As indicated above, the Bureau disagreed but the Appellate Division accepted the position of the executrix.
Of course a decedent's debts constitute a valid deduction in determining the clear market value of property transferred by testamentary disposition or intestate succession. N.J.S.A. 54:34-5. And a comprehensive definition of the word "debt" might well be said to include a claim arising from breach of a valid contract to make a bequest or devise. Subject to what is said below, however, we think such a claim was not intended by the Legislature to be included as a deduction in the calculation of the transfer inheritance
tax.*fn1 We say this because we have determined and now hold, for reasons developed below, that a valid contract to make a particular testamentary disposition is, or may be, a transfer within the meaning of N.J.S.A. 54:34-1, subd. c. This section of the Inheritance Tax Act imposes a tax upon the transfer of assets where the "property . . . is transferred by deed, grant, bargain, sale or gift . . . intended to take effect in possession or enjoyment at or after . . . death."
Whether or not a contract to make a will, or to effect some particular testamentary disposition, may be a transfer to take effect at death within the meaning of the foregoing statute has never been decided in this State.*fn2 Decisions in other jurisdictions are in conflict. Compare In re Oppenheimer, 75 Mont. 186, 243 P. 589 (1926) with In re Koeffler's Will, 218 Wis. 560, 260 N.W. 638 (1935).
The "at or after death" provision is a common feature of inheritance tax statutes. It first appeared in our law in 1892. L. 1892, c. 122. The present provision is based upon chapter 228 of the Laws of 1909. Its fundamental purpose is to preclude avoidance of the transfer inheritance tax by a lifetime transfer which is, in effect, a substitute for or a substantial equivalent of a ...