N.J. Supreme Court Settles Transfer Inheritance Tax Question
Estate of Van Riper v. Div. of Taxation, No. 082000, 2020 WL 558624 (N.J. Feb. 5, 2020).
The Supreme Court affirmed the interpretation of New Jersey’s transfer inheritance tax statute that taxed the full value of a property transferred into an irrevocable trust, upon the death of the second spouse.
Walter and Mary Van Riper were husband and wife. They established a single, irrevocable trust in 2007 to hold their marital home. Before Walter and Mary transferred the property to the trust, they owned the property as tenants by the entirety.
Under the trust terms, each of them retained a life interest. The trust required the trustee to provide a residence for the Van Ripers and to pay all carrying costs. The trust also provided that, if the residence were sold, the proceeds would be held in trust for their benefit and used to provide housing for their lives. The trust was to benefit the Van Ripers until both of their deaths, at which point the house would pass to their niece.
Walter passed away nineteen days after the creation of the trust. The inheritance tax return for his estate did not report any interest in the residence as taxable, and no inheritance tax was assessed against his estate.
Mary remained in the house and passed away six years later, in 2013.
In 2015, Mary’s estate filed a New Jersey inheritance tax return, reporting as taxable one-half the date-of-death value of the marital residence; her estate contended that the transfer inheritance tax should be assessed on only one-half of the value of the house.
The New Jersey Division of Taxation audited the return and determined that $935,000 – the full value of the house at Mary’s death – was part of her estate for inheritance transfer tax purposes. The Division determined that, under the trust terms, no transfer of property occurred until Mary’s death, at which point her 100% interest in the house passed to the niece. The gross estate was deemed to be $947,716.96, and the net taxable estate was $890,550.96. The tax assessed was $135,488.15.
New Jersey is among relatively few states that still impose an inheritance tax. In New Jersey, an inheritance tax is imposed upon a transfer in the amount of $500 or more of “real or tangible personal property[,] situated in this State[,] . . . [that] is transferred by will or by” New Jersey’s intestate laws, of a New Jersey resident “dying seized or possessed thereof.” N.J.S.A. § 54:34- 1(a). The tax also is imposed upon the transfer by will or intestate law of real or tangible personal property of a decedent who is not a resident of New Jersey at the time of death. N.J.S.A. § 54:34-1(b).
In addition, a tax is imposed on a transfer of property by deed, grant, bargain, sale or gift that is made either in contemplation of death or “intended to take effect in possession or enjoyment at or after such death.” N.J.S.A. § 54:34-1(c) (emphasis added).
Moreover, N.J.S.A. § 54:34-1.1 provides:
[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 [three] 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 estate argued that this statutory exemption applied because the Van Ripers made an irrevocable and complete disposition of their house in 2007: when the Van Ripers transferred the house to the trust as tenants by the entirety, that tenancy was severed and each spouse retained a one-half interest in the residence. The estate further asserted that the Division had failed to impose a tax on Walter’s one-half interest in the residence and was now precluded from taxing the full value.
The estate filed a complaint in the New Jersey Tax Court, which ruled against the estate on motions by both parties for summary judgment. Estate of Van Riper v. Div. of Taxation, 30 N.J. Tax 1 (Tax 2017). The Tax Court determined that the transfer was not exempt under N.J.S.A. § 54:34-1.1 because the Van Ripers retained interests in the property during their lives. The Tax Court also rejected the estate’s argument that only one-half of the value of the home was includable in Mary’s taxable estate and found that the entire value was to be included. The Tax Court likewise found that Walter’s life estate extinguished at his death and then Mary’s life estate – 100% of the residence – ended on her death. The niece did not receive any interest in the trust until both of the Van Ripers had died.
The estate appealed to the Appellate Division. The New Jersey State Bar Association and the New Jersey Land Title Association supported the estate’s position in the appeal. However, the Appellate Division affirmed the Tax Court. Id.
The New Jersey Supreme Court granted the estate’s petition for certification. Once again, the New Jersey State Bar Association and the New Jersey Land Title Association supported the estate’s position. More specifically, the New Jersey State Bar Association argued that only half of the estate should have been taxed at the time of the second spouse’s death.
Nevertheless, the New Jersey Supreme Court affirmed the Tax Court and the Appellate Division. The Supreme Court found that the entire value of the residence was properly taxed when both life estates were extinguished and the remainder interest was transferred to the Van Ripers’ niece.
The Supreme Court explained that the retention of the life interests by Walter and Mary postponed the niece’s enjoyment of the property until the Van Ripers died. They intended to and did retain benefits. In any event, the Van Ripers had not completely and irrevocably severed their ties to the trust. This rendered the transfer subject to tax under N.J.S.A. 54:34-1(c).
The Court also reasoned that no interest in the property would pass to the niece prior to the death of both spouses. The purpose of the trust was to ensure that the Van Ripers had a residence for their entire lives; the residence might have even been sold and the proceeds used for that purpose. Accordingly, it was not clear that any remainder would be left for the niece to inherit. Because the depletion of the trust was possible, the property could be taxed only after both spouses had died.
The Supreme Court also agreed that the retention of the life estates by the Van Ripers postponed the niece’s “enjoyment of the property until the death of both transferors.” Estate of Van Riper v. Div. of Taxation, No. 082000 at *9 (quoting Estate of Van Riper v. Div. of Taxation, 30 N.J. Tax at 11). The property transfer, in its entirety, took place “at or after” Mary’s death under N.J.S.A. § 54:34-1.1 and was properly taxed at its full value at that time.