This is a status report provided by the New Jersey State Bar Association on recently passed and pending legislation, regulations, gubernatorial nominations and/or appointments of interest to lawyers, as well as the involvement of the NJSBA as amicus in appellate court matters. To learn more, visit njsba.com.

NJSBA Challenges Calculation of Inheritance Tax of Transfers Made in Contemplation of Death

The Appellate Division will consider whether the inheritance tax imposed on the entire value of a life estate upon the death of one party’s interest in the life estate is permissible. The appeal tests a longstanding principle, argues the New Jersey State Bar Association in its amicus curiae filing, “that both New Jersey practitioners and residents have relied upon in creating estate plans.” The brief was written by Andrew J. DeMaio, Glenn A. Henkel, Jill Lebowitz and Heather G. Suarez.

Estate of Mary Van Riper v. NJ Division of Taxation, Docket No. 8198-2016, involves the irrevocable trust of the Van Ripers, to which they transferred all of their interests in their residence, which they held as tenants by the entirety. Later that same month, Walter Van Riper died, and his 50 percent ownership interest was reported on a New Jersey inheritance tax return. All of the assets owned individually by him and jointly with his wife, Mary, were also reported on the return. Mary died six years later, and the assets of the trust passed, pursuant to the terms of the trust, to her niece. When the estate tax return was completed, the trustee deemed the trust not taxable and filed the taxes showing a zero tax liability. The Division of Tax disagreed, deeming the full date-of-death value of the residence as taxable.

Urging the Appellate Division to overturn the tax court, the association argues that no one party in a joint tenancy may convey their interest alone in a trust and, therefore, each party owns less than 100 percent of the property in this case. The NJSBA drew comparisons with other statutes, such as N.J.S.A. 54A:3A-17d, providing that married taxpayers who own entireties of real estate and file separate New Jersey income tax returns are entitled to deduct only half of the taxes paid. It also cited to another statute allowing spouses owning tenants by the entirety property to distribute half as if one had survived and as if the other half had survived. A further example illustrating New Jersey’s treatment of married property owners allows a survivor to disclaim the interest passing by survivorship.

“When Walter and Mary Van Riper created and funded the trust, Mary conveyed only what she owned: a 50 percent undivided interest in the home held as tenant by the entirety with her husband,” wrote the association. “She could not and did not transfer the entire home to the trust.” As such, the tax court erred in finding that 100 percent of the property, and not 50 percent, was subject to inheritance tax on Mary’s death.

The association further cautioned that the tax court’s decision is not just a departure from prior case law, but could be problematic to both New Jersey practitioners and residents engaging in estate planning. “[N]ever before in New Jersey’s inheritance tax jurisprudence has a court permitted the imposition of inheritance tax on the basis of the decedent’s mere possession of an interest at death, in the absence of prior ownership and retained control by the decedent.” The association pointed out that the tax court’s holding would result in the taxation of transfers that have never before been subject to the inheritance tax.

Oral argument has not yet been scheduled in this matter.