Capitol Report: NJSBA is a Friend of the Court in Inheritance Tax Case

By NJSBA Staff posted 10 days ago


Editor’s note: The NJSBA argued in a trio of amicus cases on Sept. 12. This is the first installment of coverage. An upcoming edition of the Capitol Report will dive into the arguments made before the New Jersey Supreme Court in State v. Eileen Cassidy and Amanda Kernahan v. Home Warranty Administrator of Florida, Inc. and Choice Home Warranty.

A hot Appellate Division bench last week questioned the propriety of the treatment of inheritance tax transfers made in contemplation of death. In Estate of Mary Van Riper v. NJ Division of Taxation, Docket No. 8196-2916, 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 estate is permissible. The New Jersey State Bar Association objected to that application in its amicus curiae brief. The brief was written by Andrew J. DeMaio, Glenn A. Henkel, Jill Liebowitz and Heather G. Suarez, members of the NJSBA’s Real Property, Trust and Estates Law Section. DeMaio argued the matter on behalf of the NJSBA.

The association argued that that the transfer of an asset to a trust was a taxable event, becoming due when a spouse died. DeMaio argued that the transfer is 50 percent of the value of the estate and not the entire value, as is the interest in the designation of ownership as a joint tenant by the entirety. “We deal with this all the time administratively,” said DeMaio, pointing out that the state issues guidelines as to how to calculate a compromise tax for transfers that pass to the contingent beneficiary of such a trust. He argued that to treat both transfers as 100 percent would create a legal fiction that an estate is a 200 percent interest.

The matter stems from the creation of an irrevocable trust by the Van Ripers, to which they transferred all of their interests in their residence. 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.

The NJSBA drew comparisons with other statutes, such as N.J.S.A. 54:3A-17d, providing that married taxpayers who own entireties of real estate and file separate New Jersey tax returns are entitled to deduct only half of the taxes paid. Married spouses are also permitted to disclaim an interest passing by survivorship.

The court questioned the NJSBA’s assertion that this could upend well settled practice in the area and challenged counsel to respond to questions on how their position can be reconciled with well settled case law dating back to the 1800’s.

Citing to the new Uniform Trust Code adopted in New Jersey, Van Riper’s attorney argued that “trusts ought to mean something” and that a transfer to a trust, in essence, destroys a tenancy by the entirety. He drew comparisons to the federal gift tax law, pointing out that New Jersey does not have such a law.

The NJSBA cautioned the court that a ruling permitting the imposition of inheritance taxes on the basis of the decedent’s mere possession of an interest at death, in the absence of prior ownership and retained by the decedent, is unprecedented in New Jersey. The association pointed out that the tax court’s holding would result in the taxation of transfers that have never before been the subject of the inheritance tax.

Also filing an amicus curiae brief was the Land Title Association. Ed Eastman, an NJSBA member, which argued their support of NJSBA’s proposed treatment of the tax.

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, click here.