NJ Supreme Court sides with tax court that transfer inheritance tax law demands predictability and certainty

The New Jersey Supreme Court affirmed the trial court and Appellate Division's 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. In Estate of Mary Van Riper v. NJ Division of Taxation, Docket A-51-18, Justice Lee A. Solomon, who wrote the unanimous decision, highlighted the advancement of "the vital policy goals of clarity, simplicity, and ease of implementation" of the transfer inheritance tax law.

The New Jersey State Bar Association (NJSBA), in its amicus curiae brief, argued that only half of the estate should have been taxed at the time of the second spouse's death. 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 Estate Law Section. DeMaio argued the matter on behalf of the NJSBA.

"We are disappointed with today's decision. It does not comport with the practices of New Jersey's estate planning practitioners," said NJSBA President Evelyn Padin. "This is an important development, and we will continue to monitor the issue and analyze the decision to determine how to educate lawyers to best serve their clients going forward."

At the center of the debate is the estate planning transaction of the Van Ripers, which transferred ownership of their marital home into a single irrevocable trust. Under the terms of the trust, each spouse retained a life interest, with ownership of the property or what might remain from the proceeds of its sale to pass to the couple's niece upon the death of the second spouse. Language in the trust provided that the full value of the property would be available to provide shelter for the couple and to finance care that might be required during their lifetimes. Mr. Van Riper died shortly after the creation of the trust, at which time his 50 percent ownership interest was reported on a New Jersey inheritance tax return. Mrs. Van Riper died six years later and the estate passed to their niece.

"This decision reverses what had been well established estate planning techniques and forms of ownership," said the NJSBA in its brief. At issue is the uncertainty that lies ahead in the application of the Court's interpretation in other estate planning transactions; transactions involving non-traditional families, which could lead to absurd results; or real estate transactions, which could now lead to additional steps never before contemplated.

The Court found these arguments unpersuasive, finding that the new terms of the trust created by the Van Ripers created a new tenancy by the entirety through the specific terms of the trust, which made it clear that no interest in the property passed to the niece prior to the death of both spouses.

"Indeed, it would be unfair to assess a tax based on one-half of the value of the residence at [Mr. Van Riper's] death—[the niece's] remainder interest—because, under the controlling terms of the Trust, it was not clear that there would be any remainder for [the niece] to inherit," said the Court.

In addition to the NJSBA, Edward C. Eastman argued as amicus curiae for the New Jersey Land Title Association in line with the association's position.

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.