Property Transfer with No Retained Interest May Be Complete for Inheritance Tax Purposes Even If Grantor Still Benefits From Property

Shedlock v. Director, Div. of Taxation, No. A-5634-18T1, 2020 WL 5032512 (N.J. Super. App. Div. Aug. 26, 2020).

In July 2013 and at the age of 87, Anthony Calleo (the “decedent”) deeded his two-family home (the “property”) to his nieces, Valerie Shedlock and Judith Solan, for less than $100.  The deed included no specific provision giving the decedent any continued right, title, interest, control, or power over the property.  That same day, the decedent executed a will leaving his entire estate to his nieces.

After the 2013 deed transfer, the decedent continued to live in the property and collect rent from a tenant, which he deposited into a joint savings account that he shared with one of the nieces.  The joint account was used to pay maintenance expenses on the property.  The decedent also paid the taxes on the property and reported the rental income and expenses on his income tax return.

The decedent died in August 2016, a little more than three years after the July 2013 transfer of the property.  The nieces filed a New Jersey inheritance tax return for the decedent’s estate, but did not include the property.  The Division of Taxation (“the Division”) audited the return and issued a notice of assessment that included the property at a value of $425,000, as of the decedent’s date of death.  The heirs paid the taxes and interest due under the notice of assessment to the Division, but then filed a complaint in the Tax Court seeking a refund and costs of suit.

The Tax Court entered an order invalidating the notice of assessment and refunding the taxes and interest paid.  The Tax Court’s order was based on its conclusion that the transfer of the property was not made in contemplation of death, nor was it intended to take effect at or after death under N.J.S.A. § 54:34-1(c) and N.J.S.A. § 54:34-1.1.

The Division filed an appeal.

N.J.S.A. § 54:34-1(c) provides that transfers of real property by deed without adequate valuable consideration, within three years prior to the death of the grantor, are taxable as if made in contemplation of the death of the grantor, but “no such transfer made prior to such three-year period shall be deemed or held to have been made in contemplation of death.”

N.J.S.A. § 54:34-1.1 provides that where a property is transferred by deed “wherein the transferor is entitled to some income, right, interest or power,” it “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.”

On appeal, the Division argued the decedent did not completely and irrevocably divest his interest in the property at the time the deed was executed, and that rather the transfer was intended to take effect at the decedent’s death and was subject to the transfer inheritance tax.  The Division asserted the 2013 transfer of the property by deed had the effect of a transfer at death because the decedent remained in possession of the property and continued to receive rental income from the property.

The Appellate Division disagreed with the Division and affirmed the decision of the Tax Court that the transfer of the property was not made in contemplation of death, nor was it intended to take effect at or after death under N.J.S.A. §§ 54:34-1(c) and 54:34-1.1.

After reviewing the plain language of N.J.S.A. §§ 54:34-1(c) and 54:34-1.1, as well as the legislative purpose and history of each and relevant case law, the Tax Court explained:

It is undisputed by the very terms of the deed of transfer that [d]ecedent retained no interest, right to possession or income in, of, and from the [p]roperty.  There is no statement in the deed of transfer that establishes [d]ecedent’s exclusive right to receive rental income from the tenant or to remain in the [p]roperty until his death.  At all times, the [h]eirs had full control over, and the right to the rental income.  Decedent only had a right to use the funds in the joint bank account.  Decedent merely handled the fund[s] in the joint bank account to maintain the [p]roperty.  It is undisputed that the [h]eirs allowed [d]ecedent to handle the fund[s] of the joint bank account because [d]ecedent did not use the rental income for the benefit of himself, but rather, he used the income for the benefit of the [p]roperty, which was owned by the [h]eirs.

The court distinguished Estate of Van Riper v. Div. of Taxation, 31 N.J. Tax 1 (Tax 2017), where “the express purpose of the trust was ‘to provide a residence’ for ‘the lifetime’ of the transferors.”  Id. at 5.  And the trustee was required to use the proceeds of the sale of the property to provide shelter and housing for the transferors.  Id. at 5, n.1.

The court cited to In re Estate of Lingle, 72 N.J. 87 (1976), which concluded that three factors must usually exist in an inter vivos transaction to determine that the transfer was intended to take effect at or after death:

(1) the grantor or settlor must transfer some property, or interest therein, while retaining for his lifetime some or all of the economic benefits therefrom; (2) there must be a consequent postponement of enjoyment on the part of the grantee, promisee or other beneficiary; and (3) both the grantor’s retention and the grantee’s postponement of enjoyment must be for a period determinable by reference to the grantor’s death.

Id. at 95.

Conversely, lifetime transfers will be held not to come within the “at or after death” clause where (1) the retention of benefits by the grantor is not determined by reference to the duration of his life; (2) the grantor has completely divested himself of his entire interest in the transferred property; or (3) there was full and adequate consideration for the property transferred.

While the Division argued that the transfer by decedent met the factors in Lingle, the Appellate Division disagreed, determining that the decedent only received the rental income and remained in the property at the discretion of the heirs, that the transfer of the property was complete, and the decedent’s title was conveyed without any reference to a right to receive rental income or retain a life estate.

The Appellate Division found that the decedent completely divested himself of his entire interest in the transferred property, and thus affirmed the Tax Court’s finding that the property should not be included in decedent’s estate for inheritance tax purposes.