Whether A Transfer Made Within 3 Years of Death Triggers New Jersey Transfer Inheritance Tax

Estate of Chernowitz v. Dir., Div. of Tax’n, No. 004863-2017, 2018 WL 6173591 (N.J. Tax Court Nov. 16, 2018).

The New Jersey Tax Court addressed whether the decedent’s $5.1 million transfer was in contemplation of her death, such that it triggered New Jersey transfer inheritance tax due pursuant to N.J.S.A. § 54:34-1.

In 2012, at the age of ninety-eight years old, Edith Chernowitz (“Edith”) gifted approximately $5.1 million to her family members. Of the $5.1 million transferred, $2.8 million was transferred outright to her nephew, Richard Jacoby (“Richard”).  Another amount in excess of $2 million was transferred to a trust to benefit Richard, his wife and children.  Finally, $300,000 was gifted to a special needs trust that was previously created by Richard’s mother to benefit his brother. Id. at 7-8.

Edith filed a gift tax return in 2012, at which time the gifts qualified for the applicable annual federal unified estate and gift tax exclusion, which was $5.12 million. Id. at *8.  Less than three years later, on October 25, 2014, Edith died.  Her estate was assessed New Jersey transfer inheritance tax on the entire $5.1 million gift on the basis that the transfer was made within three years of her death and in contemplation of her death.

Edith’s estate (“Estate”) appealed the assessment. Id. at *9.

Pursuant to N.J.S.A. § 54:34-1, a tax is imposed on the transfer of real and personal property from a decedent’s estate.  Moreover, a transfer made without adequate valuable consideration and within three years prior to death is deemed to have been made in contemplation of death, absent proof to the contrary, and triggers the tax obligation. See N.J.S.A. § 54:34-1(c). Id. at *9-10.  This period has been termed the so-called “presumptive period.” Id. at *11.  To determine that a transfer was made during the “presumptive period” three elements must be established:  (1) a transfer without adequate valuable consideration; (2) within three years prior to death of the donor; and (3) of a material part of the estate. Id. at *11.

The court found it was undisputed that the transfer by gift was without adequate consideration. There was not any claim that Edith received something in return for the $5.1 million.  In addition, the gift was made in 2012 and Edited died in 2014; thus the transfer was indisputably within three years. Id. at *12.  Finally, the court found the third element was satisfied since the bequest constituted approximately 28% of the Estate, which was greater than the size of estates previously considered by the Appellate Division and Tax Court in prior cases. Id. at *12. See Estate of Maguire v. Dir., Div. of Tax’n, 9 N.J. Tax 437, 444 (Tax 1987)(finding that 17.7% constituted a material part of the estate); In re Estate of Shivers, 105 N.J. Super. 242, 246 (App. Div. 1969)(finding that 25% constituted a material part of the estate).

The Estate then sought to rebut the presumption by a preponderance of the evidence. The court relied on the factors delineated by the New Jersey Supreme Court in Swain v. Neeld, 28 N.J. 60, 70 (1958), which consist of the following:

i. Age;

ii. General condition of health of the donor at the time of  making of the gift

iii. The time interval between the inter vivos transfer and death;

iv. The existence of a desire to evade inheritance taxes;

v. Whether or not the inter vivos transfer was part of a testamentary scheme or plan;

vi. Past history of substantial gifts by the donor;

vii. Whether or not the gift was made to the natural objects of the donor’s bounty; and

viii. Whether or not there existed an emergency situation which may have prompted the donation.

Id. at *13-14.

The court determined that it could not consider any one factor in a vacuum, but rather must consider the factors in their totality. In doing so, the court found the Estate failed to overcome the presumption that the gift was made by Edith in contemplation of her death. For instance, Edith was ninety-eight years old at the time the gift was made and it was undisputed that she faced cancer and other ongoing health issues at the time. Edith also had a desire to avoid negative changes in tax law and reduce the inheritance tax burden, which was demonstrated through notes and correspondence with her financial advisor. Furthermore, Edith did not have a history of making prior gifts to her natural bounty and there was no emergent reason for making the gift. Id. at *30-31.

Accordingly, the court found an inter vivos gift was presumed to have been made in contemplation of Edith’s death, and therefore was taxable as part of the Estate.