Lichtenstein's Estate, In re

• Decision Date: 04 November 1968
• Docket Number: No. A--22,A--22
• Citation: 247 A.2d 320,52 N.J. 553
• Parties: In the Matter of the Transfer Inheritance Tax Assessment in the ESTATE of Anne Boyd LICHTENSTEIN, deceased. Louise Boyd DALE and Bankers Trust Company, Surviving Executors of the Will of Anne Boyd Lichtenstein, deceased, Appellants, v. William KINGSLEY, Acting Director of the Division of Taxation, Department of the Treasury, State of New Jersey, Respondent.
• Court: New Jersey Supreme Court

Page 553

52 N.J. 553

247 A.2d 320

In the Matter of the Transfer Inheritance Tax Assessment in the ESTATE of Anne Boyd LICHTENSTEIN, deceased. Louise Boyd DALE and Bankers Trust Company, Surviving Executors of the Will of Anne Boyd Lichtenstein, deceased, Appellants, v. William KINGSLEY, Acting Director of the Division of Taxation, Department of the Treasury, State of New Jersey, Respondent.

No. A--22.

Supreme Court of New Jersey.

Argued May 22, 1967.

Reargued Sept. 27, 1968.

Decided Nov. 4, 1968.

Harrison F. Durand, Newark, for appellants (Durand, Twombly & Imbriaco, Newark, attorneys, Harrison F. Durand and Joseph E. Imbriaco, Newark, of counsel and on the brief, Joseph Lester Parsons, III, Short Hills, on the brief).

Leon S. Wilson, Deputy Atty. Gen., argued and Elias Abelson, Deputy Atty. Gen., reargued the cause for respondent (Arthur J. Sills, Atty. Gen., attorney, Elias Abelson, Trenton, of counsel and on the brief, Joseph A. Jansen and T. Robert Zochowski, Deputy Attys. Gen., on the brief).

The opinion of the court was delivered by

HALL, J.

This case challenges the assessment of transfer inheritance taxes with respect to three Inter vivos trusts created by the decedent, Anne Boyd Lichtenstein ('the settlor'). The first trust took effect on December 30, 1935 ('the 1935 trust'), the second on January 20, 1954 ('the 1954 trust'), and the third on February 7, 1959 ('the 1959 trust'). Her executors' appeal to the Appellate Division from the determination of the Transfer Inheritance Tax Bureau ('the Bureau') was certified on their application prior to argument in that court. R.R. 1:10--1A.

The settlor died on April 1, 1959, at the age of 82, domiciled in New Jersey as she had been at all pertinent times. She left a very substantial testamentary estate, the taxation of which is not involved here. Her survivors--mentioned because they are the principal beneficiaries of the trusts--were her only child, Louise Boyd Dale ('Louise'), born March 30, 1913, Louise's husband, John Denny Dale, then 42 years old (they were married some time after 1935), and the two children of that marriage, Anne Boyd Dale, born January 4, 1941, and John Denny Dale, Jr., born October 23, 1947. ¹

At the outset brief reference should be made to some fundamentals, including the taxability provisions of the statute. The New Jersey transfer inheritance tax, N.J.S.A. 54:33--1 et seq., is not a property or estate tax, but a privilege levy on the right of succession to property transferred by 'decedents', levied on the Transferee, 'in certain cases' specified by the legislation (to use the language of the title of L.1909, c. 228, which is the basis of the present law). Howell v. Edwards, 88 N.J.L. 134, 96 A. 186 (Sup.Ct.1915), affirmed o.b. 89 N.J.L. 713, 99 A. 1070 (E. & A. 1916); Maxwell v. Edwards, 89 N.J.L. 446, 99 A. 138 (Sup.Ct.1916), affirmed 90 N.J.L. 707, 101 A. 248 (E. & A. 1917), affirmed sub nom. Maxwell v. Bugbee, 250 U.S. 525, 40 S.Ct. 2, 63 L.Ed. 1124 (1919); In re Roebling's Estate, 89 N.J.Eq. 163, 104 A. 295 (Prerog.1918), appeal dismissed, 91 N.J.Eq. 72, 108 A. 359 (E. & A. 1919); Rogers, New Jersey Transfer Inheritance Tax, § 37--44, pp. 12--17 (1940). It should be kept in mind that a transfer inheritance tax is not and was never intended to be a general gift tax. Symposium on State Inheritance and Estate Taxation, Rottschaefer, Taxation of Transfers Taking Effect in Possession at Grantor's Death, 26 Iowa Law Review 514 (1941). See Swain v. Neeld, 28 N.J. 60, 69, 145 A.2d 320 (1958); Montclair Trust Co. v. Zink, 141 N.J.Eq. 401, 405, 57 A.2d 372 (Prerog.1948). New Jersey, unlike a dozen or so other states and the federal government, has no such levy.

The taxability section is N.J.S.A. 54:34--1. It begins, so far as here pertinent: '* * * a tax shall be and is hereby imposed * * * upon the transfer of property, real or personal, * * * or of any interest therein or income therefrom, in trust or otherwise, to or for the use of any transferee, distributee or beneficiary in the following cases:'.

Since the tax is keyed to the transfer of property by one deceased and his death is the triggering event, the first 'cases' specified are transfers where real or tangible personal property situated in this state or intangible personal property wherever situated is transferred by a resident decedent and where real or tangible personal property within this state is transferred by a non-resident decedent, by intestacy or testamentary disposition. N.J.S.A. 54:34--1, pars. a and b.

The next 'cases', set forth in paragraph c of the section, are two categories of pre-death transfers of the same property made by the same classes of decedents:

1. 'Where * * * made in comtemplation of the death of the grantor, vendor or donor', if, since the amendment of L.1951, c. 250, made within three years of his death.

2. 'Where * * * intended to take effect in possession or enjoyment at or after such death'.

These provisions, found in the 1909 law and common to state transfer inheritance tax statutes, are, of course, designed to preclude avoidance of the tax by these two particular means because they are substitutes for or substantial equivalents of testate or intestate distributions. Swain v. Neeld, supra (28 N.J. at 68--69, 145 A.2d 320). The applicability of both provisions is involved in this case; the former in a conventional situation relating to one of the trusts, the latter on a somewhat novel thesis not passed upon previously by this court.

Paragraph d(1) of the section, also derived from the 1909 law, follows, now reading:

'd. Where by transfer of a resident decedent of real or tangible personal property within this State or intangible property wherever situate, or by transfer of a non-resident decedent of real or tangible personal property within this State, a transferee, distributee or beneficiary comes into the possession or enjoyment therein of:

'(1) An estate in expectancy of any kind or character which is contingent or defeasible, transferred by an instrument taking effect on or after July fourth, one thousand nine hundred and nine (hereinafter referred to as 'paragraph d(1)');

* * *' es

The Bureau applied paragraph d(1) as a basis of taxability of all three of the trusts, contending for the first time in the history of the statute that a separate category, i.e., another 'case', of taxable Inter vivos transfers, beyond those made in contemplation of death or intended to take effect in possession or enjoyment at or after death, was thereby created. ²

As to common incidents of the trusts, all were at inception and still are composed of marketable securities. All were expressly stated to be irrevocable and in fact are. The settlor retained no power to alter, amend or terminate or to change the beneficiaries designated therein. The Bureau does not contend to the contrary and does not argue that at inception she retained any realistic beneficial interest in any of them which would pass upon or after her death. None provides that the extent or termination of the income interest or the devolution of the remainder is anywise dependent upon or connected with the death of the settlor. Each completely disposes of the remainder and leaves no unprovided for contingencies. Each instrument recites in substance that the validity, construction and effect of the trust shall be governed by the laws of the State of New York, where all assets apparently have always been kept. Such a provision does not, of course, determine transfer inheritance taxability, which is controlled in this case by the law of New Jersey, the decedent's domicile.

Turning to the particular terms and the Bureau's conclusions as to the taxability of each trust, that created in 1935, before Louise's marriage, provided that she receive the income for life and, upon her death, that the principal be paid over as she should appoint by will. She released this power of appointment in 1942. In default of appointment, the trustees (a New York City bank and two individuals recited as of that city) are directed then 'to pay over the same to her issue her surviving, in equal shares, per stirpes and not per capita, or if none be then living, to distribute the same as though said LOUISE BOYD LICHTENSTEIN had died intestate while domiciled in the State of New York and owning such principal and accumulated income'. (Her death in 1967, subsequent to that of the settlor, has terminated this trust, the remainder interest thereby becoming immediately payable to her two children in equal shares).

The Bureau's determination (which, for some reason undisclosed by the record, was not made until late 1965), found the life estate became indefeasibly vested and immediately effective at the time of the creation of the trust, which was more than three years prior to the settlor's death, and not taxable under any provision of the statute. It held the remainder to be contingent, as of the date of the settlor's death, 'not only as to the identity of the persons who will ultimately take, but also as to the event of their survivorship'.

The remainder was determined to be taxable under two theories. The first was pursuant to N.J.S.A. 54:34--1, par. c, on the basis of a transfer intended to take effect in possession or enjoyment at or after the settlor's death. The thesis is that where a remainder in fee simple, after a vested life estate, is contingent, the settlor is left with a common law estate in reversion In title arising by operation of law, which passed on her death under her will to the residuary beneficiaries named there, where it will repose until the death of the life tenant, when it will desert the residuary beneficiaries and vest in the ultimate remaindermen under the trust (or probably more properly stated, it will then be extinguished). It is said that, at the death of the settlor, the transfer of the remainder interest was incomplete In title because 'there can be no permanent...