Lingle's Estate, Matter of

• Decision Date: 06 December 1976
• Citation: 72 N.J. 87,367 A.2d 878
• Parties: In the Matter of the ESTATE of Eustace E. LINGLE, Late of Monmouth County.
• Court: New Jersey Supreme Court

Page 87

72 N.J. 87

367 A.2d 878

In the Matter of the ESTATE of Eustace E. LINGLE, Late of Monmouth County.

Supreme Court of New Jersey.

Argued April 6, 1976.

Decided Dec. 6, 1976.

Stephen Skillman, Asst. Atty. Gen., for appellant Div. of Taxation (William F. Hyland, Atty. Gen., attorney; Stephen Skillman of counsel; Michael E. Goldman, Deputy Atty. Gen., on the brief).

Cary R. Hardy, Summit, for respondent executrix (Bourne & Noll, Summit, attorneys; Cary R. Hardy of counsel; Ken R. Springer, Verona, on the brief).

The opinion of the court was delivered by

MOUNTAIN, J.

This is an inheritance tax case. The decedent left his entire estate to his second wife. This testamentary disposition was in breach of a separation agreement entered into between him and his first wife, wherein he had promised to leave one-half his estate to his two daughters by the first marriage. Following probate of the will and after considerable negotiation, a settlement was reached, payment of certain sums was made to each of the two daughters and the other terms of settlement were carried out. At issue is the question as to the taxability of the assets disposed of by way of settlement.

The Transfer Inheritance Tax Bureau calculated and assessed the tax strictly in accordance with the terms of the will, taking no account of the settlement arrangements. The Appellate Division, in an unreported opinion, reversed. It held that the sums paid the daughters, being in response to valid contractual demands, should be considered as debts and hence fully deductible. We granted certification on application of the Division of Taxation. 68 N.J. 490, 348 A.2d 531 (1975).

The facts have been stipulated. Decedent, Eustace E. Lingle, married Nancy L. Lingle in 1930. Two daughters were born of this marriage. During the minority of the children, the couple separated and entered into a property settlement agreement on November 14, 1945. By the terms of this instrument, Nancy surrendered all claims against Eustace or his estate, except such rights as accrued to her under the agreement. Provision was made for Nancy's support and for that of the children. Eustace also agreed to make and keep effective a will which would leave at least one-fourth of his estate to Nancy and a like share to be divided between his two daughters; should Nancy remarry, then one-half of his estate was to pass to their children. Following the making of the agreement, Eustace and Nancy were divorced and thereafter each remarried. Decedent died domiciled in New Jersey on January 21, 1970. His will left his entire estate to his second wife, Anita E. Lingle, who was also named as executrix. The two daughters promptly asserted a claim to one-half the estate and threatened suit. By the terms of the negotiated settlement which followed, the daughters received somewhat less than one-half the estate and agreed that a portion of their shares should be held in trust, the income to be paid their stepmother during her life and the remainder to pass to them equally upon her death.

In the transfer inheritance tax return filed by the executrix she claimed as a deduction the entire value of the shares set apart for her stepdaughters by the terms of the settlement agreement, taking the position that they were deductible debts. As indicated above, the Bureau disagreed but the Appellate Division accepted the position of the executrix.

Of course a decedent's debts constitute a valid deduction in determining the clear market value of property transferred by testamentary disposition or intestate succession. N.J.S.A. 54:34--5. And a comprehensive definition of the word 'debt' might well be said to include a claim arising from breach of a valid contract to make a bequest or devise. Subject to what is said below, however, we think such a claim was not intended by the Legislature to be included as a deduction in the calculation of the transfer inheritance tax.¹ We say this because we have determined and now hold, for reasons developed below, that a valid contract to make a particular testamentary disposition is, or may be, a transfer within the meaning of N.J.S.A. 54:34--1, subd. c. This section of the Inheritance Tax Act imposes a tax upon the transfer of assets where the 'property . . . is transferred by deed, grant, bargain, sale or gift . . . intended to take effect in possession or enjoyment at or after . . . death.'

Whether or not a contract to make a will, or to effect some particular testamentary disposition, may be a transfer to take effect at death within the meaning of the foregoing statute has never been decided in this State.² Decisions in other jurisdictions are in conflict. Compare In re Oppenheimer, 75 Mont. 186, 243 P. 589 (1926) with In re Koeffler's Will, 218 Wis. 560, 260 N.W. 638 (1935).

The 'at or after death' provision is a common feature of inheritance tax statutes. It first appeared in our law in 1892. L.1892, c. 122. The present provision is based upon chapter 228 of the Laws of 1909. Its fundamental purpose is to preclude avoidance of the transfer inheritance tax by a lifetime transfer which is in effect, a substitute for or a substantial equivalent of a testate or intestate distribution. In re Estate of Lichenstein, 52 N.J. 553, 560, 575, 247 A.2d 320 (1968).

The transfer inheritance tax was never intended to be a gift tax. Its aim is the more limited one of taxing successions at death. Beck, New Jersey Inheritance and Estate Taxes, § 2 (1974); Rogers, New Jersey Transfer Inheritance Tax §§ 37, 40 (1940). A tax is levied on the right to succeed to property upon death. The statutory provision seeking to tax transfers to take effect in possession or enjoyment at or after death, as well as certain gifts made in contemplation of death, N.J.S.A. 54:34--1, subd. c, is not designed to alter the fundamental aim or thrust of the tax. It is rather intended to close avenues of avoidance so obvious that, were they not shut off and controlled, the statutory imposition would clearly fail of its purpose.

The language of the 'at or after death' provision is quite broad. It imposes a tax on all transfers valued at $500 or more, or of any interest therein or income therefrom, in trust or otherwise, to take effect in possession or enjoyment at or after the death of the transferor and includes transfers 'by deed, grant, bargain, sale or gift.' Significantly, though not surprisingly, this language has been held to include transfers accomplished by Inter vivos contracts. Schroeder v. Zink, 4 N.J. 1, 11, 71 A.2d 321 (1950); In re Deutz, 105 N.J.Eq. 671, 677, 149 A. 257 (Prerog.Ct.1930). In passing upon the scope of this clause, our courts have had occasion to examine a considerable variety of Inter vivos arrangements. Tilney v. Kingsley, 43 N.J. 289, 204 A.2d 133 (1964) (purchase of life insurance policies combined with non-refundable annuity contracts); Schroeder v. Zink, supra (corporation-stockholder buy-sell agreement); In re Estate of Lichtenstein, supra (complicated Inter vivos trusts); Darr v. Kervick, 31 N.J. 476, 158 A.2d 42 (1960) (reciprocal trusts); Minoff v. Margetts, 14 N.J.Super. 30, 81 A.2d 369 (App.Div.1951), certif. den. 7 N.J. 584, 83 A.2d 381 (1951) (partnership agreement). In each of these cases the Inter vivos arrangement was found to be taxable within the 'at or after death' provision.

A careful review of the case law suggests that the following factors must usually be found in order to bring any Inter vivos transaction within the reach of the statute: (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.

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, N.J.A.C. 18:26--5.8, Rottschaefer, Taxation of Transfers Taking Effect in Possession at Grantor's Death, 26 Iowa L.Rev. 514, 528--29 (1941); (2) the grantor has completely divested himself of his entire interest in the transferred property, In re Estate of Lambert, 63 N.J. 448, 459, 308 A.2d 11; In re Estate of Lichtenstein, supra, 52 N.J. at 578--85, 247 A.2d 320; Nazzaro v. Neeld, 18 N.J.Super. 56, 62, 86 A.2d 688 (App.Div.1952); or (3) there was full and adequate consideration for the property transferred, Schroeder v. Zink, supra, 4 N.J. at 9--10, 71 A.2d 321; Beck, New Jersey Inheritance and Estate Taxes, supra, § 17(b).

The transaction with which we are here concerned--the agreement to make a particular testamentary disposition--definitely conveyed to testator's daughters an interest in his estate within the meaning of the statute defining transfers.³ They became, at the time the contract was made, third party beneficiaries of the agreement to make a will in their favor. As such, they had a statutory right to sue upon the contract, N.J.S.A. 2A:15--2. Specifically, third party beneficiaries of a contract to make a will have been held entitled to sue at law for damages or in equity for appropriate specific relief. Drewen v. Bank of Manhattan Co. of City of N.Y., 31 N.J. 110, 117, 155 A.2d 529 (1959); Harrington v. Harrington, 141 N.J.Eq. 456, 457, 57 A.2d 542 (Ch.1948), Mod. and rev. on other grounds, 142 N.J.Eq. 684, 61 A.2d 466 (E. & A.1948).

Since the agreement contemplated an ultimate disposition by will, which could take effect only at death, the interest transferred was obviously measured in terms of the death of the contracting party. A contract to make a will, such as the one we here...