Quick and Easy Tax Strategies Sometimes Backfire as New Jersey Estate Learns

Quick and Easy Tax Strategies Sometimes Backfire as New Jersey Estate Learns
March 7, 2017

Summary

From time to time, clients ask whether their estates will save on death taxes if they simply transfer title to their residence to family members while continuing to live in the residence until they die.  We advise clients that this strategy is ill-advised. In a recent court case (Estate of Mary Van Riper v. Director, Division of Taxation), a family learned this lesson the hard way.

In 2007, Mrs. Van Riper and her husband transferred their $935,000 home to an irrevocable trust for $1.00.  The trust agreement allowed them to continue living in their home for the duration of both their lives.  Mr. Van Riper died in 2007, and then Mrs. Van Riper died in 2013.  The trust directed that the house pass to their niece after the second of their deaths. 

Under New Jersey law, a niece is a Class D beneficiary, a bequest to whom is subject to a 15-16% inheritance tax.  In addition, gifts made to a Class D beneficiary within three years of death or intended to take effect at or after death are subject to this tax.  

The New Jersey Inheritance Tax Bureau imposed the full tax on the value of the Van Riper home.  The Van Riper Estate went to court and argued that the Tax Bureau was wrong because the Van Ripers’ gift was made when the transfer to the trust occurred in 2007, which was six years prior to the death of Mrs. Van Riper.   

The New Jersey Tax Court held for the State. The court found that the fact that the Van Ripers could reside in the house until their deaths constituted a right and power to enjoy the property.  These “strings” were not cut when the Van Ripers transferred title to the trust in 2007. As a consequence, their possession, use and enjoyment of their residence until Mrs. Van Riper died rendered the full value of the residence subject to New Jersey inheritance tax. 

The Van Ripers might have saved on inheritance taxes by creating a different kind of trust, such as a qualified personal residence trust. Admittedly, this would have required an investment of a modest amount of time and expense.  However, the benefit would have been substantial.

A closing note – while the New Jersey estate tax will disappear in 2018, the inheritance tax, which applied to this case, will remain in effect.  For more information on how inheritance tax laws may affect your estate, please contact the author or the attorney at the firm with whom you are regularly in contact.

 

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