Opinion ID: 2327517
Heading Depth: 1
Heading Rank: 2

Heading: Taxability of the Entire Corpus of the 1959 Trust as a Transfer in Contemplation of Death

Text: The second subparagraph of N.J.S.A. 54:34-1, par. c, as amended by L. 1951, c. 250, sets forth the statutory prerequisites of a transfer made in contemplation of death, without, however, defining in contemplation: A transfer by deed, grant, bargain, sale or gift made without adequate valuable consideration and within three years prior to the death of the grantor, vendor or donor of a material part of his estate or in the nature of a final disposition or distribution thereof, shall, in the absence of proof to the contrary, be deemed to have been made in contemplation of death within the meaning of paragraph `c' of this section; but no such transfer made prior to such three-year period shall be deemed or held to have been made in contemplation of death. The so-called presumptive period was introduced in the statute by L. 1922, c. 174, § 1, p. 294. Until 1951 it stood at two instead of three years and there was no time limitation on transfers which could be considered as made in contemplation of death. The purpose of the 1951 amendment, which was not sponsored by the taxing authority was, according to the statement attached to the bill (1951 Assembly No. 624), to conform the state act in these respects to the federal estate tax law, now 26 U.S.C.A. § 2035 ( b ), which had been similarly amended the previous year. The thinking behind the federal change, which is equally applicable to the New Jersey amendment, is stated in the Senate Finance Committee report (S. Rept. No. 2375, 81st Cong., 2d Sess., 1950-2 C.B. 524-5) as follows: While the inclusion in the gross estate of transfers in contemplation of death has long been regarded as necessary to prevent avoidance of the estate tax, the administration of this feature of the estate tax law has always proved difficult. Principally this is due to the fact that contemplation of death deals with the intent of the transferor. Intent is extremely difficult to establish in any case and becomes increasingly so with the passage of time. Undoubtedly many gifts in contemplation of death have escaped the estate tax because of the difficulty which the Government encounters in reconstructing the motives of the deceased. On the other hand, complaints have been received that the Bureau of Internal Revenue has in some cases asserted that gifts made many years before death were in contemplation of death without having much basis for the assertion. As a result executors of estates are confronted with an unpleasant choice between compromising the asserted tax liability or engaging in expensive and difficult litigation. At the present time this problem hangs over any person who makes a gift, even though he expects to live for many years, unless he can prepare evidence demonstrating that the gift was made primarily for nontax reasons. Section [2035(b)] removes from the scope of the contemplation of death clause all transfers made more than 3 years prior to the date of death. On the other hand, the burden of showing that the transfer was not in contemplation of death will be borne by the estate in all cases where the transfer was made within a period of 3 years ending with the date of death. This will strengthen the position of the Government in cases where the transfer occurred between 2 and 3 years prior to the date of death. It is now firmly settled by the leading modern case of Swain v. Neeld, supra (28 N.J. 60) that the presumption in the statute places the obligation upon the taxpayer to establish by a preponderance of the evidence that a transfer, made within the three-year period and meeting the other specified requisites, was not made in contemplation of death. As Justice Burling put it:    the language utilized, the introducer's statement [to L. 1922, c. 174], and the fact that the presumption is grounded not only in probability but in fairness and policy as well, cumulatively compel the result that the Legislature intended to shift the burden of ultimate persuasion from the State to the taxpayer where the transfer was made within the specified period. (28 N.J., at 67-68). The statutory phrase in contemplation of death has never been limited in this state to its literal meaning of a gift causa mortis  one made with the known imminence of death. It early came to encompass inter vivos transfers which were, in substance, substitutes for testamentary disposition. Prior to 1951, and especially before the advent of our new judicial system in 1948, a voluminous body of case law had been built up dealing with what amounted to such substitutes, principally in the Prerogative Court to which such matters went in the first instance under the old practice. (Since 1948, determinations of the Bureau are reviewed in the first instance by the Appellate Division (or in this court, as in this case, if certified before argument there) as appeals from a state administrative agency. R.R. 4:88-8(a). So far as we can determine, that tribunal has not had occasion to review any contemplation of death levies governed by the 1951 amendment in the handful of cases that have come before it). Swain v. Neeld, supra (28 N.J. 60) is the only contemplation case until the present appeal to reach this court since 1948. The case was quite a clear one for taxability, involving an 87 year old decedent in poor health who gave about one-third of her estate outright to natural objects of her bounty approximately two months before death and then, three weeks prior to her demise, made a new will which took the inter vivos transfers into account and clearly indicated they were part of a general testamentary scheme, which the court found to be the dispositive fact. The occasion was taken, nonetheless, to write comprehensively concerning the test of a transfer in contemplation of death, its obvious purpose being to distill viable guidelines from what it called the plethora of judicial decisions and the contrariety of phraseology of judicial opinions on the subject for the future use of the Bureau and the courts in administering the current statute with its three-year limitation. This decision therefore became the accepted base for the future, with all the underbrush of earlier opinions cleared away. While Swain dealt with an outright transfer rather than one in trust, the principles laid down are equally applicable and need only be carried forward a bit more specifically to cover the instant situation. In doing so, we ought briefly to recapitulate the essence of that holding. Whether a particular transfer is, in substance, a substitute for a testamentary disposition depends on the subjective state of mind of the transferor at the time  his intent or motivation in making the transfer. This is a question of fact, as to which the taxpayer bears the burden of persuasion, to be determined through reconstruction of that state of mind as best one can through objective indicia, always having in mind that taxation is a practical matter and never losing sight of common understanding and experience.