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

Heading: Taxability of the Remainders of the 1935 and 1959 Trusts as Transfers to Take Effect At or After Death

Text: In putting in proper context consideration of the Bureau's theory of taxability of the remainders of the 1935 and 1959 trusts under the at or after death statutory provision, we start with the proposition, briefly adverted to earlier, that, policywise, the fundamental purpose of the provision is to prevent avoidance of the tax by a lifetime transfer made in the place and stead of a testamentary disposition. The intended scope thereof has probably not been better analyzed than by Vice-Ordinary Buchanan, the author of most pre-1948 opinions in this field, in In re Brockett, 111 N.J. Eq. 183 ( Prerog. 1932): Concededly the statute neither purports, nor was intended, to tax an immediately effective gift of the absolute title to a property (unless in contemplation of death). Neither would a tax be collectible where the donor, A, gives to B a life estate for B's life and remainder at B's death to C; it is, of course, possible that B may survive A, but C's enjoyment of the remainder is not by the terms of the gift postponed until after the death of the donor, A. Such postponement is not intended, and hence does not come within the terms of the statute. Neither does it come within the general object or design of the statute, for the transfer is not one in lieu of a testamentary disposition, but is a present gift, whereby the donor parts immediately and irrevocably with all interest in the property. If the legislature had been concerned with the fact that the remainderman, C, might not come into possession or enjoyment until after the donor's death, it could readily have provided that a tax should be levied in that contingency. Its failure so to provide indicates that it was not so concerned. (At pp. 188-189). Thus, in the case of transfers in trust, taxability has been found where: (1) the settlor retained income or some benefit for his life with remainder over on his death, Carter v. Bugbee, 91 N.J.L. 438 ( Sup. Ct. 1918), affirmed 92 N.J.L. 390 ( E. & A. 1919); American Board of Commissioners, etc. v. Bugbee, 98 N.J.L. 84 ( Sup. Ct. 1922); In re Brockett, supra (111 N.J. Eq. 183); Central Hanover Bank and Trust Co. v. Martin, 129 N.J. Eq. 186 ( Prerog. 1941), affirmed o.b. 127 N.J.L. 468 ( Sup. Ct. 1942), affirmed 129 N.J.L. 127 ( E. & A. 1942), affirmed, sub nom., Central Hanover Bank & Trust Co. v. Kelly, 319 U.S. 94, 63 S.Ct. 945, 87 L.Ed. 1282 (1943); Pennsylvania Co. For Insurance On Lives, etc. v. Kelly, 134 N.J. Eq. 120 ( Prerog. 1943); Avery v. Walsh, 138 N.J. Eq. 80 ( Prerog. 1946); Cf. City Bank Farmers Trust Co. v. McCutcheon, 8 N.J. Misc. 547, 151 A. 78 ( Sup. Ct. 1930), affirmed o.b. 108 N.J.L. 185 ( E. & A. 1931); (2) the settlor retained for his life power to amend or terminate the trust or to change beneficial interests, In re Fosdick, 102 N.J. Eq. 45 ( Prerog. 1927); Plainfield Trust Co. v. McCutcheon, 8 N.J. Misc. 593, 151 A. 279 ( Sup. Ct. 1930), affirmed o.b. 108 N.J.L. 201 ( E. & A. 1931); Renwick v. Martin, 126 N.J. Eq. 564 ( Prerog. 1939); Pennsylvania Co. For Insurance On Lives, etc. v. Kelly, supra (134 N.J. Eq. 120); (3) the settlor retained a remainder interest to himself. In re Fosdick, supra (102 N.J. Eq. 45). The more recent cases dealing with the provision have been principally concerned with applying these principles, with the same approach and looking to the substance rather than the form of the scheme, to more refined factual situations and devices, such as reciprocal trusts and agreements, annuities and the like. Schroeder v. Zink, 4 N.J. 1 (1950); Cruthers v. Neeld, 14 N.J. 497 (1954); Newberry v. Walsh, 20 N.J. 484 (1956); Darr v. Kervick, 31 N.J. 476 (1960); Tilney v. Kingsley, 43 N.J. 289 (1964); Bose v. Division of Taxation, 5 N.J. Super. 266 ( App. Div. 1949), certif. den. 4 N.J. 74 (1950). The scope of the provision has also been extended to include the case where the trust income is given to a third person for the life of the settlor, with remainder over thereafter, a matter on which there has long been a split of authority among the jurisdictions. See Chase v. Commissioner of Taxation, 226 Minn. 521, 33 N.W. 2 d 706, 6 A.L.R. 2 d 214 (1948) and cases discussed therein. Vice-Ordinary Buchanan, in Koch v. McCutcheon, 111 N.J. Eq. 324 ( Prerog. 1932), first held the remainder in this situation was not taxable in line with the thought he expressed in Brockett, supra, following the language therefrom we previously quoted. The Supreme Court reversed, 111 N.J.L. 154 (1933). The Prerogative Court followed the Supreme Court in a subsequent case, In re Hollander, 123 N.J. Eq. 52 (1938) and the Court of Errors and Appeals approved in Hartford v. Martin, 122 N.J.L. 283 ( E. & A. 1939). The thesis was that such a transfer fell within the literal language of the statute because the ultimate beneficiary could not take until after the death of the settlor and so was dependent upon the latter's demise. Perhaps the more realistic reason was that suggested by the Supreme Court in Koch and also commented on in Hollander  governing the life estate by the settlor's life is too indicative, in a family situation, of unsaid retained control by the settlor or at least furtherance of some lifetime purpose of his own. So taxability in this state under the at or after death provision has required that the settlor retain in himself some realistic interest, power or control or some other string during his lifetime, or his death must be the determinative and indispensable event in the shifting of economic benefits and burdens. Otherwise the transfer is not taxable under this provision. See e.g., In re Kellogg, 123 N.J. Eq. 322 ( Prerog. 1938); Nazzaro v. Neeld, 18 N.J. Super. 56 ( App. Div. 1952). There cannot be the slightest doubt that the trust transfers here involved do not meet these prerequisites and do not fall within the previously outlined scope and intent of the statutory provision. The settlor retained no realistic beneficial interest or power whatever. The divestment was complete at inception without any possibility of reverter in fact. Every possible contingency is covered. A final remainder to intestate takers precludes any failure of ultimate disposition. As Judge Swan said in Commissioner v. Bayne's Estate, 155 F. 2 d 475, 477, 167 A.L.R. 436 (2 Cir. 1946), in dealing with the then similar provision of the federal estate tax law: Strictly there can never be a failure of next of kin, even though a failure to ascertain them may result in an escheat. See to the same effect, Central Hanover Bank & Trust Co. v. Martin, supra (129 N.J. Eq., at 209). It is difficult to conceive of any trust transfer which on its face could be more complete than those here involved. The Bureau does not cite to us any case anywhere holding a like transfer to be taxable under the at or after death provision and we have found none. It seeks to rely on one state and two federal cases construing the at or after death provisions of their respective statutes. Miller v. Connelly, 142 Conn. 144, 112 A. 2 d 202 (1955) (but cf. Bridgeport-City Trust Co. v. Sullivan, 146 Conn. 184, 148 A. 2 d 549 (1959)); Commissioner v. Bank of California, 155 F. 2 d 1 (9 Cir. 1946), cert. den., 329 U.S. 725, 67 S.Ct. 73, 91 L.Ed. 628 (1946); Spiegel's Estate v. Commissioner, 335 U.S. 701, 69 S.Ct. 301, 93 L.Ed. 330 (1949), to which may be added Commissioner v. Bayne's Estate, supra (155 F. 2 d 475). These cases all differ from ours in one vital aspect. In each the settlor did not provide, as here, for all possible contingencies with respect to the remainder. He stopped short at certain specified beneficiaries, so that the possibility of failure of the remainder and reverting of the corpus to him by operation of law actually existed, however remote, should all of the designated remaindermen predecease him. Although there is broad and loose language in some of these opinions, the cases all turn on this possibility of reverter, an admitted impossibility in the instant situation by reason of the express ultimate contingency of intestate takers. Whether New Jersey would follow the so-called rule of Spiegel, i.e., where the settlor fails to provide for all contingencies, the mere possibility of reverter to him by operation of law is sufficient to make the entire corpus taxable, in a similar factual situation need not be decided here. There are at least two early affirmative intimations. See In re Brockett, supra (111 N.J. Eq., at 189); Central Hanover Bank & Trust Co. v. Martin, supra (129 N.J. Eq., at 212. [6] All the cases we have found where the trust provides for all possible contingencies hold that by reason thereof the transfer is not taxable as at or after death. Commissioner v. Hall's Estate, 153 F. 2 d 172 (2 Cir. 1946); Department of Revenue v. Kentucky Trust Co., 313 S.W. 2 d 401 ( Ky. Ct. of App. 1958). Cf. Commissioner v. Marshall's Estate, 203 F. 2 d 534 (3 Cir. 1953). We conceive that the Bureau gains no support for taxability here on the basis of precedent. What the Bureau really urges is an extension of the present scope of the at or after death provision to encompass even realistically complete transfers in trust on the technical basis of the common law real property doctrine of a retained reversionary interest. To reiterate, that doctrine, as put by the Bureau, is that a settlor retains, by operation of law on the creation of the trust, a reversionary interest in title, where there is a vested life estate followed by a contingent remainder (we assume arguendo the remainders here are contingent), which passes on the settlor's death under his will or by intestacy and reposes pursuant thereto pending the death of the life tenant, when it is extinguished, until which latter event the remainderman entitled to possession and enjoyment of the corpus does not receive the complete interest in the property. Ergo, the Bureau claims there has been a transfer to the ultimate remainderman intended to take effect in possession and enjoyment after the settlor's death. The contention does not rest upon any possibility that the settlor can ever regain the corpus; indeed, by hypothesis he cannot, since all possible contingencies have been provided for, and so any such reversionary interest, on the basis of which the whole corpus is sought to be swept back into the realm of taxability, is utterly artificial and valueless. In this regard, the Bureau treats the 1935 and 1959 trusts identically, although the provisions for final contingencies are different. [7] We shall treat the argument as it is presented, although we firmly believe that such highly technical concepts of property law have no proper place in the very practical field of taxation. As the United States Supreme Court said in Klein v. United States, 283 U.S. 231, 234, 51 S.Ct. 398, 399, 75 L.Ed. 996, 999 (1931), [n]othing is to be gained by multiplying words in respect of the various niceties of the art of conveyancing or the law of contingent or vested remainders. See also Plainfield Trust Co. v. McCutcheon, supra (8 N.J. Misc. at 595, 151 A. at 280). To attempt to make its point, the Bureau's brief led us on an extended excursion through the briery thicket of feudal property law and the intricate vagaries of future interests. We are convinced, however, that the thesis is legally inapplicable by reason of other pertinent law, as well as being contrary to the policy and intended scope of the statutory provision as earlier pointed out. We agree that this rule of a reversionary interest in title remaining in a grantor under the circumstances mentioned did exist in the common law of real property. 1 Simes and Smith, The Law of Future Interests (2 nd Ed. 1956) § 85; 1 American Law of Property, § 4.18, p. 435 (1952). The rule prevailed in New Jersey and apparently is still viable in appropriate situations. Fidelity-Philadelphia Trust Co. v. Harloff, 133 N.J. Eq. 44, 51-52 ( Ch. 1943). Seemingly the principle may also be effective in the field of personal property. Miller v. Woodbury Trust Co., 2 N.J. Super. 497, 503 ( Ch. Div. 1949); Wright v. Renehan, 10 N.J. Super. 363, 372 ( Ch. Div. 1950). Where the form of the grant or transfer is in trust, with the bare legal title in the trustee, the income beneficiary for life holding an equitable life estate and the remainderman's interest also being equitable, the reversion concept is more properly expressed by the terminology of a resulting trust. See 5 Scott on Trusts (3 rd Ed. 1967), § 411.2. These principles have also similarly prevailed in New York. The basic rule was of feudal origin and its ramifications and the reasons behind it were connected with that ancient system of land tenure and its incidents, which need not be gone into in any detail for they have largely become anachronistic. The one reason deserving brief mention because of its relation to the question before us is the intertwined and hoary doctrine of worthier title. Summarily stated with respect to the format of the transfer here involved, it is that where prior estates are created in others, an ultimate estate expressly granted to the heirs or next of kin is ineffective and if they take, they do so not by purchase pursuant to the provisions of the instrument, but by descent through operation of law by means of the reversion in title retained by the grantor. The latter devolution was considered more worthy apparently because of the greater advantage in feudal incidents thereby accruing to the lord of the manor. 3 Walsh, Commentaries on the Law of Real Property, § 289 (1947). The doctrine has been much criticized and has been substantially changed in effect by case law or abolished by statute in England and many states ( e.g., in New York, effective Sept. 1, 1967, by section 6-5.9 of the Estates, Powers and Trusts Law, McKinney's Consol. Laws, c. 17- b ; see 3 Simes and Smith, supra, § 1608 (1967 pocket parts)). We will shortly deal with New Jersey's view of the doctrine and the consequent inapplicability of the reversionary interest theory to this case. Before doing so we should refer to another facet demonstrating the hypertechnicality and basic unsoundness of the Bureau's theory as attempted to be applied to death taxes. It concedes (see note 4, supra ) that the theory would not apply to the 1954 trust since the income interests there are less than freehold estates, although all the other incidents of the trust are strictly comparable, as far as ultimate devolution is concerned, to the 1935 and 1959 trusts. Insubstantiality is further demonstrated by the fact that the theory breaks down if the income beneficiary in these trusts predeceased the settlor, which would result in the full vesting of the remainder and extinguishment of any reversionary interest in the settlor before the latter's death. Even on the Bureau's theory, there would not be taxability, since the transfer took effect before and not at or after such death. [8] More importantly, however, we think there is no retained reversionary interest in the case of these trusts by reason of a recent decision of this court. Clark v. Judge, 44 N.J. 550 (1965), affirming o.b. 84 N.J. Super. 35, 44-53 ( Ch. Div. 1964). Cf. In re Voorhees, 93 N.J. Super. 293 ( App. Div. 1967). Although the facts were somewhat different, the resolution of the question presented in Clark depended, broadly speaking, upon whether the reversionary interest retained in the settlor by operation of law of the remainder set forth in the indenture controlled. The trial court, adopting the New York view (before the 1967 statute above referred to), which both sides have argued in our case because of the trust provisions stating that the law of that state should control, held:    the Doctrine of Worthier Title exists in New Jersey as a rule of construction, creating an inference or presumption that a settlor intends to create a reversion, but that the inferred or presumed intention may be overcome by evidence showing a contrary intention. Generally, a settlor's intention must be ascertained from the terms of the entire trust taken as a whole. (84 N.J. Super., at 49). The conclusion there was that the presumption had been overcome and that the settlor intended to create a remainder and, in substance, that any reversion arising by operation of law was thereby annulled. The principal factors relied on exist to an even greater extent here, viz. : that the settlor intended to make a full and complete disposition of the property and retained no sufficiently substantial power over or interest in it. Here, the settlor retained absolutely nothing. We therefore conclude that she intended to create a remainder completely disposing of the corpus and no reversionary interest remained in her or her distributees under her will. We think this basic rationale is applicable to the 1935 trust as well as to that created in 1959 even though the ultimate contingent remaindermen in the former were the life tenant's intestate takers and not her own. In this connection we ought also to mention the earlier quoted clause in the 1959 trust (found in the 1954 trust as well) whereby the settlor expressly disclaimed any reversionary or remainder interest in the trust property. Appellants argue that this clause, in and of itself, effectively divested the settlor of any possible future interest in the trust. The Bureau responds that the provision, contended to be akin to a release, is void because it fails to identify the intended releasee. We need not pass on that question. (As to such releases, see N.J.S.A. 54:34-1.1, L. 1955, c. 135 and statement annexed to the bill). The clause in question is not a disclaimer made subsequent to the creation of the trust, but a mere declaration, as part of its creation, of the settlor's intention. As such, it strongly buttresses our conclusion that she intended that the corpus interest pass by way of remainder and not through any reversion. See Department of Revenue v. Kentucky Trust Co., supra (313 S.W. 2 d 401). We therefore hold that the Bureau's reversionary interest theory is legally inapplicable and that for this and the other reasons expressed, the 1935 and 1959 trust remainders are not taxable under the at or after death provision of N.J.S.A. 54:34-1 par. c.