Legal Tip of the Week – 05/5/17!

In an interesting overlap between trust and inheritance tax laws, a recent NJ case shows us that transfers to trust are not exempt from inheritance taxes when the Grantor(s) retains benefits or strings of control.  As some of you may already know, the State of NJ does not have a gift tax for gifts made during lifetime except that when gifts are made within 3 years from the date of death, these gifts will be brought back into the estate for the purposes of calculating inheritance taxes.  NJ is one of the few states that imposes an inheritance tax for assets passing to anyone other than a spouse, parent(s), child, stepchild, or grandchild a/k/a/ Class A beneficiaries

In the case of the Estate of Mary Van Riper v. Director[1], the clients had transferred their home into an irrevocable trust. The trust allowed them to live in the home until their deaths but then after both of their deaths, the home would pass to their niece.  The estate argued that the home had been “gifted” into the trust more than 3 years from the date of death of the clients so this asset should not be subject to inheritance taxes; however the court held that by retaining the ability to live in the home until their deaths, the Grantor-clients had not made a completed gift and as such the asset was indeed going to be subject to inheritance taxes.

The solution therefore is to have the Grantors make a completed gift of the home into the trust but then work out a rental agreement with the Trustee(s) of the trust based on an arm’s length transaction so that the Grantors can continue to live in the home paying rent each month; the disadvantages here are the loss of the “stepped-up” basis afforded to the home upon transfer to the trust as well as the disallowance of the property tax exemptions that would normally have been available for a primary residence.  Consult an estate planning attorney who can guide you on the pros and cons of such transfers applicable to your specific case.

[1] 35-5-2623 Estate of Mary Van Riper v. Dir., Div. of Tax., Tax Ct. (Cimino, J.T.C)