An important and commonly misunderstood law regarding gift giving prior to one’s death was recently highlighted in a NJ case. As background, when a child inherits from a parent there is no New Jersey inheritance tax, whereas there is a tax if any other relative or friend inherits. As a result, if one gifts an unusually large amount of money within three years of his or her death to someone other than a child, the possibility that the gift was made to avoid paying state inheritance tax comes into question. A common misunderstanding is that unless there is reason to assume the giver was aware of his impending death the transfer is not a taxable one. In fact, the truth is quite to the contrary.
In Estate of Muscle v. Director, Peter Muscle, an 88 year old New Jersey resident, transferred PSE&G shares valued at a total of $1,038,947 to Linda Jackson, a girlfriend with whom Peter had a longstanding relationship but never lived with. Over the years Linda had constantly asked Peter to marry her but because of a previous bitter divorce Peter fiercely resisted the idea. Finally, in 2006, Peter agreed to purchase a property together with Linda and move in together, but did not yet agree to get married. In 2007, Linda met with James DeMartino, an attorney knowledgeable in the area of eldercare, wills, and estate planning. He suggested that Peter gift Linda the PSE&G stock, saying it would not only be beneficial for tax purposes but for Medicaid eligibility as well, for which there is five-year look-back period (no gifts can be made within 5 years of application). After Mr. DeMartino met with Peter, Peter gifted her the stock and told Linda that he was finally ready to “make it legal” which he clarified meant to get married. As of that moment, Peter never conveyed any concerns to Linda about death. Peter died on January 4, 2008, less than six months after the transfer of stock. After his death, the Director of Taxation demanded that the value of the stock be added to the estate and therefore included in the inheritance tax. The reasoning behind the Director was that as a result of The New Jersey Transfer Inheritance Act there is a presumption that a gift made by a decedent during his life is taxable as a testamentary substitute if made in “contemplation of death”. The statute requires the State to consider four essential facts: (a) a transfer occurred; (b) there was no adequate consideration; (c) the gift was a material portion of the decedent’s estate; and (d) the gift occurred within three years of the decedent’s death. If these facts exist, the burden of proof is shifted to the recipient, to show that the gift was not made in contemplation of death.
Linda challenged the Director’s determination with two arguments. First, she claimed that the stock was an engagement present and was therefore not in contemplation of death. Furthermore, she pointed out that a motive of the gift had been for Medicaid purposes to qualify with a five-year look-back, which would imply that Peter expected to live at least 5 more years.
The Tax Court ruled in favor of the Director, maintaining that unless it can be factually proven otherwise, a gift meeting the 4 requirements of the statute is deemed “in contemplation of death”. It pointed out that “contemplation of death” is not limited to its literal meaning, rather the test in New Jersey is whether, regardless of “the existence of any life associated motives,” the decedent had an “impelling motive to make a present disposition in lieu of a testamentary disposition”. As for Linda’s arguments, the Court decided that because Peter only made the gift subsequent to meeting with an elder-law attorney it indicated that his motivation was for tax purposes. As for the 5 year Medicaid look-back argument, the Court deemed it irrelevant since the only requirement for taxing a gift is the presence of an impelling motive to avoid inheritance tax, regardless of other motives.