After meeting with a lawyer who advised him about divesting himself of assets so that he one day would be able to qualify for Medicaid, Peter Muscle, age 88, made a gift to his girlfriend of PSE&G stock having a value just over $1 million. He died six months later.
As most readers know, New Jersey has both an estate tax and an inheritance tax. The estate tax is triggered on a decedent’s assets that exceed $675,000. The inheritance tax is imposed on assets that do not pass to a spouse or lineal descendants. Since New Jersey does not have a gift tax, gifting assets away during lifetime under some circumstances can have the effect of saving New Jersey transfer taxes.
However, the inheritance tax law (but not the estate tax law) also contains a rule that gifts made in contemplation of death are pulled back into the decedent’s estate and subject to inheritance tax. See NJSA 54:34-1(c). Furthermore, if the decedent makes a transfer without adequate consideration of a material portion of the decedent’s estate within three years of death, then the burden of proof switches to the estate to prove that the gift was not in contemplation of death.
In this relatively straightforward case, the court did not believe the estate’s explanation that the gift was made in celebration of marriage, and held that the estate failed to carry its burden of proof. The gift was therefore made in contemplation of death and was subject to New Jersey inheritance tax.
Gifts are an effective planning technique to reduce state level estate tax exposure, but advisors need to be aware of this risk in New Jersey inheritance tax cases.