Central Hanover Bank & Trust Co. v. Kelly

Background

A man who lived in New Jersey transferred securities into an irrevocable trust in New York, leaving income to himself and then to his wife for life, and specifying that if his wife died first his two sons would each get half the principal. The securities stayed in New York with a New York trust company as trustee. The man died in 1936 while living in New Jersey; his wife had already died and both sons survived him but lived outside New Jersey. New Jersey’s tax officials assessed an inheritance/transfer tax under a state law that reaches transfers made by a resident, including transfers intended to take effect at or after death.

Reasoning

The Court addressed whether New Jersey could tax the transfer of these intangible securities even though the papers and trustee were in New York and the remainders were contingent when the trust was made. Relying on state-court determinations about the kind and timing of the interest transferred and on long-standing principles, the Court said domicile (the person’s legal home) controls. The State may treat the creation of the equitable contingent remainders as a taxable transfer, and it may measure the tax by the property’s value at the owner’s death or make payment conditional on continued domicile at death. Timing of valuation or the physical location of the securities and trustee did not prevent New Jersey from taxing the transfer. The Court affirmed the state courts’ judgment and upheld the tax assessment.

Real world impact

The ruling confirms that a state can tax transfers made by people who live there even when the assets and trustee are outside the state. Nonresident heirs or an out-of-state trustee do not automatically defeat the domiciliary state’s tax claim. States may value property at death for tax purposes and delay tax payment until death if they choose.