On January 30th 2014, the New Jersey Supreme Court explained the law on gifts between father and son in Bhagat v. Bhagat 217 N.J. 22 (2014)
The court remanded the case to the trial court for proceedings consistent with the Supreme Court decision clarifying the standard to apply when determining whether a transfer of property between family members is a gift. This case involved a fathers 1989 transfer of stock in a closely held corporation to the defendant, his son. The son claimed that the transfer of stock was a gift to him from the father. The father denied that the transfer was a gift, but was done for financing purposes and was never intended to be final.
The Supreme Court in Bhagat held in an opinion written by Judge Cuff:
There are three elements of a valid and irrevocable gift. First, there must be actual or constructive delivery; that is, the donor must perform some act constituting the actual or symbolic delivery of the subject matter of the gift. Pascale v. Pascale, 113 N.J. 20, 29 (1988). Second, there must be donative intent; that is, the donor must possess the intent to give. Ibid. Third, there must be acceptance. Ibid. We have also recognized that the donor must absolutely and irrevocably relinquish ownership and dominion over the subject matter of the gift, at least to the extent practicable or possible, considering the nature of the articles to be given. In re Dodge, 50 N.J. 192, 216 (1967); accord Sipko v. Koger, Inc., 214 N.J. 364, 376 (2013); Farris v. Farris Eng g Corp., 7 N.J. 487, 500-01 (1951).
Actual delivery of the gifted property is necessary except where there can be no actual delivery or where the situation is incompatible with the performance of such ceremony. Foster v. Reiss, 18 N.J. 41, 50 (1955) (quoting Cook v. Lum, 55 N.J.L. 373, 374 (Sup. Ct. 1893)). A gift of stock is such a situation because the ownership of stock is now often recorded simply in book form by the issuer or a broker. See N.J.S.A. 12A:8-301b. Therefore, [i]n the absence of express provisions to the contrary, stock may be transferred by delivery of a separate written transfer, without delivery of any certificate where it is not in possession of the transferee. Hill v. Warner, Berman & Spitz, P.A., 197 N.J. Super. 152, 162 (App. Div. 1984). In other words, the delivery of the stock certificate may be constructive, and the failure to record the transfer on the corporate books does not defeat the gift so long as the transfer is accompanied by words that express donative intent and the donor has divested himself completely of the property. Id. at 162-63.
The burden of proving an inter vivos gift is on the party who asserts the claim. Sadofski v. Williams, 60 N.J. 385, 395 n.3 (1972). Generally, the recipient must show by clear, cogent and persuasive evidence that the donor intended to make a gift. Farris, supra, 7 N.J. at 501. When, however, the transfer is from a parent to a child, the initial burden of proof on the party claiming a gift is slight. Metro. Life Ins. Co. v. Woolf, 136 N.J. Eq. 588, 592 (Ch. 1945), aff d, 138 N.J. Eq. 450 (E. & A. 1946). In such cases a presumption arises that the transfer is a gift. Peppler v. Roffe, 122 N.J. Eq. 510, 515 (E. & A. 1937); First Nat l Bank v. Keller, 122 N.J. Eq. 481, 483 (E. & A. 1937); Bankers Trust Co. v. Bank of Rockville Ctr. Trust Co., 114 N.J. Eq. 391 (E. & A. 1933); Prisco v. Prisco, 90 N.J. Eq. 289, 289 (E. & A. 1919); Herbert v. Alvord, 75 N.J. Eq. 428, 429 (Ch. 1909); Betts v. Francis, 30 N.J.L. 152, 155 (Sup. Ct. 1862). The presumption does not apply if the parent is a dependent of the child. Peppler, supra, 122 N.J. Eq. at 515. See also Weisberg v. Koprowski, 17 N.J. 362, 372-73 (1955). The rationale for the presumption is that a child is considered a natural object of the bounty of the donor. Weisberg, supra, 17 N.J. at 373. See Restatement (Third) of Trusts 9(2) (2001) (noting that resulting trust does not arise when transfer of property is made by one person but payment is made by another when recipient is spouse, dependent, or other natural object of person making payment).
This presumption, however, is rebuttable by evidence of a contrary intent. The earliest reported case that we have identified that addresses the nature of the proofs and the standard of proof to rebut the presumption is Peer v. Peer, 11 N.J. Eq. 432, 439 (Ch. 1857). In that case, the court held that a gift will be presumed when a parent advances funds to purchase real estate for a son and instructs that title shall be in the name of a child. Id. at 438-40. The presumption may be rebutted by evidence of the same kind . . . deemed sufficient to create the presumption. Id. at 439. The court described the quality of the evidence that would be admissible to rebut the presumption as convincing, and of such a character as to leave no reasonable doubt as to the intention of the party. Ibid.; accord Read v. Huff, 40 N.J. Eq. 229, 234 (E. & A. 1885).
In 1909, a court reiterated the Peer standard stating that the proofs required to rebut the presumption are convincing and leave no reasonable doubt as to the intention of the party. Herbert, supra, 75 N.J. Eq. at 430. Ten years later, in Prisco, supra, a case in which a father purchased real property and took title in the name of his sixteen-year-old son, the Court of Errors and Appeals adopted the rule applied by the trial judge regarding the evidentiary burden of a party seeking to rebut the presumption of a gift. 90 N.J. Eq. at 289. The trial judge stated the evidence must be convincing and leave no reasonable doubt. Ibid.; see also McGee v. McGee, 81 N.J. Eq. 190, 194 (E. & A. 1913) (instructing that proof offered to rebut presumption of gift must be certain, definite, reliable and convincing, leaving no reasonable doubt of the intention of the parties ).
In addition, the proofs advanced to rebut the presumption of a gift must be of facts antecedent to or contemporaneous with the purchase, or so immediately afterwards as to form a part of the res gestae. Herbert, supra, 75 N.J. Eq. at 429-30; accord Prisco, supra, 90 N.J. Eq. at 289; Read, supra, 40 N.J. Eq. at 234; Peer, supra, 11 N.J. Eq. at 439.
In Herbert, supra, the court excepted from the antecedent or contemporaneous requirement statements or acts of the party to be charged with the gift. 75 N.J. Eq. at 429-30. Furthermore, in Weisberg, supra, this Court followed the rule announced in Killeen v. Killeen, 141 N.J. Eq. 312, 315 (E. & A. 1948) and Yetman v. Hedgeman, 82 N.J. Eq. 221, 223 (Ch. 1913) that the subsequent conduct of the parties may be given in evidence to corroborate the inference drawn from prior and contemporaneous circumstances. 17 N.J. at 374; see also Bertolino v. Damario, 107 N.J. Eq. 201, 202 (E. & A. 1930) (explaining that gift presumption may be rebutted by later admissions of parties). Notably, in Weisberg, supra, this Court did not preclude evidence of conduct subsequent to the sons purchase of the house in which his mother lived to rebut the presumption of a gift. 17 N.J. at 374-76.
The Court in Bhagat concluded:
We, therefore, hold that a person who has transferred property to another, which raises a presumption that the transferred property was a gift, must meet the clear and convincing evidence standard of proof to rebut the presumption. We also hold that the person seeking to rebut the presumption is limited to evidence antecedent to, contemporaneous with, or immediately following the transfer. In addition, a party seeking to rebut the presumption may also adduce proof of statements by the parties concerning the purpose and effect of the transfer.
The Bhagat Courtrecognizedcriticism that the gift presumption between parent and child has because the presumption is founded on an undue emphasis on certain relationships and that it is based onconsiderations of the closeness of the relationship or the extent of natural affection, [ ]or by reason of any legal obligation to furnish support . The Supreme Court further pointed out that other commentators promoted a preponderance of the evidence standard. The Supreme Court concluded that, Notwithstanding the criticism of the presumption itself and the use of an enhanced standard of proof to rebut the presumption that a transfer of property, including stock in a family business, from a parent to a child is a gift, we can identify no reason to depart from our use of an enhanced standard of proof which has served well for more than 150 years.
Gifting of assets to your intended beneficiaries is an effective way to minimize Federal and New Jersey Estate taxes. In order to do so, you must consider the tax implications of making the gift, who will receive the gift, the type of gift, the value of the gift, and the cost basis of the gift.
There are several possible tax liabilities which can be incurred as the result of making a gift: federal gift tax, capital gains tax, generation skipping transfer tax, federal estate tax, New Jersey estate tax, and New Jersey inheritance tax.
A gift can also be subject to New Jersey and/or federal estate tax under the three-year look back rule or the lifetime look back rule. Section 2035 of the Internal Revenue Code provides that there is a limited three-year look back for federal estate tax purposes.
There is also a five-year look back for gifts when doing Medicaid/ nursing home protection. For estate planner, the sooner the gift is made the better. A secret, unwritten side deal or verbal agreement is not legal.