Action Required: New Jersey Estate Tax is Repealed

Earlier this month, on October 14, 2016, New Jersey Governor Chris Christie signed into law that increased the NJ Estate Tax exemption from $675,000 to $2 million for deaths in 2017, and fully eliminated the state estate tax in full on January 1, 2018.

New Jersey is currently one of 19 states that impose an estate tax. As other states have moved to increase their estate tax exemption, New Jersey has kept the exemption at $675,000, which is the lowest exemption in the nation.  With the new law, New Jersey will compare favorably to states such as Florida, Texas and California for estate tax planning purposes. In the Northeast, states retaining an estate tax include New York, Connecticut, Massachusetts, Vermont, Maine, Maryland and Delaware. Pennsylvania continues to impose an inheritance tax.

But there’s a big catch for many New Jersey families since New Jersey imposes two death taxes: the estate tax and the inheritance tax. The new legislation fails to mention whether the New Jersey Inheritance Tax, which is a completely separate tax that would remain in place and unadjusted. New Jersey’s inheritance tax is levied on siblings, nieces and nephews–not spouses or children, and the exemption is only $500.

The New Jersey Inheritance Tax is a tax imposed on beneficiaries of a New Jersey estate based on the amount each beneficiary receives and the relationship to the decedent. Property received by “Class A” beneficiaries (i.e., spouses, parents, children and grandchildren) and “Class E” beneficiaries (i.e., qualifying charities) is exempt from the tax, which means that many estates do not incur the Inheritance Tax at all. However, the Inheritance Tax is due eight months from date of death (a month before the Estate Tax), and a return must be filed if any portion of the decedent’s estate passes to someone other than a Class A beneficiary (e.g., sibling, niece or nephew). Further, unlike the Estate Tax, the New Jersey Inheritance Tax applies to non-residents who own real estate or tangible property located in New Jersey. However, only the higher amount of the Inheritance Tax and the Estate Tax is ultimately payable, which means that the Inheritance Tax would still be due and payable.

State estate and inheritance taxes are separate from the federal estate tax, which has a generous $5.45 million exemption (with proper planning, a couple can shield $10.9 million). After that, there’s a 40% tax.

In light of these significant changes, New Jersey families should review their current estate plans and discuss with their tax advisor whether revisions should be made. In general, you might unexpectedly leave too much in trust for your family when an outright disposition to your surviving spouse might have been preferred.

For example, the current structure of your will or revocable trust may create a trust for the benefit of your spouse and children, to be funded at your death with the maximum amount that would not create a federal or New Jersey Estate Tax, with the balance of your estate passing outright to your spouse. Under such a funding formula, this change in the New Jersey Estate Tax exemption could dramatically shift the amounts allocated outright to your spouse or in trust for your family. For example, if you died in 2017, your plan would leave $2 million (instead of $675,000) in trust for your spouse and children; and, for a death in 2018, would leave more than $5,450,000 (the federal exemption amount this year) to that trust.

Old structures to minimize New Jersey estate tax may no longer make sense. Individuals with these types of plans are should review and revise their estate plans as soon as possible.

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