A few words about: Elimination of the New Jersey Estate Tax

Phaseout and Elimination of the New Jersey Estate Tax

          As many of you know, New Jersey has two death taxes that are imposed at the time of a resident decedent’s death.  One is the New Jersey Transfer Inheritance Tax; the other is the New Jersey Estate Tax.  As discussed below, the New Jersey Estate Tax is being phased out and eliminated assuming Governor Christie signs the State Senate and Assembly passed legislation; the New Jersey Transfer Inheritance Tax remains.

          At present, (2016), the excludable amount for New Jersey Estate Tax purposes is $675,000.00. I contrast that with the applicable exclusion amount for federal estate tax purposes which for a year 2016 decedent is $5,450,000.00 (to the extent not offset by lifetime gifts in excess of the annual exclusion, and excluding any Deceased Spouse Unused Exclusion amount (where applicable) received from a deceased spouse).  New Jersey’s $675,000.00 amount has historical ties to the federal estate tax credit amount which was in place back on December 31, 2001. But that is about to change. Thus, assuming Governor Christie signs the legislation:  

          Effective January 1, 2017, the New Jersey Estate Tax excludable amount is going to increase to $2,000,000.00.  That figure, of course, still pales in comparison to the federal exclusion.  However, come January 1, 2018, the New Jersey Estate Tax will be eliminated, repealed.  That will leave just the New Jersey Transfer Inheritance Tax in place, which often results in a $0.00 tax in many instances (where, for example, the assets are passing to a spouse, or children or grandchildren, or certain trusts for their benefit, or to charities).

          From a planning standpoint, for a married couple, the format of the estate plan most frequently centers on (i) whether to set up the estate plan so that the entire residuary estate passes to the surviving spouse subject to the spouse being able to disclaim assets into what we call a contingent Disclaimer Trust, or (ii) whether to devise to the surviving spouse an optimum amount or portion of the estate designed to reduce the federal estate tax to $0.00, with the balance then going into a Family Trust (or Credit Shelter Trust or By-Pass Trust as it is also frequently called). In both cases, the Disclaimer Trust or the Family Trust are typically set up for the sole benefit of the surviving spouse, designed to provide the spouse with all of the net income from the trust assets, and so much of the principal as needed for the spouse’s health, maintenance, support, or education (which are considered to be what are referred to as “ascertainable standards”).  In both cases, the two types of Trusts are designed to keep the assets in the subject trust out of the estate of the surviving spouse for death tax purposes when he or she later dies.  Thus, this type of planning is most often utilized to provide for the surviving spouse in a tax advantageous manner.

          For those couples who live in New Jersey, and who utilized the optimum marital deduction, balance to the Family Trust approach in their Wills, we would frequently also include language which basically said that if the decedent spouse was a New Jersey resident and if the New Jersey Estate Tax was decoupled from the federal estate tax, which it has been since 2002, that in such event, the optimization of the marital deduction amount to pass to the surviving spouse, and conversely the balance to pass to the Family Trust, would be optimized for New Jersey Estate Tax purposes rather than for federal estate tax purposes. Previously this would mean that, in effect, the Family Trust would be funded with upwards of $675,000.00 (with an eye on the above mentioned New Jersey Estate Tax excludable amount), and the balance of the estate would pass to the surviving spouse either outright or in a type of trust designed to qualify for the marital deduction (a “Marital Trust”).

          With the upcoming changes to the New Jersey Estate Tax, for a year 2017 decedent, however, a New Jersey optimized Family Trust would be funded with upwards of $2,000,000.00 rather than just $675,000.00. But then starting in 2018, with repeal of the New Jersey Estate Tax, there would be no New Jersey optimization, and the language optimizing for federal purposes would once again rule.  In a Will where the entire residuary estate was devised to the surviving spouse, but with the inclusion of a contingent Disclaimer Trust in the document, the amount the surviving spouse might disclaim in year 2017 would increase to upwards of $2,000,000 with an eye on New Jersey Estate Tax, (and again that being up from $675,000.00 under present law).  In year 2018 the surviving spouse might disclaim upwards of the full federal exclusion amount (which in tax year 2016 would be $5,450,000.00 and increases with inflation).  The surviving spouse in 2018 would not have to worry about disclaiming an amount permissible for federal estate tax purposes, but too large for New Jersey Estate tax purposes and thereby trigger the imposition of New Jersey Estate Tax. For example: in year 2016 if the surviving spouse disclaimed $5,450,000.00 the amount he/she disclaimed over $675,000.00 would be subject to New Jersey Estate tax.  But as I said, come year 2018, this type of problem for a New Jersey resident should be eliminated. 

          From a planning standpoint, for a married couple, depending upon the couple’s estate size, the planning choice going forward will still come down to, in many instances, whether (i) to choose to optimize the marital deduction with the balance going into the Family Trust versus (ii) whether to leave the entire residuary estate to the surviving spouse with a contingent Disclaimer Trust in place. In the latter scenario the surviving spouse would determine whether he/she wants to keep the entire residuary estate or whether to disclaim some of it and have it go into the Disclaimer Trust and thereby keep the assets in the Disclaimer Trust out of his/her subsequent estate for federal estate tax purposes. The decision would be made by the surviving spouse basically within the first 9 months after the death of the first spouse to die.  In contrast, under a Will that utilizes a formula optimization approach, the funding of the Family Trust will occur because of the terms of the Will itself – it will not require the surviving spouse to disclaim assets.  However, in the optimization situation, unless the deceased spouse’s estate is large (say over $5,450,000.00), the surviving spouse would not receive any portion of the probate estate outright (assume assets passing under the Will, aside from, for purposes of this discussion, tangible personal property).  Rather, the entire estate (below the federal exclusion amount) would pass into the Family Trust. 

          Over the past 15 years since the changes made to the federal estate tax laws in 2001, it has been my observation that more and more married couples are utilizing Disclaimer Trust wills, other than in the largest estates.  I do not think, looking forward, that the upcoming repeal of the New Jersey Estate Tax, will mark a change in that trend.  With that said, however, non-tax factors still need to be considered: for example, the health of the surviving spouse; is this a second marriage with children by prior marriages; is the surviving spouse comfortable with managing the investments; and are there assets located in another state. Two tax factors in particular should also be considered in making the formatting decision: that is, (i) is it desired that the assets be included in the surviving spouse’s estate at his/her subsequent death in order to get a step up in basis for those assets at the surviving spouse’s death, and (ii) is generation-skipping planning important or not.  Further, I note that even in a Will designed to create a Family Trust, it is not unusual to also include a contingent Disclaimer Trust in case insufficient assets are passing through the Will to enable full funding of the Family Trust, and thereby make likely the need to possibly disclaim non-probate assets, that is, assets passing outside the Will.

          As with all major changes in the estate tax laws, the passing of new legislation, federal or state, is often an appropriate time to review your estate plan and see what impact the new legislation may have on your plan and whether an update to your documents is advisable. Assuming Governor Christie signs the new law into effect, this is one of those appropriate times. If we may be of assistance to you in this regard, please do not hesitate to call us at (908) 359-8000 or email us at:  bmblaw@ymail.com.

October 13, 2016                                                         Barry M. Benson, Esq.