New Jersey is no longer one of the most expensive states in which to die. On October 14, 2016, Governor Christie signed a new law that repeals the estate tax for those dying in 2018 and beyond. If a person dies in 2017, only those with assets of more than $2,000,000 will be subject to New Jersey estate tax. Currently, those persons dying with assets greater than $675,000 are subject to the tax, so the new law represents a dramatic shift.
Reasons for the Change
There has been a trend towards eliminating or reducing estate tax over the years – the federal government has increased its estate tax exemption to $5,450,000, and many other states have adopted similar increases. Because New Jersey remained one of the few states to keep its estate tax exemption low, many retirees have been leaving the state to retire in other areas. The estate tax repeal is an effort to keep the wealth within the state, as millions of dollars in economic activity are lost when people retire elsewhere. Additionally, the estate tax repeal was one of the compromises made for an increase in the gas tax by $.23 per gallon.
Inheritance Taxes Remain
Currently, New Jersey imposes two types of taxes on estates: an inheritance tax and an estate tax. Although the estate tax is set to be eliminated, the inheritance tax will remain unchanged. The New Jersey inheritance tax is based on the relationship between the decedent and the person receiving assets from the decedent. For example, “Class A” beneficiaries (spouses, parents, children and grandchildren) are exempt from inheritance tax. However, further extended family and unrelated beneficiaries, such as siblings, spouses of children and step-grandchildren are all subject to the inheritance tax, which ranges from roughly 11 to 16 percent, depending on the relationship and the gift’s value.
What this Means for Clients
Many New Jersey estate plans involve tax planning in the form of a credit shelter trust to hold the New Jersey estate tax exemption at first death. This planning was tax efficient as it protects both the exemptions of a married couple thereby allowing more assets to pass down tax free to the ultimate beneficiaries of the estate. However, with the repeal, this type of planning may no longer be needed. Instead, beginning in 2018, decedent’s assets (regardless of amount) may pass entirely to a surviving spouse without incurring any New Jersey estate tax and without the need to preserve the first spouse’s exemption amount. Clients should revisit their plans to confirm that it still is in line with their wishes.
Although tax strategy may have been a significant driver in your estate plan, there are still many reasons to have a comprehensive trust-inclusive estate plan. For example, issues to address can include protection of minors or disabled persons, creditor and spendthrift concerns, protection of retirement plan assets and increasingly common, planning for the blended family in second marriages. And there are strategic advantages to using a revocable trust based estate plan, rather than reliance solely on a Last Will. Use of a revocable trust as your central document, avoids the need for probate. This makes the administration process confidential and expedites the transfer of assets from one generation to the next. New Jersey still requires death tax waivers (for the inheritance tax) to transfer certain bank accounts, brokerage accounts and securities of a New Jersey resident upon death. This process is an administrative hassle and can delay access to funds and the transfer of assets to the ultimate beneficiaries. Assets held in a revocable trust, however, are not subject to the tax waiver requirement.
And finally, apart from the benefits available to your heirs, the revocable trust offers a significant lifetime benefit to you and to your family. It establishes a system now for handling one’s affairs in the event of incapacity – an unfortunate, increasingly common concern as many of us live into our 80’s and 90’s and beyond.
Overall, New Jersey’s changes in its estate tax laws present an opportune time to revisit your estate plan to ensure that it is carrying out your wishes.