NJ Inheritance Tax Planning

What Should You Be Doing in 2018 to Minimize Death Taxes?

Do you often wonder what NJ inheritance taxes or estate taxes you will have to pay when a person dies?  Perhaps you have an elderly parent and want to make sure they are making wise planning decisions; perhaps you’re worried about your own loved ones.  How can you preserve your hard-earned money and assets to the fullest extent?

These are common questions, the answers to which need not be complicated.  Here’s what you need to know now.

NJ Estate Tax Repealed

As of January 1, 2018, New Jersey no longer has an estate tax.  In 2016 and earlier, the New Jersey exemption from estate tax was only $675,000 (as opposed to the much higher Federal exemption — $5.49 million in 2017).  Therefore, many New Jersey residents were facing the payment of state estate taxes and talk of how to avoid paying was commonplace.    Tax-driven estate plans were drafted and some even planned to retire elsewhere because of it.   But beginning in 2018, New Jersey has eliminated the estate tax.

Why was the NJ Estate Tax Repealed?

The estate tax repeal was 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 by the legislature in exchange for an increase in the gas tax.

Is There A NJ Inheritance Tax?

Yes. New Jersey is one of the few states to have had two death taxes — an estate tax and an inheritance tax.  While the estate tax has been repealed, the NJ inheritance tax laws have remained unchanged. Inheritance taxes are imposed differently from the estate tax.

What Are NJ Inheritance Tax Rates?

Inheritance tax is imposed on any transfers greater than $500 to a certain taxable class of beneficiaries at rates ranging from 11-16%.  Whether there is tax depends on the beneficiary’s relationship with 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. The inheritance tax is imposed not only on transfers by will and intestacy but also on gifts made within three years of death and transfers of property at death by joint ownership (such as joint bank account with a sibling, a commonly seen trigger of taxes).

You may wonder why the inheritance tax is still intact while the estate tax has been eliminated.  One reason could be that the inheritance tax is designed to impact the less typical family scenario (those without spouses or children), since spouses and children are exempt, while historically, the estate tax was imposed on transfers to children exceeding a certain amount.

What This Means for New Jersey Tax Payers

• Check current estate plans to see that they still make sense for your situation. Many New Jersey estate plans involve a “formula” clause directing the Trustee to create a credit shelter trust to hold the New Jersey or Federal estate tax exemption at first death. These trusts are often called “exemption trusts” or “credit shelter trusts”.  This was smart planning when there was an estate tax; however, now that this is not a concern, it may not be necessary and could lead to unintended consequences.
• A simpler and more flexible alternative to the above would be the inclusion of what is called a  “disclaimer trust”. Disclaimer planning gives the surviving spouse the option to “disclaim” assets and fund a credit shelter trust after taking into account the existing tax laws as well as his or her own tax and non-tax objectives at the time of the first spouse’s death.   Every case is different and depends upon the type of assets owned, their value and many other factors.  Given the changing laws, it is best to have the option to evaluate the situation when the time comes.
• Be wary of unwittingly naming beneficiaries that would trigger an inheritance tax. For example, gifts to nieces, nephews, in-laws, and step-children are subject to inheritance tax.  You may need to learn about the different “classes” of beneficiaries and consider alternate ways to structure gifts to avoid such a trigger.  You could, for instance, name such persons as the beneficiary of life insurance proceeds which are exempt from inheritance tax.

What If the NJ Estate Tax Returns?

Even though the estate tax has been repealed as of January 1, 2018, anything could happen in the future.  The absence of the estate tax will result in a significant loss of revenue to the state of New Jersey.  With our new governor, many practitioners believe the estate tax will be brought back but with a $2 million exemption, or at $5.49 million (which is on par with New York and the same as the pre-2018 Federal amount).  No one has a crystal ball, but the best we can do is create estate plans using the information we have now and build in maximum flexibility to account for possible changes to the law.

Schedule an Inheritance Tax and Estate Plan Review

It is always a good idea when there is a change in New Jersey tax law to have a legal professional review your estate plan. Give us a call at (201) 488-4644 to schedule an appointment with a member of our NJ interhitax tax team.