On October 14, 2016, Governor Christie signed a new law which made sweeping changes to a variety of tax provisions, including New Jersey’s estate tax. This new law (the “Tax Law”), passed as a compromise to, and in conjunction with, a second law that increases the state gas tax by 23 cents per gallon, will have an impact on all New Jerseyans. Perhaps most significantly, the Tax Law leads to the repeal of the New Jersey estate tax.

Pursuant to the Tax Law, the New Jersey exclusion amount for estate tax will increase from $675,000 to $2,000,000 for the estates of New Jersey residents dying on or after January 1, 2017. No estate tax will be imposed on the estates of New Jersey residents dying on or after January 1, 2018.  Given how low our current $675,000 exclusion amount is, this change in the law will have a dramatic impact for estates and the estate planning of many of our clients and friends.

There is still, of course, a Federal estate tax. However, the Federal estate tax exclusion amount is currently $5,450,000 per person ($10,900,000 per married couple), indexed for inflation annually and scheduled to increase to $5,490,000 in 2017. This substantial exclusion, combined with the 2017 increase in the New Jersey exclusion and the 2018 repeal of the New Jersey estate tax, effectively removes the threat of estate taxes from the vast majority of estates. For those individuals and couples whose estates will remain subject to an estate tax, the Tax Law means a dramatic reduction in the size of the potential tax liability.

In light of the Tax Law, consider the following recommendations:

Review your estate plan. If your will creates a “credit shelter trust” or “by-pass trust,” which allows use of your available estate tax exclusion amount, you should confirm that the increase in the state exclusion and the ultimate repeal of the tax will not cause a greater proportion of your estate to pass under this clause than you had planned. For example, many wills provide that the maximum amount possible, tied to the lesser of the then effective Federal applicable exclusion amount and the state exclusion amount, passes to such a trust, with the rest to pass to a surviving spouse. However, with the increase in the New Jersey exclusion in 2017 and the repeal of the tax in 2018, that may result in much more going to the trust than intended. If the beneficiaries of this trust are not the persons that should benefit from this larger share of your estate, or if the credit shelter trust was included solely for estate tax savings, then changes in your will may be in order.

Conversely, the formula language for funding some credit shelter trusts may be keyed to the state exclusion amount in a manner that could result in an unfunded credit shelter trust upon repeal of the tax. If your estate is greater than the Federal exclusion amount, a review of your plan is in order to insure that the credit shelter trust will be funded and not eliminated.

Life insurance and life insurance trusts designed primarily to replace funds used to pay a New Jersey estate tax or to provide liquidity for estates subject to a New Jersey but not a Federal estate tax, as well as any ongoing lifetime gifting plans designed primarily to reduce the state estate tax bite, should be reevaluated in light of the Tax Act too. For federally taxable estates, the benefit of lifetime gifting will be more limited, while the adverse income tax consequences (generally, in the form of capital gains tax cost due to the receipt of gifted assets with a carry-over basis and not a stepped-up basis) will remain relevant.

Don’t forget about the New Jersey inheritance tax. Although the Tax Act effectively repeals the estate tax beginning in 2018, no changes were made to the New Jersey inheritance tax.  The inheritance tax is a separate tax imposed on the transfer of assets valued at $500 or more at death, with a tax rate based on the beneficiary’s relationship to the decedent, and not on the size of the estate. Although amounts left to spouses, descendants (including step-children), parents, grandparents and charities are exempt from the inheritance tax, amounts left to other individuals (including step-grandchildren) are not exempt. There is a small exemption of $25,000 for amounts left to each brother, sister or spouse of a child, but no exemption for anyone else, with graduated tax rates ranging from 11% to 16%.  If your will leaves substantial assets to siblings, nieces, nephews and friends, your estate will be subject to the inheritance tax. Without modifying such estate plans, those estates may unnecessarily pay a tax at death.

Consider non-tax reasons for estate plans. Don’t tear up your wills just yet (or on January 1, 2018) even if your estate will be comfortably below the Federal exclusion amount. Many estate plans contain trusts for spouses for non-tax reasons too. Whether it’s a trust for a second spouse to protect assets for the children of a first marriage, a trust for the benefit of a surviving spouse and children designed to meet the needs of all heirs upon one’s death, or a trust to meet special needs or protect against long term care expenses, trusts should not be removed from an estate plan without considering all of the consequences.

Watch for changes in the Federal law. In the midst of this election season, we must also be aware of tax changes proposed by the candidates. Both Hillary Clinton and Donald Trump have sweeping tax proposals which, if enacted, could result in either (i) a reduction in the Federal exclusion amount from the current $5,450,000 to $3,500,000 without indexing for inflation, or (ii) a repeal of the Federal estate tax. Note that we do not anticipate the enactment of any major Federal estate tax laws right away. However, this is something to keep an eye on going forward.

Continue using the gift tax “freebies.” Although death and taxes may be certain, the tax laws are not. If you currently make annual gifts or have a gifting plan involving gift-tax free gifts, you may wish to stick with it.  Tax free gifting plans serve to benefit your children and grandchildren now and reduce your estate taxes (Federal and, until 2018, New Jersey), without using up any of your Federal exemption. Federal annual exclusion gifts (up to $14,000 per person or $28,000 if there is a spouse who agrees to treat the gift as having been made one-half by each spouse) and direct payments of medical expenses and tuition are simple and straight forward methods of sharing your wealth without using any of your estate and gift tax exclusion, since such transfers are generally not treated as gifts by the IRS. Due consideration should be given to the income or capital gains tax consequences of any non-cash gifts prior to making them, however.

Reconsider plans to leave New Jersey. Many New Jersey residents have left New Jersey for states like Florida with no income or estate tax. If your sole reason for considering a change in domicile or residency is the New Jersey estate tax, you may wish to reevaluate. Other provisions of the Tax Law may provide some additional incentive to stay in New Jersey as well:

  • A reduction in the sales tax to 6.875% beginning January 1, 2017 and 6.625% beginning January 1, 2018;
  • A personal exemption from income tax for veterans of $3,000; and
  • An increase in the pension and retirement income exclusion to $100,000 for married couple filing jointly, $50,000 for married person filed separately or $75,000 for a single taxpayer, phased in over four years (for taxpayers age 62 and older with gross income of $100,000 or less).

Of course, we are here to answer any questions you may have regarding the current state of the estate tax laws, to review your existing estate plans with you, and to help you establish the plan that is right for you. Please contact our Roseland office for more information.

Steven A. Holt, Esq.
Lisa Factor Fox, Esq.
Richard I. Miller, Esq.
Thomas W. Ackermann, Esq.
Casey Gocel, Esq.
Martin D. Hauptman, Esq.