On Oct. 7, 2016, the New Jersey legislature approved a bill that would eliminate the New Jersey estate tax by 2018. The bill is the result of a compromise between Gov. Chris Christie and the state legislature to increase the state’s gas tax by 23 cents per gallon and slightly reduce the state sales tax. The bill is expected to be signed by Governor Christie in mid-October. [UPDATE: The governor signed the bill into law on October 14, 2016].
New Jersey currently has one of the most penalizing estate tax regimes in the country, with an exemption of only $675,000 and a top marginal rate of 16 percent. The new legislation would increase the exemption to $2 million on Jan. 1, 2017, and eliminate the tax entirely on Jan. 1, 2018.
Estates are taxed at marginal rates based on the extent to which the value of the deceased individual’s taxable estate exceeds the exemption. The value of the taxable estate is determined based on the fair market value of a New Jersey resident decedent’s assets. Proponents of the estate tax repeal contend that the tax drives wealthy individuals and businesses out of the state while raising very little revenue. Opponents counter that the loss in revenue would eliminate funding of important state programs from the budget, particularly those that aim to assist low-income individuals.
While data from the New Jersey Department of the Treasury indicate the estate tax currently affects only about 3,500 estates per year (or 5 percent of the New Jersey residents who die each year), during 2014, the tax generated nearly $320 million of revenue. The New Jersey Office of Legislative Services estimates that a full repeal of the estate tax would result in an annual loss of $550 million from the state’s revenue by 2022.
In addition to the estate tax — which is imposed on the entire value of a decedent’s estate in excess of the exemption — New Jersey imposes an inheritance tax on the value of specific inherited assets by the beneficiaries of the estate. Maryland is the only other state to impose both an estate tax and an inheritance tax. For now, it appears that the New Jersey inheritance tax will continue to apply.
The amount of the inheritance tax is dependent on the relationship of the beneficiaries of the estate to the decedent. The inheritance tax is not imposed on transfers to grandparents, parents, spouses, children (and more remote descendants) or charities. It applies to transfers to siblings and sons- and daughters-in-law to the extent they exceed $25,000, and transfers to other relatives and friends if they exceed $500. The inheritance tax rates range from 11 percent to 16 percent.
The elimination of the estate tax could provide an opportunity for New Jersey residents with more modest estates to significantly simplify their estate plans. Currently, married New Jersey residents with combined estates that exceed $675,000 often structure their estate plans to ensure that the New Jersey exemption of the first spouse to die is not wasted by transferring assets to a so-called “credit-shelter trust” at the death of the first spouse.
With no New Jersey estate tax, these couples would no longer need to create a credit-shelter trust solely for the purpose of maximizing their use of the New Jersey estate tax exemption, thereby simplifying their estate planning documents and the lives of their surviving family members.
The elimination of the New Jersey estate tax also would diminish the significance of a common technique that is used to avoid the tax. As New Jersey does not impose a state gift tax, estate planners often advise New Jersey residents to make lifetime gifts to their loved ones in order to remove assets from their estates and escape the New Jersey estate tax at their death (although the estate tax does catch any assets that are gifted within three years of death). From a state estate tax perspective, this technique would no longer be needed.
New Jersey residents will of course continue to be subject to the federal estate tax, which taxes estates of all U.S. citizens and residents on their worldwide assets. Unlike New Jersey, however, the federal regime also imposes a tax on the lifetime gifts made by U.S. citizens and residents, with a single unified exemption available to shield gifts from taxation.
In 2016, the unified estate and gift tax exemption is $5,450,000, with transfers in excess of the exemption taxed at a rate of 40 percent. Moreover, federal law allows a deceased spouse to pass the unused exemption to his or her surviving spouse, a concept known as “portability.” This advantageous provision is not available under the New Jersey estate tax regime, thereby popularizing the use of the aforementioned credit-shelter trusts for New Jersey married residents.
It remains to be seen whether New Jersey legislators will next set their sights on eliminating the New Jersey inheritance tax. If they do, New Jersey would join the 31 other states that do not impose estate or inheritance taxes.
Reprinted with permission of Law360.