Breaking News – New Jersey Estate Tax Repealed

On October 7, 2016, the New Jersey legislature passed a bill to increase the gas tax by 23 cents per gallon and the bill was signed into law by Governor Christie on October 14. Included in the new legislation is a major change to New Jersey’s estate tax law.

New Jersey is currently one of 14 states that have an estate tax. The tax applies to New Jersey residents who die owning more than $675,000 of assets that pass to beneficiaries other than a surviving spouse or a charity.

Under the new law, the New Jersey estate tax exemption will increase to $2,000,000 per person on January 1, 2017. More significantly, on January 1, 2018, the estate tax will be repealed and New Jersey will join the ranks of states that no longer impose an estate tax. After that date, the only estate tax that would apply to a New Jersey decedent (assuming no real or tangible property located in another state that has an estate tax on non-residents) is the Federal estate tax for those estates in excess of the $5,450,000 Federal exemption ($10,900,000 for a married couple). Please note that the Federal exemption is adjusted every year and it is anticipated that the 2017 exemption will be $5,490,000.

Important items to note are:

  1. If your Will or Revocable Trust contains a “formula” clause bequest, for example a reference to “the maximum amount that can pass without causing the imposition of any State estate tax,” your Will or trust must be reviewed and possibly revised. The unintended effect may be to pass your entire estate to your children instead of your spouse, or to a trust for your spouse when you prefer that your spouse receive assets outright.
  2. Mandatory trusts created under a Will or Revocable Trust that are intended to shelter assets from being subject to the New Jersey estate tax, sometimes called “credit shelter” trusts or “bypass” trusts, will no longer be necessary for New Jersey estate tax purposes; however, these trusts may still be advisable for Federal estate and/or generation-skipping tax purposes. Furthermore, there can be significant non-tax reasons, including but not limited to creditor and divorce protection, to hold assets in trust for a beneficiary rather than have them pass outright.
  3. A Federal estate tax return (Form 706) must still be filed with the IRS, even if the estate is below the $5,450,000 exemption, if portability is desired. Portability is the transfer of the first spouse’s unused Federal exemption to the surviving spouse for use on the second death, thus giving spouses the ability to transfer a total of $10,900,000 of assets to family members free from the Federal estate tax. If Form 706 is not filed, the ability to transfer the Federal exemption to the surviving spouse will be forever lost.
  4. Date of death values of the decedent’s real estate, securities and certain other assets still need to be obtained since the income tax basis of such securities is “stepped up” to the date of death value. This information is vital if such assets are sold by the estate or the beneficiaries.
  5. Although the estate tax will be repealed, New Jersey still has an inheritance tax that applies to assets passing at death, and gifts made within three years before death, to individuals other than a spouse, descendant or ancestor.

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