New Jersey has two death taxes–the New Jersey estate tax and the New Jersey inheritance tax. Only one other state, Maryland, has an estate and inheritance tax.
In New Jersey, an estate with a gross value exceeding $675,000 is subject to the New Jersey estate tax. The gross value of the estate would include all assets that the decedent owned–his house, his IRAs, his stocks and bonds, and the death benefit of his life insurance.
New Jersey’s inheritance tax is primarily based upon the relationship of the beneficiary to the decedent. The more distant the relationship, the greater the chance the inheritance tax will be imposed. For instance, a spouse, children, and grandchild will not pay inheritance tax. Nieces and nephews, cousins, and friends are subject to the tax.
For many years, some politicians have been attempting to repeal one or both of these taxes or to raise the threshold at which a decedent’s estate would pay the tax to such a high level that few, if any, estates would ever pay the tax. For instance, there is a push to raise the credit exemption against the New Jersey estate tax from $675,000 to the amount of the credit against the federal estate tax, which is currently $5,430,000.
Since very few people are worth $5,430,000 and since a couple could easily shelter $10,860,000 (or two times $5,430,000), the chances of an estate paying tax if the credit against the tax were that high are somewhere between slim and none.
Politicians who seek to repeal these taxes claim that people are fleeing New Jersey for more tax-friendly states, such as Florida. Florida has no death taxes. The politicians claim that when a person flees New Jersey to avoid death taxes, the State loses the income taxes that otherwise would have been imposed on that taxpayer and that the income tax the State loses is far more valuable than the estate tax that will be imposed against the taxpayer’s estate.
That’s a fine argument. The problem with the argument is, it is completely unsubstantiated and probably has no basis in reality.
A large part of my job for the past fifteen years has been helping people minimize or eliminate the impact of estate tax on their estate. I have counseled thousands of people. I have never had a client who was not otherwise leaving the state say to me that they would be willing to leave the state in order to avoid New Jersey death taxes.
Some clients are already half way (or more) into another state, such as Florida, and may decide, for instance, to live six months and a day in Florida instead of five months in order to avoid New Jersey’s death taxes. But no client has ever substantially altered their living arrangements in order to avoid the taxes.
Now my “study” isn’t scientific, but my experiences are far greater and far richer than most people’s experiences, including our great state’s politicians. So, to me, it’s fine to say, “I’m going to eliminate death taxes.” We all like fewer and lower taxes, but I think people should do it for a legitimate reason, and they should have a plan for how they are going to make up the lost tax revenue.
New Jersey’s death taxes bring in about $700 million of New Jersey’s $2.7 billion in tax revenue. That’s almost 3% of the total tax revenue. Since you can bet that Governor Christie isn’t going to raise income taxes, from what source is the lost revenue coming?
I don’t know about you, but I’d rather faces a tax for which I can plan to avoid or reduce and that only impacts me after I die than a tax for which I cannot plan to avoid and that impacts me during my life.
Estate planning decisions should be based on current law rather than political debate. A plan that reflects today’s rules is the best way to protect your family.