The New Jersey estate tax is effectively eliminated as of January 1, 2017, since the credit equivalent against the estate tax will increase from the current figure of $675,000 to a $2,000,000 credit equivalent as of that date.  Since most people do not own $2,000,000 in assets, the New Jersey estate tax is effectively repealed in a few months for the vast majority of New Jersey residents.  For the very few of us who do have more than $2,000,000 in assets, the New Jersey estate tax will actually be repealed as  of January 1, 2018.

With the repeal of the estate tax comes planning opportunities.  I have planned to reduce or eliminate the estate tax for thousands of couples.  Most of the clients for whom I planned to reduce or eliminate the estate tax had estates worth between $900,000 and $1,500,000.  If you have been fortunate in life, this is the range of wealth in which most people in New Jersey fall.

Let’s assume that Mr. and Mrs. Smith have an estate worth $1,000,000.  Let’s further assume that the Smiths’ wealth consists of a home that they own jointly worth $500,000 and a joint brokerage account worth $500,000.

In the past, I would have advised the Smiths to put trusts in their Wills called credit shelter trusts.  These trusts would have permitted the Smiths to eliminate any New Jersey estate tax issue.  In addition, when Mr. Smith died and when Mrs. Smith died, the assets they owned (the house and the stocks in the brokerage account) would receive a step-up in basis.

The step-up in basis means that the beneficiaries of the Smiths’ estates will own the stock and the house they inherited from the Smiths with a basis equal to the value of the assets as of the date of the death of Mr. Smith or Mrs. Smith.  For instance, if Mr. and Mrs. Smith purchased their house for $100,000 and now it is worth $500,000, their children will have a basis in their house of $500,000.  When the children sell the house for $500,000, there will be no gain in the sale, so the children will not have to pay capital gains tax on the sale.

Before the repeal of the estate tax, it was difficult to accomplish the multiple goals of eliminating the estate tax, receiving a step-up in basis in the assets, and removing the assets from the names of the Smiths for purposes of long-term care/Medicaid planning.  If Mr. and Mrs. Smith were interested in planning for future Medicaid eligibility to enable them to avoid spending all of their money on a nursing home, I had to tell them that it would be difficult to plan for Medicaid and to achieve all of the tax benefits we could achieve if we didn’t plan for future Medicaid eligibility.

Now, I can tell people in the Smiths’ position that they don’t have to worry about estate tax and that they should think about planning to guard against spending all of their money on a nursing home.  So, what would I advise?

For people in the position of Mr. and Mrs. Smith, I would advise that they implement elective share will planning.  Here’s how that works.

We divide all of the Smiths’ assets between Mr. and Mrs. Smith.  Mr. Smith will own half the house, Mrs. Smith will own the other half of the house.  Mr. Smith will own half the brokerage account, Mrs. Smith will own the other half of the brokerage account.

When Mr. Smith’s dies, his Will says that he leaves Mr. Smith the smallest fraction of his estate permitted by law. A spouse is entitled to receive up to one-third of the total estate.  The total estate includes all assets that both Mr. and Mrs. Smith own.

Since Mrs. Smith already owns 50% of the assets and since 50% is more than one-third, Mrs. Smith receives nothing from Mr. Smith’s estate. Mr. Smith’s assets pass to the Smiths’ children.  Mr. Smith’s assets (50% of the total estate) are now safe from nursing home costs and Mrs. Smith cannot be punished by the Medicaid program for having made a gift to her children since she received everything from Mr. Smith’s estate to which she was entitled.  Nothing.

Every significant tax law change creates winners, losers, and a period of uncertainty while families and advisors sort through the consequences. The challenge is not simply keeping up with new rules. It is recognizing how those rules affect existing plans and whether adjustments should be made before opportunities disappear.