The death of the New Jersey estate tax will soon be upon us. In 2017, the credit against New Jersey estate tax (technically called the credit equivalent exemption) rose from $675,000 to $2,000,000. The credit had been $675,000 for many years prior to 2017. What this means is, if a person died prior to 2017 with an estate worth less than $675,000, his estate paid no New Jersey estate tax. In 2017, if an individual died with an estate worth less than $2,000,000, his estate paid no estate tax.
Effective January 1, 2018, there will be no New Jersey estate tax, irrespective of the value of the estate. So, if a person dies with an estate worth $10,000,000 after January 1, 2018, his estate will not be subject to New Jersey estate tax.
For the time being, there will still be a federal estate tax. The credit against federal estate tax is $5,490,000. A married couple can easily shelter twice that amount, or approximately $11,000,000. The current federal tax proposal that the Republican Party is pushing calls for a repeal of the federal estate tax.
Given the fact that most people have nowhere near five and half million dollars, the vast majority of New Jersey residents will not pay any estate tax after this year. New Jersey will continue to have an inheritance tax.
The New Jersey inheritance tax is imposed primarily based upon the relationship of the beneficiary to the decedent. A surviving spouse, child, grandchild, or other lineal descendants pay no inheritance tax. A charity that is a beneficiary of an estate would pay no inheritance tax. Other relatives and non-relatives, such as brothers/sisters, nieces/nephews, and friends, would pay an inheritance tax.
There is no state gift tax. A person can give away an unlimited amount of money and the state of New Jersey will not impose a gift tax on the amount given away. There remains a federal gift tax, however, the credit against the federal gift tax is the same as the credit against the federal estate tax, that is, $5,490,000.
What this means is—and contrary to popular misconception—a person would have to give more than $5,490,000 before he would ever pay a federal gift tax. But I thought I could only gift $14,000 a year! The $14,000 “rule” is only half the story. The full story is, you can only gift $14,000 a year to an unlimited number of people without reducing your $5,490,000 lifetime credit against federal gift tax. So, if you don’t have $5,490,000, then don’t worry about federal gift tax. The current Republican tax proposal does not call for an elimination of the gift tax.
The fact that there is no estate tax (or effectively no estate tax because most people have nowhere near the federal exemption amount) means that people are not as constricted as they were in the past when engaging in estate planning. Most people simply do not need to consider estate tax issues when putting together an estate plan.
In my opinion, this—along with other changes in the laws governing trusts in New Jersey—opens up other planning opportunities for people. Instead of worrying about estate tax, you should worry about how your estate is transferred to your children.
You should be thinking about things such as What would happen if my child is sued? What if my child gets divorced? and What if my child dies after me? What will happen to the inheritance I left my child in these situations? The solution may be a trust in your Will for the benefit of your child, a bloodline or dynasty trust. Given recent changes in New Jersey trust law, your child could be the trustee of his trust and his inheritance would still be protected from his potential problems.
Reflecting on the year helps highlight lessons for planning ahead. Understanding the key developments in elder law can guide you in making informed decisions for your family.
Each year brings changes that build on what came before, sometimes in subtle ways and sometimes more dramatically. Taking a step back to look at those shifts can provide useful context for decisions moving forward.