There is a story brewing that says the New Jersey Legislature is considering revising the New Jersey estate tax law. Over the past few years, there have been various proposals to either repeal the estate tax or raise the applicable exemption credit against the estate tax.
According to the recent story, a deal to modify the estate tax has widespread support if the modification comes with an increase in the New Jersey gas tax. In other words, the Legislature is considering raising the credit against the estate tax very high if it can increase the gas tax.
Gas prices are nearly at an all-time low on an inflation adjusted basis. Meaning that if you take into consideration the value of a dollar today versus the value of a dollar in 1970, gas prices are nearly as low as they were in the 70’s. So, why not raise the gas tax? After all, gas prices are so much lower than they were a few years ago that a few pennies per gallon aren’t going to be noticed.
And eliminating the estate tax is something politicians can tout. “I killed the death tax!” For politicians, this is a perfect scenario, raising a tax that no one will notice but is ubiquitous and eliminating a tax that many people fear yet few people pay.
Here’s reality. New Jersey has two “death taxes”—the New Jersey estate tax and the New Jersey inheritance tax. We are one of two states that have two death taxes.
The New Jersey inheritance tax is a tax that is imposed primarily based upon the relationship of the beneficiary of the asset to the decedent. The more remote the relationship, the higher the tax. For instance, spouses, children, grandchildren do not pay inheritance tax. More remote relatives (aunts, uncles, cousins) and friends pay tax at about 15%.
To my knowledge, the New Jersey Legislature is not considering modifying or eliminating the inheritance tax. The Legislature is only looking at the estate tax.
The New Jersey estate tax is a tax that is based upon the gross value of the estate. “Gross value” includes all assets the decedent owned (his home, 401(k), IRA, stocks, bonds, bank accounts) and the death benefit of any life insurance policy that he may have owned. If the gross value of his estate exceeds $675,000, then his executor must file a New Jersey estate tax return. If the net value (gross value less expenses) exceeds $675,000, then an estate tax is owed.
The federal government imposes an estate tax, but the applicable exemption equivalent (that’s the technical name for the $675,000 threshold) is $5,450,000 in 2016. So, in order to ever pay federal estate tax, the net value of your estate would have to exceed $5,450,000. For all intents and purposes, there is no federal estate tax for 99% of us.
The average rate of the New Jersey estate tax is 10%. On a $1,000,000 estate, which is an estate that exceeds the $675,000 credit by $325,000, the executor will pay a tax of $32,500, or 10% of the amount by which the value of the estate exceeds $675,000. (If an estate has to pay federal estate tax, the rate is 40%, so the federal rate is much higher.)
Now, $675,000 is a rather low credit amount. In fact, I believe it’s the lowest in the nation. In my opinion, the credit should be closer to $1,500,000. But here’s why I think killing the estate tax as a quid pro quo to increase the gas tax is wrongheaded.
The gas tax affects all of us—rich and poor alike. While gas prices may be low today, we all know that can change tomorrow. The estate tax affects what people inherit from the estates of individuals who were relatively well-off.
As I say, if the applicable exemption equivalent were $1,500,000, it would be difficult for people to say that such an estate wasn’t a valuable estate. Few of us will ever inherit from such an estate.
Politicians claim that people are fleeing New Jersey to avoid the estate tax. This is absolute bunk. I meet with people on a continuous basis to discuss estate tax. None of them have ever agreed to take up residence in another state, such as Florida, to avoid the estate tax, and I have directly discussed that technique with many of them. And many of the people with whom I discuss this option already have a second home in Florida. Most say, “That’s my kids’ problem.”
It’s tantalizing to some people to say “Kill the death tax!” but the revenue that tax generates constitutes 3% of the State’s revenue. From where is that lost money coming?
Estate tax laws can change over time, making it important to review your estate plan whenever significant tax legislation is proposed or enacted. Understanding how these changes affect your family can help you make informed planning decisions.