NEW JERSEY’S DEATH TAX: WHAT ARE MY OPTIONS?

In a recent column, I discussed the fact that the state of New Jersey enacted a new law that modified the New Jersey Estate Tax. If you die with an estate greater in value than $675,000, your estate will pay New Jersey Estate Tax. In the past, the State’s estate tax was based on and equal to the credit that the federal government would give to an estate for estate tax paid to a state. Wow! That sounds complicated, right?

Well, not really. What that means in English is this, if an estate had to pay $10,000 to New Jersey for estate tax, the federal government would give the estate a $10,000 credit against the federal estate tax that the estate owed to the feds; accordingly, if the total federal estate tax would have been $100,000 without the credit, then the estate would owe New Jersey $10,000 and the feds $90,000. The state estate tax did not increase the overall tax liability of the estate.

On July 1, 2002, that all changed. Since a new federal tax law – passed in June 2001 – increased the credit that the federal government gives an estate against federal estate tax and eventually eliminates the federal estate tax and since that same law reduces the credit that the federal government will give to an estate for estate tax paid to a state and eventually eliminates the credit, New Jersey’s estate tax would have disappeared, along with hundreds of million dollars revenue. So, on July 1, 2002, New Jersey passed a new law that freezes the State’s estate tax at the rate that existed on December 31, 2001.

Now, even though the federal government provides a reduced – and eventually no – credit for state estate tax paid, New Jersey will continue to receive its revenue. For some estates, this new law could actually increase the overall tax liability, notwithstanding the federal governments sweeping tax law, which was sold as the death to death taxes.

So, now that you know about New Jersey’s new tax law, how do you plan for it? New Jersey’s elder law attorneys have been discussing the planning options for several months now. Here are some of the suggestions that I’ve heard:

Relocate. One suggestion is that you move to another state where the estate tax isn’t so onerous or where there is no state estate tax. I don’t view this option as viable for two reasons. One, I think it’s unlikely that anyone – or at least very few people – would relocate in the twilight years of their life after having lived in a state for most, if not all, of their life just to avoid a death tax. Secondly, the state to which the person moves may – and probably will – change its estate tax law in a manner similar to the manner in which New Jersey modified its law.

Gifts. If you give assets away, the reasoning goes, those assets won’t be included in your estate for purposes of calculating the estate tax. The catch is, the gift must have been made three years prior to the date of death. If the gift was made within three years of death, then the gift is brought back into the estate for purposes of calculating the New Jersey Estate Tax. So, not only would the decedent have lost the benefit of the asset gifted during his/her life if he failed to live for three years after making the gift, the gift still would not escape the estate tax. Gifting is an option, but not a great option.

Credit Shelter Trust. Briefly, as I discussed in prior columns, a married couple can draft trusts into their Wills that protect each spouse’s applicable exemption against the federal estate tax. In English, if the federal government gives a credit equal to $1,000,000 against federal estate tax, then the credit shelter trust will receive $1,000,000 of assets on the death of the first spouse (assuming he or she were lucky enough to own $1,000,000 in assets). If the federal credit were $1,500,000, the trust will receive $1,500,000 on the spouse’s death, and so on.

If the credit against the State death tax is now frozen at $675,000, a trust could be drafted into the couple’s Wills that will be funded with $675,000, and the remainder of the estate of the deceased spouse can pass to the surviving spouse. This type of trust preserves each spouse’s credit against New Jersey Estate Tax and $675,000 of the federal credit. On the flip side, this trust causes the estate of the first-to-die spouse to lose any federal credit above the $675,000 level, currently $325,000 and rising.

It’s a Hobson’s choice, but so far, it’s the best solution I’ve heard. What I think everyone can agree on is, the new law requires an estate plan to be reviewed if the estate is greater in value than $675,000.