In the last several years, the laws governing estate taxes have changed at both the state and federal levels of government. The short of it is, unless you are quite wealthy, you no longer need to worry about estate tax.
Currently, a decedent’s estate only needs to pay federal estate tax if the gross value of the estate exceeds $5,490,000. A married couple can easily shelter twice that amount by having the surviving spouse prepare and file a federal estate tax return for her deceased spouse’s estate and by making an election on the estate tax return for the deceased spouse’s estate.
So, for all intents and purposes, married couples can shelter nearly $11,000,000 from federal estate tax. Since very few people have an estate worth more than $11,000,000 (or more than $5,490,000 for that matter), very few people even have to think about federal estate tax.
Recently, the state of New Jersey changed its state estate tax law. Currently, only estates with a value in excess of $2,000,000 have to pay New Jersey estate tax. Beginning January 1, 2018, the New Jersey estate tax is completely eliminated.
A married couple can currently shelter up to $4,000,000 from New Jersey estate tax with a simple and common estate planning method utilizing a trust in the couple’s last wills and testaments. The trust is called a “credit shelter trust.”
With credit shelter trusts, each spouse drafts a Will in which he devises a portion of his estate into a trust for the surviving spouse equal to the amount that can pass free of tax. So, for instance, Mr. Smith dies leaving up to $2,000,000 into a trust for Mrs. Smith’s benefit that is in his Will. Mrs. Smith can use the assets in the trust for her health, maintenance, and support. Mrs. Smith may even serve as the trustee of the trust, so Mrs. Smith is free to use the assets of the trust at any time without consulting anyone else.
When Mrs. Smith dies, the remaining assets in the trust would pass to Mr. and Mrs. Smith’s children. Any assets that Mrs. Smith owned in her own name at the time of her death (those assets not owned in the trust) would pass free of tax to her children if her assets had an aggregate value of less than $2,000,000.
Credit shelter trusts were a simple and benign method to double the amount of assets that could pass free of New Jersey estate tax to a married couple’s family. Beginning next year, however, a married couple will no longer have to employ the use of credit shelter trusts in their Wills.
What all of this means is that the vast majority of estates in New Jersey (and throughout the country) will no longer have to pay an estate tax. What this also means is that many people who were planning to avoid the estate tax by employing credit shelter trusts in their Wills can eliminate this planning technique.
While the planning technique is not harmful, it has become unnecessary in most instances. Having a credit shelter trust in your Will could cause the administration of your estate to be more cumbersome than is necessary.
If you have a credit shelter trust in your Will, then I would recommend you have your Will examined to determine if the trust is beneficial given your circumstances. Depending upon your circumstances, a lawyer might recommend removing the trust in its entirety or might recommend replacing your existing trust with a “disclaimer trust.”
A disclaimer trust is a trust that is only funded if the surviving spouse says she doesn’t want (disclaims) a portion of the deceased spouse’s estate. With a disclaimer trust, the surviving spouse can decide to fund the trust, or not, after the death of the first spouse, depending upon the size of the overall estate at that time.
Your will isn’t a “set it and forget it” document — it’s something that should grow with your life. Whether it’s family changes, financial shifts, or new goals, revisiting your will every few years can make sure your wishes stay current and clear.