The Fiduciary Advisor

New Jersey Estate Tax To Be Phased Out

With the ringing in of the New Year, residence of New Jersey woke up to a new estate tax exemption level – $2 million (increased from $675,000).  This increase was a part of the negotiated tax bill that became  law effective November 1, 2016. 

A main component of the new law is the eventual phase out of the New Jersey Estate Tax.  Several friends and family have asked whether this will impact my job as an estate planning attorney.  My answer is “no”.  In fact, this change will allow me to focus more on what’s really important – – my client’s legacy.  Before I explain why estate planning is still important, let me give you a brief overview of the new law.

In sum:

1. The automobile gas tax more than doubles from the current 14.5 cents per gallon tax to 23 cents per gallon;
2. There is a gradual decrease in the sales tax from 7% to 6.625%;
3. The earned income tax credit is raised from 30% to 35%;
4. The tax exclusion on retirement income increases over the next four years to $100,000 for joint filers; and
5. Veterans receive a personal exemption for state income taxes.

Other than the significant gas tax increase, this is all great news.  But what is really exciting is that the New Jersey Estate Tax is being phased out.  The New Jersey estate tax was a tax on the estate of New Jersey resident and applied to estates valued in excess of $675,000.  Prior to the new law, the best advice I could give an estate planning client desiring to avoid the tax was to move out of New Jersey.  Now, this is not necessary.  Under the new law, the exemption is now $2 million for 2017 and will be completely eliminated effective January 1, 2018.

The elimination of the estate tax does not mean a New Jersey resident will no longer need estate planning.  Nor does it mean you need to necessarily revise your current estate plan.

A good estate plan never focuses exclusively on tax planning.  Take for example a Will which provides an opportunity for the surviving spouse to disclaim a portion of the deceased spouse’s assets into a “disclaimer trust.”  Of course one reason for this planning technique is to defer the taxes until the surviving spouse’s death.  However, a disclaimer trust can also be a powerful tool for addressing advanced age, financial management, subsequent remarriage or concerns about undue influence.  By pushing off the decision to disclaim into this type of trust until a later date, the surviving spouse can take a look and determine what is in his or her best interest when it really matters.

In addition, there is still a need to address:

1. Blended families;
2. Caring for minor children;
3. Caring for children or adults with disabilities;
4. Guardianship for an incapacitated individual; and
5. Charitable gifting.

Further, the New Jersey Inheritance Tax was not phased out, so tax planning is still necessary for individuals leaving all or part of their estate to beneficiaries other than their descendants (e.g. children/grandchildren) or ancestors (e.g. parents) whose distribution are still subject to the New Jersey Inheritance Tax .  Tax planning will continue to be important also for individuals with an estate over the Federal lifetime estate and gift exemption (for 2016, $5,450,000 for individuals and $10,900,000 for couples).  Not to mention, tax planning in relation to the income taxation of estates and trusts has become even more important and will continue to impact most estates and trusts without proper planning.

Further still,  estate planning attorneys will continue to support their clients through the estate administration process or represent their interests when a conflict arises over the distribution of an estate (e.g. will contest) or the handling of the administration of an estate or trust (e.g. breach of fiduciary duties).

So while it might seem like I should be concerned that the estate tax will be phased out, in fact, I am quite excited.  First, as a New Jersey resident, this is great news.  Second, as an estate planning attorney I will continue to focus on preserving and creating my client’s legacy. Finally, please remember the elimination of the New Jersey estate tax does not necessarily mandate the execution of new wills and/or trusts.  As a rule of thumb we recommend reviewing all of your estate planning documents whenever family and financial circumstances change significantly, after major events occur (e.g. marriage, divorce, death) and at least every five (5) years to make sure your plan still properly meets your needs.