New Jersey Considers Amending Its Estate Tax Threshold
When the federal government increased the amount which is exempt from federal estate tax to over $5 million dollars a few years ago, many clients thought that death taxes and estate tax planning were no longer relevant issues of concern for them. What they failed to recognize, however, is that New Jersey is still one of only two states in the entire country which impose two of its own state death taxes: New Jersey Inheritance Tax and New Jersey Estate Tax.
New Jersey inheritance tax is based upon the relationship of the person who passes away to the people who inherit. Since spouses, children, step children and grandchildren are all exempt from New Jersey inheritance tax consideration, many clients are not affected by this tax. (Interestingly, children of step-children are not exempt from inheritance tax).
Unfortunately, only a spouse (who is also a US citizen) can claim an exemption from New Jersey’s estate tax. Furthermore, New Jersey expressly “de-coupled” from the federal estate tax back in 2001, so that the threshold for New Jersey’s estate tax has been set in stone since that time at $675,000.00. Perhaps worst of all, nearly every asset which has value, including life insurance, retirement accounts and the family home, are counted when determining if a decedent’s estate has exceeded the $675,000.00 threshold. Thus many of my clients who are far from “wealthy” will be subject to this tax when the second spouse passes away based solely upon the value of their home equity, life insurance policy benefit and/or retirement account balances.
From time to time wealthy residents have left the state (or at least established legal residence elsewhere) due to taxation concerns, and there have often been rumors suggesting that New Jersey may amend its estate tax threshold to at least lessen the impact of this tax on middle class residents. For instance, when the federal estate tax threshold hit the $5 million mark, many states increased their state death tax thresholds to $1 million or higher, and there was speculation that New Jersey may follow suit. To date, this has not occurred and until recently, there was little hope that relief was on theway.This past week, however, a front page article in the Star Ledger highlighted efforts in Trenton to generate more money to fix state roads and bridges which could entail a tax trade-off between Democrats and Republicans resulting in a higher exemption threshold.
The back drop to these negotiations is that New Jersey’s Transportation Trust fund is rapidly running out of money, while New Jersey’s gas tax is also exceedingly low compared to other states. Since this tax is what pays for road maintenance and improvements, some in Trenton are seeking to raise the state’s gas tax. Others, however, point out that past increases in a variety of taxes have not gotten the intended results, and once increased, such taxes are rarely reduced or eliminated.
In order to break this legislative log jam, some are now advocating raising the gas tax but lowering or eliminating the estate tax. While on the one hand the state can ill afford to lower or eliminate the estate tax when it is struggling to balance its budget and fund state pension systems, a closer look at the numbers suggests that a reduction of this tax targeted at middle class families may be doable.
According to the Star Ledger article, the state expects $760 million in revenue this year from estate and inheritance taxes. This is a huge number that cannot be easily offset, so the elimination of New Jersey’s estate tax would seem highly unlikely. On the other hand, estates valued at less than $1 million generated approximately $30 million in state revenue. Arguably this $30 million from families who are far from wealthy may be something the state could afford to forego. Other states, including all neighboring states, have been at least this generous in establishing their state estate tax exemption thresholds.
Fortunately, there are a variety of ways and means available for many New Jersey residents to reduce or eliminate death taxes even if New Jersey decides once again to buck the trend and stick with its punishing death tax regimen. For example, for many couples, the inclusion of optional and discretionary provisions in otherwise simple Wills could save the next generation over $50,000.00 in taxes.
For assistance with these and other planning concerns, please contact us.