BEWARE OF NEW JERSEY’S ESTATE TAX
By: Jonathan L. Mate
Most people are now aware that the federal estate tax exemption per person has risen to $1.5 million dollars for persons dying in 2004, with further increases to take place in future years. In addition, any assets which are left outright to a surviving spouse are also exempt from federal and New Jersey Estate Taxes. This exemption is called the marital deduction.
However, when the federal government decided to increase the exemptions for federal estate tax, many states did not go along with the increase, because it would have deprived them of much needed tax revenues. In fact, New Jersey enacted a new estate tax, which is applicable to estates of any New Jersey resident dying after December 31, 2001. The new law effectively “froze” the New Jersey Estate Tax exemption at $675,000.
Prior to December 31, 2001, most wills prepared for New Jersey residents with estates in excess of $1 million dollars contained a clause which created a credit shelter trust for the benefit of a spouse in an amount equal to the maximum federal estate tax exemption. This provision was designed to reduce the size of the estate of the surviving spouse by the amount which went into the trust. However, amounts left to a credit shelter trust do not qualify for the marital deduction because the surviving spouse does not have complete control of the assets in the trust.
Therefore, if an individual dies in 2004 with a $1.5 million estate and leaves his entire estate to a credit shelter trust for his surviving spouse with the remainder to his children after his spouse dies, there will be no federal estate tax liability because the entire bequest qualifies for the federal estate tax exemption. However, there will be a New Jersey estate tax on the excess over $675,000, the level at which New Jersey froze the maximum exemption. The New Jersey estate tax is computed on the difference between $675,000 and $1.5 million and, in this case, is $64,400. Even a smaller credit shelter bequest--$1 million, for example, will still result in a $33,200 New Jersey estate tax bill.
In order to eliminate the payment of the New Jersey estate tax, the credit shelter trust would have to be limited to $675,000, with the balance of the estate passing outright to the surviving spouse or in a trust which would be included in the surviving spouse’s estate. This arrangement will expose the excess over $675,000 to federal estate tax in the estate of the surviving spouse when he or she dies, at a tax rate which is far in excess of the New Jersey estate tax. For example, if the combined assets of a husband and wife are $3 million, using a credit shelter trust can ultimately pass the entire amount to their children free of federal estate tax if they both die in 2004. However, this arrangement would incur a New Jersey estate tax of $64,400. If the trust in the estate of the first spouse to die were limited to $675,000 to avoid the New Jersey estate tax, there would be a federal estate tax in the surviving spouse’s estate of approximately $250,000.
Clearly there is a need to give the Executor of a decedent’s estate as much flexibility as possible to determine, at the time of the decedent’s death, how much to put into the credit shelter trust provided for in his/her Will. This decision will be based on a number of factors, which include the size of the estate of the surviving spouse and the amount of the federal exemption at the time of the decedent’s death.
There are several drafting techniques which have been used to maximize the flexibility available to an Executor and the surviving spouse in making these decisions. It would be wise to check the wording in your own Will to determine if that flexibility exists. Through the use of certain trusts and disclaimers by the surviving spouse, the Executor would have the option of limiting the amount of the credit shelter trust to minimize the New Jersey estate tax or maximize the amount of the credit shelter trust to reduce the tax in the estate of the surviving spouse.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
Most people are now aware that the federal estate tax exemption per person has risen to $1.5 million dollars for persons dying in 2004, with further increases to take place in future years. In addition, any assets which are left outright to a surviving spouse are also exempt from federal and New Jersey Estate Taxes. This exemption is called the marital deduction.
However, when the federal government decided to increase the exemptions for federal estate tax, many states did not go along with the increase, because it would have deprived them of much needed tax revenues. In fact, New Jersey enacted a new estate tax, which is applicable to estates of any New Jersey resident dying after December 31, 2001. The new law effectively “froze” the New Jersey Estate Tax exemption at $675,000.
Prior to December 31, 2001, most wills prepared for New Jersey residents with estates in excess of $1 million dollars contained a clause which created a credit shelter trust for the benefit of a spouse in an amount equal to the maximum federal estate tax exemption. This provision was designed to reduce the size of the estate of the surviving spouse by the amount which went into the trust. However, amounts left to a credit shelter trust do not qualify for the marital deduction because the surviving spouse does not have complete control of the assets in the trust.
Therefore, if an individual dies in 2004 with a $1.5 million estate and leaves his entire estate to a credit shelter trust for his surviving spouse with the remainder to his children after his spouse dies, there will be no federal estate tax liability because the entire bequest qualifies for the federal estate tax exemption. However, there will be a New Jersey estate tax on the excess over $675,000, the level at which New Jersey froze the maximum exemption. The New Jersey estate tax is computed on the difference between $675,000 and $1.5 million and, in this case, is $64,400. Even a smaller credit shelter bequest--$1 million, for example, will still result in a $33,200 New Jersey estate tax bill.
In order to eliminate the payment of the New Jersey estate tax, the credit shelter trust would have to be limited to $675,000, with the balance of the estate passing outright to the surviving spouse or in a trust which would be included in the surviving spouse’s estate. This arrangement will expose the excess over $675,000 to federal estate tax in the estate of the surviving spouse when he or she dies, at a tax rate which is far in excess of the New Jersey estate tax. For example, if the combined assets of a husband and wife are $3 million, using a credit shelter trust can ultimately pass the entire amount to their children free of federal estate tax if they both die in 2004. However, this arrangement would incur a New Jersey estate tax of $64,400. If the trust in the estate of the first spouse to die were limited to $675,000 to avoid the New Jersey estate tax, there would be a federal estate tax in the surviving spouse’s estate of approximately $250,000.
Clearly there is a need to give the Executor of a decedent’s estate as much flexibility as possible to determine, at the time of the decedent’s death, how much to put into the credit shelter trust provided for in his/her Will. This decision will be based on a number of factors, which include the size of the estate of the surviving spouse and the amount of the federal exemption at the time of the decedent’s death.
There are several drafting techniques which have been used to maximize the flexibility available to an Executor and the surviving spouse in making these decisions. It would be wise to check the wording in your own Will to determine if that flexibility exists. Through the use of certain trusts and disclaimers by the surviving spouse, the Executor would have the option of limiting the amount of the credit shelter trust to minimize the New Jersey estate tax or maximize the amount of the credit shelter trust to reduce the tax in the estate of the surviving spouse.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
