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Increased Gas Tax – How Does It Impact NJ Estate Tax? Part 2

            Last week , I wrote about the announced compromise between Governor Christie and legislative leaders that will replenish the out of money transportation fund and get much needed road projects started again.  The compromise involves a 23 cent gas tax increase but tax cuts in other areas, including the elimination of New Jersey’s estate tax completely by January 1, 2018.  The bill was approved by New Jersey’s Senate and Assembly this past Friday and will go to Governor Christie for his approval this week.

            Let’s talk about what it actually means.  For 2017 the estate tax exemption will increase to $2,000,000.  Only estates over that amount will face estate tax.  In 2018 the tax will be gone.  But, does that eliminate any need to do estate and tax planning?  No, it doesn’t but it may change how we go about planning.

            There is still a federal estate tax with an exemption that is currently $5,450,000.  If your estate is approaching or already exceeds that amount then tax planning with credit shelter trusts and irrevocable life insurance trust may still be advisable.  Admittedly, this will only apply to a small segment of the population.

            General estate planning, including a will and minor trust for young children, is still necessary regardless whether there is an estate tax.  Proper planning is the only way to insure that your assets pass in the manner that you choose, rather than having the government dictate it to you by what is known as the intestacy laws.  It’s just that for many of our clients estate tax planning won’t be a part of that plan.

            There is, however, another glaring omission here.  In all the talk about eliminating the estate tax that has been ongoing for years I have never read or heard any discussion about eliminating New Jersey’s inheritance tax.  Remember that we have two “death” taxes in New Jersey.  The inheritance tax is based on the relationship of the heirs to the person who died.  Class A beneficiaries are not subject to inheritance tax.  They are spouses, parents and grandparents and lineal descendants (ie. children, grandchildren).

            If you have a spouse, domestic partner and/or children to whom you are leaving your estate, the inheritance tax is not something you need to worry about.  It appears that supporters of eliminating the estate tax wanted to take care of these Class A beneficiaries because of the real or perceived loss of residents who move out of state to avoid the estate tax.

            If, on the other hand, you are leaving any of your assets to non-Class A beneficiaries or all of your estate – such as to nieces and nephews because you have no children – then the inheritance tax is still very much alive and remains with us.  Again, this will effect a smaller percentage of estates than does the estate tax.

            There is one final point, however, to note here.  Because we still have an inheritance tax we also still have that pesky tax waiver system which places a lien by law on New Jersey assets until the estate issues a waiver releasing the lien.  This waiver applies only to inheritance tax and not to estate tax.  The State issues this piece of paper when the tax is paid or satisfactory proof is established that no tax is due (by filing an affidavit known as an L-8 or L-9).  For some estates that waiver system may cause assets to be frozen for a period of time (see my post of 10/26/15).

            So, to summarize what has happened in Trenton these past two weeks, the elimination of the estate tax will certainly save many New Jersey residents money.  For some others, however, an inheritance tax will still take a bite out of their estates.