In 2016, the Christie administration announced that there would be a tax trade-off: New Jersey would repeal the estate tax, increase the gross income tax exclusion on retirees, reduce the state sales tax from 7% to 6.875, and then to 6.625%, and oh yeah… Increase the gasoline tax by 23 cents per gallon. So, with the repeal of the New Jersey estate tax, do New Jerseyans need to continue using trusts to avoid paying an estate tax?
It is now a year and a half after these laws went into effect. The State has a new governor and a new legislature preparing and abiding by a new state budget. On the table for discussion? New income taxes on “multimillionaires,” new corporate taxes, and an increase in the sales tax.
Although the budget that was signed by the Governor (preventing the second government shut down in two years), did not include the hike in sales tax, it implemented the increase in taxes on “multi-millionaires” and corporations. This only goes to show you that what one government does, another government has the power to undo.
Pre-2016 Estate Planning
Before the November 2016 law that abolished the estate tax, New Jersey had the dubious honor of having both an inheritance tax and an estate tax. These two taxes are different in effect and application. The Estate Tax applies to what the decedent left behind, while the inheritance tax applies to what the heirs receive from that estate. New Jersey had the second dubious honor of having the lowest estate tax exemption amount of $675,000.00.
As you can imagine, if you own a home free and clear, you can eat up a good portion of that exemption amount if you do not implement some additional legal planning. This is especially true for married couples and domestic partners where the surviving spouse is the primary beneficiary of the couple’s lifetime accumulation of assets. You now have double the assets, but you don’t get double the tax exemption (at least under New Jersey law, federal law is different).
Enter disclaimer trusts
A “disclaimer” in estate law is a nifty paper trick where a named (or unnamed intestate) heir declares that he or she does not want to receive an inheritance, and the law acts as though that person (the survivor) died before the decedent.
The “disclaimer” is entirely optional, but in practice, it has allowed New Jerseyans to save themselves tens- if not hundreds of thousands of dollars in taxes. This “disclaimer trust” then receives those assets that were disclaimed. The person who disclaimed can still access the assets and use them for his or her benefit, but they are excluded from the survivor’s taxable estate.
(Other estate planning options would accomplish this goal, but this is one of the most common.)
So, is this paper trick still necessary?
As of 2018, the US Federal Government still imposes an estate tax. The exemption amount is significantly higher at $11,180,000.00 per person. (Yes, over eleven million dollars.) Additionally, under federal law, your spouse can inherit any unused exemption amount, so married couples have the potential to double that to almost $22.36 million ($11.18 million for one spouse plus $11.18 million for the other spouse equals $22.36 million combined). And as of January 1, 2018, New Jersey has eliminated the estate tax.
The Federal exemption amount is a massive departure from the previous estate tax exemption amounts. In 2017, the exemption amount was $5.49 million. The law that determined the exemption amount was tied to inflation and 2018’s exemption amount was expected to be $5.6 million per person. Congress’s new budget proposed and implemented a much higher than expected estate tax exemption.
So that begs the question, are trusts still necessary with the elimination of or extreme extensions of the estate tax amounts?
Do you plan to die this year? If so, then maybe it does not matter. You have no NJ estate tax to worry about and over $11 million to exempt if you have not used up all your gift tax exemptions.
If your estate is estimated to be valued at over $11 million, you must decide if you want to give the government a chunk of your life’s work, if you’re going to take a world-wide cruise and spend as much as possible, or if you want to do some planning to preserve your life’s work for the next generation.
I’m just going to direct your attention to the proposed New Jersey budgets that contemplated raising the sales tax, that increased the income taxes on corporations, and that implemented new taxes on New Jersyans earning more than $5 million.
The law is a nebulous and fickle creature: what can be done, can also be undone. Estate planning needs to take a long-term planning view and sometimes project out into the future what a government and elected officials might contemplate years before it’s discussed.
So, yes, a trust is still necessary. They take some of the risks out of the changeable nature of the tax code. I cannot tell you if a trust is required for you individually, but I can say that as a concept, the trust is still a viable planning method that can help many individuals accomplish their estate planning goals, which sometimes include avoiding a tax that is a moving target.