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New Jersey Estate Taxes Increase as the
Federal Estate Tax Goes Down
Just when Uncle Sam
started to pull his
hand out of the
"cookie jar" of
estates and trusts,
New Jersey has dug
its hand in deeper.
With the recent
passage of
amendments to the
state estate tax,
New Jersey has
significantly
increased the amount
of death taxes for
New Jersey residents
with estates in
excess of
$675,000.00.
Prior to the recent
amendments, New
Jersey had an estate
tax which is
commonly called a
"sponge tax." It
imposed a state
estate tax equal to
the maximum credit
for state death
taxes allowed on the
federal estate tax
return, less any New
Jersey Inheritance
Tax and any death
taxes paid to
another state.
Dramatic changes in
federal law have led
to changes in state
law. In 2001, the
Economic Growth and
Tax Relief
Reconciliation Act
made several
significant
amendments to the
federal estate tax
system. Two
amendments
responsible for
greatly reducing
state death tax
revenues in states
with "sponge" taxes
are the reduction of
the tax credit for
state death taxes
paid, which will
eventually be
converted into a
deduction, and the
gradual increase in
the federal estate
tax exemption
equivalent (the
amount of assets
that can be
transferred at death
before a federal
estate tax is
imposed).
Prior to amendment
of the federal law,
state death taxes,
up to a certain
level, operated as a
tax credit on
federal estate tax
returns, thereby
reducing the federal
estate tax due
dollar for dollar.
Many states have
estate taxes similar
to New Jersey's
prior system of
simply maximizing
the use of the
federal estate tax
credit for state
death taxes.
However, the current
federal law provides
that the federal
credit for state
death taxes will be
decreased over the
next several years
until its repeal in
2005, when state
death taxes will be
taken as a
deduction.
The new federal
estate tax exemption
equivalent was
increased from
$675,000 up to
$1,000,000 for 2002
and will continue to
gradually increase,
eventually reaching
$3.5 million before
the federal estate
tax is repealed in
2010. Of course, the
repeal of the
federal estate tax
is only for one
year, and in 2011,
the repeal sunsets
and the federal tax
will be imposed once
again.
The affect of these
amendments to the
federal law has
resulted in a loss
of income to the New
Jersey fisc. As a
result, the New
Jersey legislature
amended the state
estate tax to
capture the revenue
lost by the federal
amendments. The
effect of the new
state law is to
capture the same
amount of state
estate tax as if the
federal law had
never changed. As a
result, estates with
assets over $675,000
will now pay state
estate taxes, even
if there is no
federal estate tax
liability.
There are some
possible solutions
to avoid, or at
least minimize, the
effect of the
changes in state
law. The most
obvious solution is
to limit the amount
passing to a bypass
trust to $675,000 on
the death of the
first spouse. The
option requires
balancing of the
potential federal
estate tax that may
be imposed upon the
death of the second
spouse, with some
state tax liability
on the death of the
first spouse.
Another option is to
reduce the amount of
a taxable estate
through making gifts
up to the federal
annual exclusion
amount (currently
$11,000 per year),
or in some cases, to
make lifetime
taxable gifts using
a portion of the $1
million federal gift
tax exemption.
In any event,
careful
consideration must
be given to both
federal and state
estate tax planning
for New Jersey
residents that have
assets in excess of
$675,000. It will
require balancing on
family needs and
desires, as well as
careful advice from
practitioners.
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