Articles Posted by David G. Hardin

On October 14, 2016, Governor Christie signed a bill that raises the gasoline tax 23 cents per gallon, effective November 1, 2016. There will also be a reduction in the sales tax from 7% to 6.625%, to be phased in over two years.

Other provisions of the new law have an impact on New Jersey estate and income taxes. Specifically, the New Jersey estate tax exemption will increase, effective January 1, 2017, from its present $675,000 to $2,000,000, with a complete elimination of the New Jersey estate tax slated to be effective January 1, 2018. Note that these changes are to the New Jersey estate tax regime; the New Jersey inheritance tax, which applies to gifts to persons other than spouses, direct descendants, and direct ancestors, was not changed and remains effective at rates of 11% to 16%.

The effect of the change to the estate tax law is that New Jersey taxpayers will be able to shelter more of their assets from taxation. While gifts to spouses at death do not bear tax under either New Jersey or federal law because of the unlimited marital deduction (for U.S. citizens), the new law means that upon the death of the second spouse, with appropriate planning a married couple will be able to shelter from the New Jersey estate tax up to $4 million of assets for their descendants. The federal estate tax exemption, also called the Basic Exclusion Amount, is much higher and is indexed for inflation. That exemption stands at $5.45 million per taxpayer in 2016, increasing to $5.49 million in 2017.

New Jersey has been widely recognized as among the more onerous states in terms of transfers at death. While federal and state death tax laws have been loosened over the past many years so as to exempt more and more people from estate and inheritance taxes1, New Jersey has not been among them. New Jersey’s estate tax exemption stands at $675,000 per person. By contrast, the federal estate tax exemption is currently $5,450,000 per person2 ; the New York estate tax exemption is currently $4,187,500 (rising to the federal exemption level in 2019); the Connecticut estate tax exemption is $2-million; and Florida has no estate tax at all.

The federal estate tax regimen encompasses both lifetime gifts and death-time transfers. The federal estate tax exemption is reduced by taxable gifts made during lifetime. For example, an individual making a taxable gift of $100,000 in 2016 would reduce his or her federal estate and gift tax exemption by that amount, leaving a remaining federal estate and gift tax exemption of $5,350,000. An individual making a taxable gift during lifetime does not incur a gift tax liability for federal purposes until the entire federal exemption is exhausted. In 2016, that means one would have to make taxable gifts in excess of $5,450,000 before a gift tax becomes payable. This unified estate and gift tax structure for federal purposes does not differentiate between lifetime and death-time transfers, and consequently for gifts of equal value up to the maximum federal exemption amount there is no intrinsic benefit of a lifetime gift over a death-time transfer3.

In contrast to the federal estate and gift tax regime, New Jersey imposes a tax only on death-time transfers. For policy reasons that are not entirely evident, New Jersey does not impose a tax on lifetime gifts4. This anomaly between the federal and New Jersey tax structures offers a planning opportunity in a number of situations. An example will illustrate the point. Assume that an unmarried individual has a taxable estate with a value of $2-million and that the beneficiaries are children of the individual. Given the federal exemption of $5,450,000, there is no federal estate tax liability, regardless of the identity of the individual beneficiaries. For New Jersey death tax purposes, inasmuch as the beneficiaries are children of the individual, the New Jersey inheritance tax is inapplicable, and the only tax of concern is the New Jersey estate tax. The New Jersey estate tax on a taxable estate of $2-million is $99,600.

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