Repeal of New Jersey’s Estate Tax and Increased Federal Exemptions Creates Opportunity to Review Estate Plans

In view of the repeal of the New Jersey estate tax as of January 1, 2018, as well as the recent significant increases in the federal estate, gift and generation-skipping transfer tax (“GST”) exemptions to $11,180,000 per person, also effective January 1, 2018, many clients should review their estate plans.

A. Formula Gifts in Wills and Trust Agreements. For example, if the estate plan bases the disposition of the estate on the available estate tax exemption and divides the estate into shares, with one share for the spouse and the other share for the family, that plan could now result in over-funding the amount passing to family members other than the spouse, thereby reducing or eliminating the spousal share. In short, if the estate plan is based on a formula gift, whether outright or in trust, or if the plan creates a marital trust and a “credit shelter trust” or “family trust” (sometimes called an “AB trust plan”), the estate plan and documents should be reviewed.

B. GST Exemption Gifts. Similarly, if an estate plan includes a gift based on the amount of the GST exemption, for example, a bequest of the GST exempt amount outright to grandchildren, or to a trust for the benefit of children for life and then for grandchildren, this too could significantly reduce the amount a client may wish to provide for his or her spouse or other beneficiaries.

C. Modification/Termination of Trusts That No Longer Save Estate Taxes. Finally, because of the large federal exemptions, estate taxation at death is now less of a concern for many people. Clients may benefit by shifting their focus to income tax planning, specifically, obtaining the “step-up” in basis at death on appreciated assets, which reduces or eliminates capital gains tax on a subsequent sale. If a trust has been established under a parent’s will or trust agreement, or by a predeceased spouse, and that trust holds appreciated assets, there is an opportunity for income tax savings if the assets are included in the beneficiary’s estate. Assuming the trust meets certain requirements, it is possible to accomplish this result by modifying or terminating the trust pursuant to the New Jersey Uniform Trust Code. The effect would be to save taxes overall for the family.

If any of these situations applies to you, we suggest you reach out to your estate planning attorney for a review of the effect of recent changes to New Jersey and federal tax law on your estate plan.