As of January 1, 2018, the New Jersey Estate Tax is repealed and the 2017 Tax Cuts and Jobs Act effectively doubles the amount each person may gift during lifetime or on death before paying a penny of federal gift or estate tax. Although the IRS has not yet announced what the exact amount will be for 2018, there’s a good chance it will be around $11.2 million per person. This means that, for a married New Jersey couple, more than $22 million can be given or left to others without incurring any estate or gift tax.
changes in the laws have a dramatic impact for estates and the estate planning of many of our clients and friends.
Now is the time to review your estate plan.
If your will creates a “credit shelter trust” or “by-pass trust,” which allows use of your available estate tax exclusion amount, you should confirm that the increase in the federal exclusion and the repeal of the New Jersey Estate Tax will not cause a greater proportion of your estate to pass to the trust under this clause than you had planned. Many wills provide that the greatest amount that can pass estate tax free under federal and state law passes to such a trust, with the rest to pass to a surviving spouse. Under the new limits, that may result in much more going to the trust than intended. If the beneficiaries of the trust are not the persons that should benefit from this larger share – or all – of your estate, or if the credit shelter trust was included solely for estate tax savings, then changes in your will may be in order. Conversely, the formula language for funding some credit shelter trusts may be keyed to the state exclusion amount in a manner that could result in an unfunded credit shelter trust, now that the New Jersey Estate Tax has been repealed. Accordingly, a review of your plan is necessary to ensure that the credit shelter trust will be properly funded.
In some estate plans, especially where the children are older, our clients have designated the federal estate tax exclusion amount to pass to the children, and do not use the credit shelter trust approach. These plans were probably done when the federal estate tax exclusion amount was much lower than it is today. This approach could result in too much of the estate passing to the children and unavailable for the use by the surviving spouse.
Even in those estate plans that employ the credit shelter trust approach, and where the increased amount does not suggest a problem or issue, it is still important to review the terms of the trust to make sure that the larger amount can be used and enjoyed by the proper beneficiary or beneficiaries.
For our clients and friends in New York, keep in mind that the New York estate tax exclusion is fixed at $5,250,000 until April of 2019. Your estate may pay a hefty New York estate tax at the death of the first spouse to die, if your will funds a credit shelter trust based on the larger federal credit amount formula. Most plans should contemplate the deferral of any estate taxes until the death of the surviving spouse.
Trusts, life insurance plans and gifting plans, in addition to wills, should all be reevaluated in light of the new laws.
Don’t forget about the New Jersey inheritance tax
. Although estate taxes are no longer a concern for many New Jerseyans, no changes were made to the New Jersey inheritance tax. The inheritance tax is a separate tax imposed on the transfer of assets valued at $500 or more at death, with a tax rate based on the beneficiary’s relationship to the decedent, and not on the size of the estate. Although amounts left to spouses, descendants (including step-children), parents, grandparents and charities are exempt from the inheritance tax, amounts left to many other individuals (including step-grandchildren) are not exempt. There is a small exemption of $25,000 for amounts left to each brother, sister or spouse of a child, but no exemption for anyone else. The inheritance tax rates are graduated and range from 11% to 16%. If your will leaves substantial assets to siblings, nieces, nephews and friends, your estate will be subject to the inheritance tax. Without modifying such estate plans, those estates may unnecessarily pay a tax at death.
Watch for future changes in the laws
. Under the 2017 Tax Cuts and Jobs Act, the estate and gift tax exclusion will only be $11 million-plus through 2025. If a new law isn’t enacted, beginning in 2026, the exclusion amount will be cut in half, back to last year’s limit (inflation adjusted). In addition, there’s no guaranty New Jersey won’t bring back the estate tax.
We are here to answer any questions you may have regarding the current estate tax laws, to review your existing estate plans, and to help establish the plan that is right for you. Please contact us to follow up on your estate planning needs.