This Issues and Insights discusses important changes to New Jersey tax law for high-net-worth residents.

  • New legislation in October 2016 raised the New Jersey estate tax exemption to $2,000,000 per person effective January 1, 2017, and repeals the estate tax completely as of January 1, 2018. 
  • The New Jersey inheritance tax remains unchanged and applies to transfers at death to beneficiaries other than a surviving spouse or lineal descendants and ascendants.
  • The repeal of the New Jersey estate tax will remove a complicating factor from the development of a comprehensive estate plan for New Jersey residents.

On Friday, October 7, 2016, as part of bipartisan legislation aimed at strengthening New Jersey’s Transportation Trust Fund, New Jersey legislators also agreed to eliminate the New Jersey estate tax. However, the state’s inheritance tax remains unchanged for now.  Consequently, New Jersey residents should not fall victim to the assumption that the repeal of the New Jersey estate tax eliminates the need to review and update their estate plans.

Currently, the New Jersey estate tax applies to New Jersey residents who die with estates greater than $675,000, and the state estate tax is applied at rates up to 16%. The new legislation raised the New Jersey estate tax exemption to $2,000,000 per person as of January 1, 2017, and repeals the estate tax completely as of January 1, 2018. Moreover, the legislation may streamline (or eliminate) estate tax planning for New Jersey residents since they will no longer need to incorporate often complex plans to address estate taxes between the state exemption of $675,000 and the current federal exemption of $5,490,000.

Following repeal, a few, but certainly not all, of the planning issues to consider are:

Inheritance tax

New Jersey inheritance tax remains unchanged and applies to transfers at death to beneficiaries other than a surviving spouse or lineal descendants and ascendants.

Review current plans

Residents should have their estate planning documents reviewed to ensure that allocations, divisions, and formulas previously incorporated for the purpose of funding trusts and bequests in a manner aimed at minimizing federal and New Jersey estate taxes do not lead to unintended results or unnecessary complication of the wealth transfer plan.

Insurance planning

Many New Jersey residents, even those not subject to the federal estate tax, have feared the need to liquidate real estate, business interests, and retirement accounts, perhaps at a deep discount and with adverse income tax consequences, in order to pay the New Jersey estate tax on assets in excess of $675,000. To mitigate this fear and provide liquidity to pay the tax, life insurance may have been purchased. As a result of this significant change in law, life insurance for such residents should be reviewed to determine whether the current level and structure of insurance is appropriate and sufficient (or excessive) in the context of the overall estate plan.

Estate plans are typically not guided solely by estate tax considerations, but the impact of tax planning throughout many estate plans is undeniable. Even without the New Jersey estate tax, there will continue to be a strong need for New Jersey residents and their advisors to be thoughtful and proactive with their estate plans. However, the repeal of the New Jersey estate tax effective January 1, 2018 will certainly remove a complicating factor from the development of a comprehensive estate plan for New Jersey residents, and allow the estate planning conversation and implementation process to be informed by other important considerations.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. This publication is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, while this presentation is not intended to provide tax advice, in the event that any information contained in this presentation is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein.

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