Tax Planning for Married Couples Whose Estate Are Subject to NJ Death Tax

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Estate Planning Attorney

New Jersey is one of the few states in this country with its own estate tax. Fewer than twenty of the fifty states in the United States have an estate tax. The estate of a New Jersey resident is subject to estate tax if the value of the gross estate exceeds $675,000. (The federal government has an estate tax as well; the credit against the federal estate tax is $5,340,000.) Even New York State, the poster child of oppressive taxation and regulation has phased out its own death tax in favor of the higher federal exemption.

Your gross estate includes all assets you own, includingthe proceeds of life insurance. Yes, life insurance is included unless you have created an irrevocable life insurance trust. That’s why I purposely advise moderately wealthy and higher net worth clients to “get out of New Jersey. NJ does not want you here.” So, for instance, if Mr. Ira B Wealthy owns a home worth $300,000, cash of $100,000, and life insurance with a death benefit of $500,000, for a total of $900,000, his estate would be subject to the New Jersey estate tax, in the absence of an irrevocable life insurance trust.

The rate of tax imposed under the New Jersey estate tax is roughly blended at 10%. So, for instance, if a decedent’s estate is worth $1,000,000, his estate exceeds the $675,000 credit by $325,000 and would pay approximately $33,000 in estate tax.

When I meet with a married couple, each spouse comes to my office with a credit of $675,000 against the estate tax. Upon the death of the first spouse, there is no estate tax between spouses. So, if Mr. and Mrs. Wealthy have an estate worth $1,000,000, and Mr. Wealthy dies leaving his entire estate to Mrs. Wealthy, Mrs. Wealthy will not have to pay an estate tax, at first. But when she dies, her estate gets “killed” by New Jersey. This tax can be avoided by an estate planning strategy called “disclaiming”. By disclaiming planning, when Mrs. Wealthy dies, she will use her $675,000 credit against the New Jersey estate tax. Her children will then be able to avoid paying $33,000 in estate tax on the $325,000 in her estate because she disclaimed her husband’s $675,000 bequest.

If Mr. Wealthy were to leave his estate to someone other than his wife, he can use his $675,000 exemption credit to a non-spouse beneficiary. For instance, if Mr. Wealthy gives $100,000 to his children while alive by gift, he can use $100,000 of his $675,000 credit, and no tax would is due.

The problem is, Mr. Wealthy probably wants to leave his entire estate to his wife, and Mr. Wealthy’s wife probably wants to receive Mr. Wealthy’s entire estate. While the couple ultimately wants to benefit their children, both Mr. and Mrs. Wealthy want to benefit each other first and foremost.

I mentioned disclaimer planning earlier in this post. The solution I offer my clients, a solution that has existed for several decades, is a trust in each spouse’s last will and testament for the benefit of the surviving spouse. Because we have no idea which spouse will die first, we place a trust in each spouse’s Will. The surviving spouse is the primary beneficiary of the trust and the trustee of the trust if the trust is drafted correctly.

Essentially, when the first spouse dies, the surviving spouse will reserve the inheritance that her spouse left her in a trust for her own benefit. This trust goes by many names—credit shelter trust, by-pass trust, a disclaimer trust. Personally, I like to call it a disclaimer trust because that’s what the trust is doing—sheltering the credit of the first spouse to die.

So, assume that Mr. Wealthy dies leaving $500,000 to a trust in his Will for Mrs. Wealthy’s benefit. Mrs. Wealthy is the trustee of the trust. By doing this, Mr. Wealthy uses $500,000 of his $675,000 credit against NJ estate tax. Mrs. Wealthy can continue to use the money in the trust for the remainder of her life, and when she dies, the money that remains in the trust will pass to Mr. and Mrs. Wealthy’s children. Mrs. Wealthy will also leave her estate to her children.

Instead of dying with an estate worth $1,000,000, Mrs. Wealthy dies with an estate worth $500,000. Since neither Mr. nor Mrs. Wealthy left more than $675,000 to someone (or something) other than his/her spouse, neither estate is subject to estate tax.

By employing a very simple trust that does not interfere at all with the surviving spouse’s life and finances, the couple saved $33,000 for their children.

If you have questions regarding estate planning, please contact Fredrick P. Niemann, Esq. toll-free at 855-376-5291 or email him at fniemann@hnlawfirm.com. We look forward to meeting with you.