Last fall, the state of New Jersey made a momentous step when it announced the phase-out of its state estate tax. This two-step phase-out started with an increased estate tax exemption to $2,000,000 per person starting January 1, 2017. This tax will be completely eliminated beginning in January of 2018. This was big news because, as you probably know, the Garden State previously was one of the only U.S. states to:
- Have both an estate tax and an inheritance tax
- Have an estate tax exemption threshold that was much lower ($675,000 in 2016) than the federal estate tax threshold (currently $5.49 million)
This menu of “death taxes” often was enough to push many New Jersey residents and businesses to move elsewhere during retirement. Before this year, even state residents who weren’t ultra-wealthy felt the state was bleeding them (and their heirs) dry with estate-related taxes.
The Current State of New Jersey Death Taxes
The announcement that the estate tax would be going away was a big one. However, we find that many folks are still unclear about the implications of the change.
For one thing, many people overlook that New Jersey still has an inheritance tax. In the past, residents were subject to either the estate or inheritance tax—whichever was higher. Because the dollar level at which you’d pay the estate tax was fairly low, at $675,000, many people got accustomed to assuming they’d pay the estate tax. They pretty much ignored the inheritance tax, as a result.
When residents heard that the estate tax was ending, many of them celebrated—and forgot that their beneficiaries aren’t completely off the tax hook. Taxes on a beneficiary’s inheritance can still range from 11 to 16%, depending on their relationship with the decedent.
The inheritance tax system separates beneficiaries into one of four classes:
- Class A covers spouses and direct bloodline relatives, a stepchild, civil unions, and domestic partners. This class is exempt from inheritance taxes.
- Class C covers siblings and son/daughter in-laws. The inheritance tax begins at $25,000 to the beneficiary at a rate of 11% and goes up to 16% for bequests greater than $1,700,000.
- Class D is every other transferee not classified as A, C, or E. The tax is 15% on the first $700,000 and 16% on anything above $700,000
- Class E beneficiaries are exempt from tax. These beneficiaries include charities, religious institutions, non-profits, and the State of New Jersey.
Amendment on July 1, 1963 eliminated Class B.
What This Means to You
Check with your Wealth Advisor and estate attorney. You should know what impact the shift to a New Jersey inheritance tax might have on your estate plans. In particular, you may need to learn more about the different “classes” of beneficiaries—who falls into what category and how much they’ll pay in taxes.
This information could make a difference, for instance, if you want to leave equal shares of your business to both your son and your niece. Right now, your son is exempt from New Jersey inheritance taxes, so he’ll receive his business shares free and clear. Your niece, on the other hand, falls into New Jersey’s Class D for inheritance taxes. Her business shares could be taxed up to 16%.
If you want to compensate your two heirs equally, you might make other financial arrangements in your estate for your niece. For example, you could bequeath some tax-exempt life insurance proceeds to her.
Your Wealth Advisor can help you explore options.
And What if the Estate Tax Returns?
That’s the multi-million-dollar question. There’s a chance we see some legislative changes with our new Governor. When or how that might happen is anyone’s guess, and the change in governor could impact laws post-January 1, 2018. Many people believe the estate tax will be brought back at a $2 million exemption level. Or it could be reenacted to match the $5.49 million federal exemption level. An exemption of $5.49 million would also keep New Jersey on par with New York.
If that happens, of course you’ll again want to check in with your Wealth Advisor. Taxes shouldn’t be the only reason to tweak estate and other financial plans, but it’s always a factor.
Of course, RegentAtlantic will stay on top of any state tax change news. We’ll share more insights with you here and directly through your Wealth Advisor.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.