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Lifetime Gifting and the New Jersey Estate Tax

October 31, 2016

The American Taxpayer Relief Act of 2012 made permanent a $5,000,000 exemption amount (indexed for inflation) for federal estate, gift and generation-skipping transfer tax purposes.  In contrast, the New Jersey estate tax exemption amount is $675,000 (not indexed for inflation), New Jersey does not impose a gift tax on lifetime gifts and New Jersey does not have a generation-skipping transfer tax.  

Traditionally, estate planners utilize gifting programs for New Jersey clients designed to take advantage of New Jersey’s tax-free treatment of gifts in light of the higher federal exemption amount (currently $5.43 million) in order to reduce the New Jersey estate tax owed at death. Although these types of gifting programs may be useful, estate planners must be sensitive to the fact that making lifetime taxable gifts in order to reduce an individual’s net taxable estate (i.e., his or her gross estate minus allowable deductions) below $675,000 may reduce, but not eliminate, New Jersey estate tax.  The bottom line is that a New Jersey estate escapes New Jersey estate tax only when the net taxable estate plus lifetime taxable gifts is equal to or less than $675,000.1  This is the result of the complicated way the New Jersey estate tax is calculated.

If an individual’s gross estate plus lifetime taxable gifts exceeds $675,000, a New Jersey estate tax return is required.2 The New Jersey estate tax due is equal to the allowable state death tax credit on the 2001 Federal Estate Tax Form 706 ("2001 Form 706").  The allowable state death tax credit is equal to the lesser of (1) the tentative federal estate tax calculated under Table A of the 2001 Form 706 and (2) the state death tax credit calculated under Table B of the 2001 Form 706.  A net taxable estate of $675,000 in 2001 would not generate a federal estate tax under Table A; therefore, with no federal estate tax to offset, there would be no federal state death tax credit allowable and, accordingly, no New Jersey estate tax in 2015. However, a net taxable estate of $675,000 with de minimus lifetime taxable gifts would generate an allowable federal state death tax credit and, therefore, a New Jersey estate tax.  

Let’s look at an illustration using a $675,000 net taxable estate and $100,000 of lifetime taxable gifts.  Why would a net taxable estate of $675,000 plus $100,000 of lifetime taxable gifts generate a New Jersey estate tax when: (i) $675,000 does not exceed the New Jersey exemption amount; and (ii) taxable gifts are ignored for the purpose of computing the 2001 federal state death tax credit?  It’s because the table for computing the tentative federal estate tax (Table A) is different from and independent of the table for computing the federal state death tax credit (Table B).  In fact, the federal state death tax credit can apply with a net taxable estate beginning at over $100,000 (i.e., $100,000 less $60,000 exclusion = $40,000, the amount at which Table B begins taxing at 0.8%). Accordingly, even though lifetime taxable gifts are not part of the base for computing the 2001 allowable federal state death tax credit, it matters because the table for computing the federal state death tax credit (Table B) is different than the tentative federal estate tax table (Table A).

A net taxable estate of $675,000 plus lifetime taxable gifts of $100,000 would generate a New Jersey estate tax of $17,000 (the amount of the federal state death tax credit under Table B which is less than the tentative federal estate tax under Table A). This is true with a net taxable estate of $675,000 regardless of the size of the gift (i.e., lifetime taxable gifts could be $100,000 or $4 million, but the New Jersey tax is still $17,000).

What if the net taxable estate was $775,000 with no lifetime taxable gifts?  The New Jersey estate tax in this instance would be $21,600. Making a lifetime taxable gift of $100,000 reduced the New Jersey estate tax owed by $4,600.  However, unless a lifetime gifting program is implemented that reduces the net taxable estate to $100,000 or below, some New Jersey estate tax will be owed when, through gift planning, the net taxable estate is reduced below $675,000 but, when adding back those lifetime taxable gifts, the number exceeds $675,000.  

In sum, a New Jersey resident may minimize the New Jersey estate tax owed at his or her death by making lifetime taxable gifts but, depending on the circumstances, New Jersey estate tax may not be eliminated in its entirety, even where the net taxable estate is reduced to under $675,000.  

1.      For purposes of this Article, it was assumed that (1) no marital deduction is available and (2) the credit for any inheritance tax paid is not greater than the estate tax owed.
2.      A New Jersey estate tax return can be prepared using the simplified tax system method or the Form 706 method.  This Article assumes the Form 706 method is used.

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