New Jersey Estate Tax May Require Will Changes
New Jersey has two separate and distinct death taxes: the transfer inheritance tax, which is a tax on the amount each beneficiary receives from the decedent's estate, and the estate tax, which is based on a credit against the federal estate tax.
Prior to 2002, the New Jersey estate tax was exactly equal to the federal state death tax credit (reduced by the amount of New Jersey transfer inheritance tax paid). The result was that this tax never caused an addition to the death taxes payable by a taxable estate; it merely re-directed some tax dollars from the IRS to New Jersey.
However, for individuals dying after December 31, 2001, the New Jersey estate tax has changed. Computation of that tax will now use the less favorable federal rates in effect on December 31, 2001, which, in many cases, will mean a substantial increase in New Jersey estate tax. For example, in 2003, for married couples with traditional "bypass wills" (which use the federal marital deduction and a fully funded credit shelter trust), the estate of the first spouse to die will now pay a New Jersey estate tax of $33,200 - even though their estate plan was intended to cause no tax at all to be payable at the first death. Next year, that tax will increase to $64,400 and, in future years, will rise as high as $229,200.
Couples who have traditional "bypass wills" and whose aggregate wealth totals less than $2,000,000 (i.e., twice the current federal estate tax exemption amount) are especially at risk of paying a possible unnecessary New Jersey estate tax. In light of this new law and the ongoing changes in federal estate taxation, you may want to consider reviewing your estate plan to ensure that it is up-to-date and affords sufficient flexibility to allow for post-mortem adjustments that may minimize overall state and federal estate tax consequences.