For estates of decedents dying after December 31, 2001, the New Jersey estate tax has changed. That tax is now computed using the federal estate tax rates and credits in effect on December 31, 2001, which may generate a tax for many estates that would, under the prior tax regime, have paid no such tax at all. And with a change in the federal estate tax rules to take effect in 2004, even more attention to planning may be required.
In 2004, the federal applicable credit equivalent (i.e., the amount an individual can transfer free of federal estate tax) rises from $1,000,000 to $1,500,000. Taxpayers who take full advantage of this benefit to fund a credit shelter ("bypass") trust at death (i.e., placing the full $1,500,000 in trust) in 2004 will now pay a New Jersey estate tax of $64,400 (compared with $33,200 using maximum funding in 2002 and 2003 - and $0 in 2001).
However, minimizing New Jersey estate tax in 2004 (by not funding a credit shelter trust to the maximum extent) may mean paying more federal estate tax later. Underfunding the credit shelter trust at the death of the first spouse to die pushes more assets into the estate of the surviving spouse. If those assets are subject to a higher federal estate tax at the death of the surviving spouse, more tax in the aggregate may be payable than if some New Jersey estate tax had been paid at the first death using a fully funded credit shelter trust -- even if the second death takes place years after the first death. In short, for planning purposes, under the current federal estate tax regime, it may still make sense to maximize the use of the federal credits and pay some New Jersey estate tax from the credit shelter amount in any year in which a federal estate tax is applicable.
To aid in dealing with the uncertainties posed by the revised New Jersey estate tax, some (but not all) estate plans may benefit by adding certain "disclaimer provisions" to the wills. By prudent use of the disclaimer, the surviving spouse would be able to revisit the estate tax situation after the first death when more of the relevant factors would be known - e.g., federal state death tax credit amount; federal estate tax exemption amount; size of the estate; life expectancy of surviving spouse, etc. With knowledge of those factors, the survivor would then be able to make a more informed decision as to whether to pay the New Jersey estate tax at the first death in order to get the full benefit of the federal estate tax exemption (and so minimize possible federal estate tax at his or her later death) or to forgo the full federal benefit in order to avoid state death tax at the first death (and risk possible increased federal tax later).
The revised New Jersey estate tax also offers two possible methods for reporting that tax: (i) for estates required to file a federal estate tax return, such a return prepared as though 2001 federal law applied must be submitted and the New Jersey estate tax return (Form IT-Estate) prepared using the figures from that 2001 federal return (the "Form 706 Method"); and (ii) for estates not required to file a federal estate tax return (i.e. those whose gross estate plus adjusted taxable gifts in 2004 is $1,500,000 or less), the new Form IT-Estate may be prepared using either the Form 706 Method or a completely different "Simplified Form" Method that may yield a significantly different tax.
Owing to the reporting options, return preparers for and fiduciaries of estates above $675,000 but below $1,500,000 (i.e., estates that may report under either the Form 706 Method or the Simplified Form Method) should take care to examine the tax computed under both methods owing to the potentially different results.
Given the potential for even higher New Jersey estate tax in 2004, the different methods potentially available for reporting the new tax and our highly unstable estate tax environment, you may want to revisit your estate plan (especially if your total assets are less than $3 million), giving special attention to whether your current wills afford sufficient flexibility to allow for post-mortem adjustments that may minimize overall state and federal estate tax consequences for your family.
