NJ Estate Tax for Estates over $675,000

NJ Estate Tax for Estates over $675,000

Recommendation for Tax Planning now if husband and wife’s total assets including life insurance exceeds $675,000

       A New Jersey estate tax return must be filed if the decedent's gross estate plus adjusted taxable gifts as determined in accordance with the provisions of the Internal Revenue Code in effect on December 31, 2001 exceeds $675,000. It must be filed within nine months of the decedent's death (nine months plus 30 days if the Form 706 method is used). Additionally, a copy of any Federal estate tax return filed or required to be filed with the Federal government must be submitted within 30 days of the date it is filed with the Internal Revenue Service and a copy of any communication received from the Federal government must be submitted within 30 days of its receipt from the Internal Revenue Service.

    The NJ Estate Tax is in addition to any NJ Inheritance Tax.

Who Must File

     A New Jersey estate tax return must be filed if the decedent’s Gross Estate exceeds $675,000. There is substantial taxes that must be paid after the 2^nd spouse dies on amounts over $675,000.  You can hire an attorney to set up Trusts to try to reduce taxes due. We charge a minimum fee of $600 for each trust within a Will. A separate stand alone Trust has a minimum fee for $2,000.

           Even if your net worth is well below the threshold where the federal estate tax becomes an issue, the New Jersey Estate Tax may still be a problem. The New Jersey Estate Tax affects any person or married couple with net worth over $675,000. There is no exemption for assets you leave to your children; those assets are fully taxed. There is also no exemption for the value of your home and life insurance, so it is easy to hit the $675,000 threshold very quickly.

WHAT IS CREDIT SHELTER TRUST?

The Credit Shelter Trust (sometimes referred to as a “Bypass Trust” or an “A/B Trust”) is a popular estate planning technique used by married couples with combined assets in excess of $675,000. The purpose of the Credit Shelter Trust is to avoid the wasting of federal and state exemptions on the death of the first spouse. Instead of leaving all assets to the surviving spouse and thereby exposing the surviving spouse’s estate to more tax, both spouse’s Wills are drafted to establish a Credit Shelter Trust to come into existence and be funded on the first spouse’s death.      In a typical Credit Shelter Trust, the surviving spouse is entitled to receive all of the income from the Trust for his or her lifetime, and has the right to demand principal distributions for his or her health, education, support and maintenance in his or her accustomed manner of living. Distributions in excess of that standard require the cooperation of a Co-Trustee – often an adult child of the surviving spouse or a trust department of a bank.          The amount, which funds a typical Credit Shelter Trust, varies according to a particular Client’s financial and family circumstances. For Federal Estate Tax purposes, a Credit Shelter Trust can be funded with the Decedent’s remaining federal estate tax exemption ($5 million as of 2012 if no prior gifts have been made). However, in New Jersey, since the state estate tax exemption is only $675,000, if the Credit Shelter Trust is funded with more than $675,000, this will cause some New Jersey Estate Tax to be paid. For example, if the $2 million is funded, the tax to the State of New Jersey is $99,600. Because of this, many Clients choose to fund the Credit Shelter Trust with only $675,000.        If the Credit Shelter Trust technique is implemented as part of a Client’s Estate Plan, you can hire the attorneys for a separate fee  to assist the Client in re-titling his or her assets so that assets are available to fund the Credit Shelter Trust. Re-titling is necessary because most Clients tend to hold assets jointly with right of survivorship and assets must be titled individually in a person’s name in order to be eligible to fund a Credit Shelter Trust. We work with a tax attorney to help our clients.

Source: http://www.davidkwhitlock.com/CM/FAQ/What-Is-Credit-Shelter-Trust.asp:

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Examples of NJ Estate Tax due if no estate planning

Estate of  $800,000

Your Estimated Federal Estate Tax:  0.00
Your State Taxable Estate Value:  $740,000.00
Your Estimated State Estate Tax:  $22,799.60
If Estate Value:  $900,000.00
Your Estimated Federal Estate Tax:  $0.00
Your State Taxable Estate Value:  $840,000.00
Your Estimated State Estate Tax:  $27,600.00
If Estate Value:  $1,000,000.00
Your Estimated Federal Estate Tax:  $0.00
Your State Taxable Estate Value:  $940,000.00
Your Estimated State Estate Tax:  $33,200.00
If  Estate Value:  $1,100,000.00
Your Estimated Federal Estate Tax:  $0.00
Your State Taxable Estate Value:  $1,040,000.00
Your Estimated State Estate Tax:  $38,800.00
If Estate Value:  $1,200,000.00
Your Estimated Federal Estate Tax:  $0.00
Your State Taxable Estate Value:  $1,140,000.00
Your Estimated State Estate Tax:  $45,200.00
If Estate Value:  $1,300,000.00
Your Estimated Federal Estate Tax:  $0.00
Your State Taxable Estate Value:  $1,240,000.00
Your Estimated State Estate Tax:  $51,600.00

                                                                                                                 

          We recommend tax planning when the husband and wife own over $700,000 in assets.

When an Estate Tax Return Is Required

    If you’re a New Jersey resident and leave assets with a gross value of more than $675,000, the executor of your estate will have to file a New Jersey estate tax return. (Federal estate tax returns are required only for estates of more than $5.12 million in 2012, but this amount may change in 2013.) The New Jersey estate tax does not apply to nonresidents, even if they own valuable New Jersey real estate or other property.

    The value of your gross estate is calculated by adding up all of the assets you own at death, including:

    Real estate in New Jersey

Bank accounts and certificates of deposit

Investment accounts and securities

Vehicles and other items of personal property

Proceeds from insurance policies on your life, unless you didn’t own the policy

Retirement account funds

Small business interests (sole proprietorship, limited liability company, or small corporation)

        It doesn’t matter, for tax purposes, whether or not any of your assets go through probate at your death. Real estate in a living trust, a retirement account for which you’ve named a beneficiary, a jointly owned bank account—it all gets counted.

Some other less obvious assets are also included:

-taxable gifts you made during life (more than the federal gift tax annual exclusion amount, currently $13,000 per year per recipient).

-proceeds of any life insurance policy you transferred to an irrevocable life insurance trust within three years before death.

        Property you leave to your spouse or civil union partner is exempt from state estate tax, no matter what the amount. This differs from federal law, which does not treat same-sex couples, whether they are legally married under state law or civil union partners, like married couples.

    More information on Estate Tax is available on our website www.njlaws.com.

    The New Jersey estate tax was revised on July 1, 2002 and made to apply retroactively to decedents dying after December 31, 2001. Prior to its revision the New Jersey estate tax was a "sponge" or "pickup" tax whose sole purpose was to absorb any credit for state inheritance, estate, succession or legacy taxes available in the Federal estate tax proceeding. The revised New Jersey estate tax is decoupled from the Federal estate tax.

      In New Jersey, the estate exemption is $675,000. The tax rate is not a fixed percentage. The rate varies depending upon the size of the estate. Like the federal estate tax law, the New Jersey estate tax law allows an unlimited marital deduction for assets left to a spouse. However, the New Jersey estate tax is $33,200 on $1 million left to non-spouse heirs, $66,400 on $1.5 million, and $99,600 on $2 million. The top rate reaches 16%.

    The New Jersey estate tax is now imposed upon the transfer of the estate of every resident decedent, which would have been subject to a Federal estate tax under the provisions of the Internal Revenue Code in effect on December 31, 2001. The tax is either the maximum credit for state inheritance, estate, succession or legacy taxes allowable under the provisions of the Internal Revenue Code in effect on December 31, 2001 or an amount determined pursuant to the Simplified Tax System prescribed by the Director, Division of Taxation.

  The person or corporation responsible for payment of the tax may choose the Form 706 method or the Simplified Tax System method of filing the New Jersey estate tax return.

 

  The New Jersey estate tax is due on the decedent's date of death and must be paid within nine months in all cases. Any tax not paid within nine months generally bears interest at the rate of ten percent (10%) per annum from the expiration of nine months until paid. The Director may extend the time for the filing of the return but not for the payment of the tax. Payments are first credited in satisfaction of accrued interest.

Lien

For resident decedents dying after December 31, 2001, the NJ Estate Tax remains a lien on all property of the decedent as of the date of death until paid. No property may be transferred without the written consent of the Director.

  The Form 706 method requires that the Form IT-Estate be prepared and filed along with a 2001 Form 706 completed in accordance with the provisions of the Internal Revenue Code in effect on December 31, 2001. The New Jersey estate tax is based upon the Federal credit for state inheritance, estate, succession or legacy taxes as it existed on December 31, 2001 and not as it existed on a decedent's date of death.

  If a Federal estate tax return has or will be filed or is required to be filed with the Internal Revenue Service, any election made by a taxpayer to treat an asset in a particular manner for Federal estate tax purposes must also be made for New Jersey estate tax purposes. A taxpayer may not make one election for Federal purposes and another for State purposes with the following exception. If the decedent was a partner in a civil union and died on or after February 19, 2007, survived by his/her partner, a marital deduction equal to that permitted a surviving spouse under the provisions of the Internal Code in effect on December 31, 2001, is permitted for New Jersey estate tax purposes. In these cases, the 2001 Form 706 should be completed as though the Internal Revenue Code treated a surviving civil union partner and a surviving spouse in the same manner.

  The Director has prescribed a Simplified Tax System method pursuant to the provisions of the revised statute. This method may only be used in those situations where a Federal estate tax return has not and will not be filed nor is a tax return required to be filed with the Internal Revenue Service. The Simplified Tax System is not intended for use in all estates. Any attempt to develop a tax system which could be used in all situations and which would produce a tax liability similar to that produced using the Form 706 method would, of necessity, result in a tax system as complex as the Federal tax itself. The Simplified Tax System requires that a Form IT- Estate be prepared and filed along with a New Jersey inheritance tax return (Form IT-R) completed in accordance with the provisions of the inheritance tax statute in effect on December 31, 2001.

The taxable value of the estate using the Simplified Tax System method is the net estate as determined and reflected on line 7 of the New Jersey inheritance tax return (Form IT-R) adjusted to reflect:


    Real and tangible personal property located outside of New Jersey; plus

-The proceeds of life insurance on the decedent's life owned by the decedent (or transferred within three (3) years of his/her death) paid to any beneficiary other than the estate, executor or administrator; plus

- All transfers made by the decedent within three years of death not included in the inheritance tax net estate ; plus

  In the event that the decedent was a surviving spouse or a civil union partner and received qualified terminable interest property (QTIP) from the predeceased spouse or civil union partner for which a marital deduction was elected for Federal and/or New Jersey purposes, the full value of the QTIP property; plus

  Any other property includable in the Federal gross estate under the provisions of the Federal Internal Revenue Code in effect on December 31, 2001; less

  Property passing outright to the decedent's surviving spouse or civil union partner who died on or after February 19, 2007 provided he/she was a U.S. citizen on the decedent’s date of death. This deduction does not include QTIP (Qualified Terminable Interest Property) or similar property. QTIP property is property that passes from the decedent and in which the surviving spouse or civil union partner has a qualifying income interest for life. The surviving spouse or civil union partner has a qualifying income interest for life if he/she is entitled to all or a specific portion of the income from the property payable annually or at more frequent intervals, or has a usufruct interest in the property (right to enjoy the property) for life, and during the surviving spouse's or civil union partner’s lifetime no person has a power to appoint any part of the property to any person other than the surviving spouse or civil union partner. Additionally, the surviving spouse or civil union partner must be a citizen of the United States on the decedent's date of death. If QTIP property or the surviving spouse's or civil union partner’s citizenship is a significant factor, consideration should be given to the use of the Form 706 method of filing; less

    Property passing for charitable purposes.

    The New Jersey estate tax is reduced by the portion of the tax that is attributable to property located outside New Jersey. The amount of the reduction is calculated by multiplying the tax due on the entire gross estate wherever located by a fraction the numerator of which is the gross value of property located outside the state and the denominator of which is the New Jersey entire gross estate wherever located. In general, for purposes of the calculation, intangible personal property is considered to be located in New Jersey regardless of where it may actually be located.



Gross Value of Property Located Outside New Jersey			0.		0.
0.______________________________	0.x Tax Due on Entire Gross Estate Wherever Located	0.= Allowable Reduction
0.New Jersey Entire Gross Estate Wherever Located	0.	0.

    A decedent’s interest in a family limited partnership is valued in accordance with the provisions of N.J.A.C. 18:26-3A.2(b). A family limited partnership is a limited partnership in which more than 50% of the partners are related by blood or marriage and which does not have a true business purpose.

        Unlike the prior New Jersey estate tax, the revised estate tax is a lien on all the property of a decedent. Additionally, the statute provides that the decedent's property may not be transferred without the written consent of the Director. The tax waiver form releases both the inheritance and the estate tax liens and permits the transfer of the property listed thereon for both inheritance and the estate tax purposes. Waiver requirements for both the inheritance and the estate tax are set forth in N.J.A.C. 18:26-11.1 to N.J.A.C. 18:26-11.32.

    Form L-8 may be used in many instances to secure the release of bank accounts, stocks, bonds and brokerage accounts without the necessity of obtaining a tax waiver from the Division. Form L-9 may be used in many instances to secure a tax waiver for realty without the necessity of filing a tax return with the Division. Form L-8 may not be used if the taxable estate plus adjusted taxable gifts as determined in accordance with the provisions of the Internal Revenue Code in effect on December 31, 2001 exceeds $675,000. Form L-9 may not be used if the gross estate plus adjusted taxable gifts as determined in accordance with the provisions of the Internal Revenue Code in effect on December 31, 2001 exceeds $675,000. In situations where these forms cannot be used Form L-4 may be used to request the issuance of waivers prior to the filing of a New Jersey estate tax return. When reviewing a request for the early issuance of tax waivers the Division will withhold waivers and/or require a payment on account or other security sufficient to insure the payment of the tax and interest for which the decedent's estate is ultimately determined to be liable.