What Can the Boss Teach New Jersey Residents About Estate Tax Planning?

New Jersey’s legendary troubadour just completed a triumphant return to MetLife Stadium in the swamps of Jersey. We know that Bruce and Miami Steve learned more from a three-minute record than they ever learned in school. But, perhaps you didn’t know that the Boss’s classic lyrics can also remind us to show a little faith as there is still some “magic in the night” for New Jersey residents who want to avoid or reduce the New Jersey Estate Tax.

“Don’t give me my money, honey  . . . I don’t want it back”

The New Jersey Estate Tax is a tax that can be eliminated or reduced by lifetime gifts.  Instead of leaving two grand sitting in your pocket, a New Jersey resident can make gifts without triggering federal gift tax by using available annual exclusions (currently $14,000 per donee) and the lifetime gift tax exemption of $5,450,000.  Because New Jersey does not impose a state gift tax, these federal exemptions offer “tramps like us” an opportunity to stay and avoid getting out while we’re young.

New Jersey’s estate tax law is based on the former credit for state death tax, which was repealed in 2005.  These are better days, it’s true, because under the current rules, lifetime gifts are not “pulled back” when considering the New Jersey taxable estate.  In other words, a New Jersey resident is only taxed on the assets that the decedent still owned at the time of his or her death – not the assets that have been gifted.

Note, before trying to make it good somehow, there are some other taxes to consider before a substantial gift is made.  If appreciated assets are gifted, the donee receives the transferor’s basis.  In an instance where the capital gains tax which would be triggered by a donee’s sale exceeds the anticipated New Jersey Estate Tax, it is more tax-efficient for the individual to retain the asset until death (and pay the New Jersey Estate Tax) because assets subject to the Estate Tax will receive a “step-up” in basis.  The step-up can work to avoid the higher capital gains tax when the beneficiary ultimately sells the asset.  Also, when the donor intends to benefit individuals who are not a spouse, parent or descendant, those lifetime transfers can be subject to a New Jersey Inheritance Tax of up to 16% when the transfers are made “in contemplation of death” to non-exempt beneficiaries.

“This boardwalk life for me is through .  . . you know you ought to quit this scene too”

New Jersey imposes a state estate tax on estates valued in excess of $675,000.  Many clients change their “domicile” to a different jurisdiction to avoid the state estate tax.  Florida is a frequent destination, but more recently, clients will cross the river from the Jersey side to New York to take advantage of the current $4,187,500 state estate tax exemption available to New York residents.

A person can have multiple residences, but for purposes of state estate taxation, an individual has only one “domicile.”   While there is no universally adopted definition of domicile, many states (and the IRS) share a general understanding that domicile means the place where a person has a fixed residence and the present intention of making it his or her permanent home. Once a domicile is established, “she’s the one” until superseded by a new one.

When clients have multiple residences and they want to change their domicile from New Jersey to Waynesboro County, Darlington County or some other jurisdiction, advance planning is recommended. Although there is no one fact that establishes a decedent’s legal domicile, when a change is considered, some of the following actions are recommended:

  • Filing a Declaration of Domicile in the new domicile state
  • Changing of vehicle and voter registrations
  • Filing state income or personal property taxes in the new domicile state
  • Executing new estate planning documents
  • Changing registrations for places of worship or club memberships

“The times are tough now, just getting tougher . . .  cover me”

Many New Jersey estate planning clients choose to maintain their house up in Fairview or take a good look around and refuse to leave their hometown.  The reason is often not tax motivated – clients want to be close to their family, grandchildren, shore homes and friends.  Also, gifting strategies to reduce the estate tax may not be viable or tax efficient.

For those who have learned to sleep at night knowing the price to pay by staying in New Jersey, there has been renewed activity in the purchase of single life and second-to-die life insurance to “cover” the New Jersey Estate Tax that will be incurred.  Many clients are coupling the life insurance with a Long Term Care rider to help preserve family assets in the event of a long-term illness.  Advice from a qualified or visionary planner, perhaps dressed in the latest rage, should be sought regarding the ownership and beneficiary designation of such policies, the tax considerations when an LTC rider is involved and the benefits of an irrevocable trust to own the policy.