New Jersey Estate Tax: The #1 Planning Structure [2021 Edition]

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Paul Sundin, CPA

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Our clients in the Garden State tend to complain a lot about the taxes that are levied in the state. It’s true that it is not the most tax friendly state.

New Jersey Estate Tax

New Jersey used to have an estate tax. It created a little government controversy. Many state governments like the tax because it is thought to be a tax revenue generator.

But many states have changed their view of the tax. It can give residents a reason to move to another state. For this reason, over the years many states have scrapped their estate taxes.

Effective January 1, 2018, New Jersey no longer levies an estate tax. The tax was actually phased out over several years and is now nonexistent. As a result, no matter the estate size, if someone passes away after January 2018, they have no New Jersey estate tax liability. However, depending on the estate size, you might still have an IRS estate tax liability.  

Federal Estate Tax Rules

Often referred to as the death tax, the estate tax is only applicable to less than 1% of the United States.

While it does sound intimidating, the calculation is rather straightforward. You also receive a nice federal exemption amount which was $11.7 million in 2021. Because the exemption is so high, few households have exposure to the tax.

Let’s walk through a simple scenario of how to calculate the estate tax. First, the executor would aggregate all assets of the estate. This includes cash, real estate, mutual funds, stocks, and even cars and boats.

Money on an abacus

Evaluating most of those assets is not that challenging. However when it comes to business interests that’s where the calculation can be complex. Typically an appraiser is hired to determine the final valuation amounts.

Once the final valuations are determined, the executor can then deduct certain professional fees like accounting, attorneys fees, and appraisal costs.

The executor can also deduct mortgages, did instruments, and other liabilities like medical bills or credit card accounts. After these amounts have been deducted, the result is net assets. This is the amount that is applied at the 40% tax rate.

New Jersey Inheritance & Estate Tax

Unfortunately for many residents, New Jersey does have an inheritance tax. Exactly how much is owed depends on the beneficiaries relationship to the deceased.

You are exempt from the inheritance tax if you are one of the following:

  • spouse;
  • domestic partner;
  • civil union partner;
  • parent or grandparent;
  • child, grandchild, great-grandchild; or
  • mutually acknowledged child or step-child.

However, you will owe taxes if you are a sibling or are the spouse or civil partner of the deceased’s child. This is the case if you were married to the deceased’s child, who previously died. For anyone else such as a friend, taxes will be owed. The tax rate depends on the size of the inheritance and on the relationship to the deceased.

New Jersey does not have a gift tax. But remember the federal gift tax will apply to gifts of more than $15,000 per person and per year.

Strategies to Avoid the New Jersey Estate Tax

You might not currently have a large estate. But that can often change. Your accountant and attorney may have some advice for you as well. Make sure you discuss the following ideas with them:

  • Grantor Retained Unitrusts (GRUTs)
  • Irrevocable Life Insurance Trust (ILIT)
  • Grantor Retained Annuity Trusts (GRATs) 
  • Crummey Trusts 
  • Qualified Terminable Interest Property (QTIP)
  • Special Valuation of Farms and Businesses
  • Revocable Grantor Trusts
  • Gifts Below Annual Exemption
  • Grantor Retained Income Trusts (GRIT)
  • Family Limited Partnerships (FLPs)
  • Charitable Remainder Trusts (CRUT)
  • Qualified Personal Residence Trusts (QPRTs) 
  • Intentionally Defective Grantor Trust (IDGT)
  • Minor Trusts 

Estate Tax Return Requirements

When an estate is valued over the exemption amount, you must file Form 706. A few issues to consider:

  • You must file Form 706 within nine months after the date the decedent passed away. If you are unable to file by the required deadline, you may request a formal extension. Complete Form 4768 to apply for the 6-month extension of time. 
  • If your net estate is less than the exemption amount, you do not have to file an estate tax return (except if you are filing for the sole purpose to elect portability).
  • Regarding the portability issue, an executor can transfer the “DSUE” amount to the surviving spouse if Form 706 is filed on a timely basis. 

Who must start estate planning?

While everybody might want to consider at least some form of planning, it is imperative for many people in high tax brackets. If you fall into the following categories, you should get started immediately:

  • Retirement plan assets in excess of $1 million
  • Significant real estate holdings
  • Stand to inherit large sums of money
  • Life insurance policies in excess of $1 million
  • Professional occupation and high-earner
  • Own a business or are an entrepreneur
  • Large stock, bond, or mutual fund investments

Tax Structure

Below is a list of some of the other taxes that are assessed in New Jersey:

  • Income tax rates are progressive ranging from 1.4% to 8.97%;
  • The state sales tax is 6.625%;
  • The average property tax rate is 2.40% (one of the highest in the nation).

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