The New Jersey estate tax exemption for 2016 stood at $675,000, and it increased to $2 million in 2017. Both exemption amounts are well below the New York exemption (leaving aside the “cliff” issue in New York). But thanks to a deal reached on September 30, 2016 between the Governor and key legislative leaders regarding funding for the Transportation Trust Fund, the New Jersey estate tax will be fully repealed in 2018. This might have significant ramifications for tax advisors in New York; for the first time, New Jersey might become a tax haven for New Yorkers looking to avoid the New York estate tax. Maybe—for certain individuals.
Will This Really Happen?
Uncertainty abounds, as a myriad of tax issues might affect estate tax planning for New York individuals. The key unknown is federal estate tax developments. With Donald Trump in the White House and Republican control of the House and Senate, the long-sought permanent repeal of the federal estate tax might actually happen, rather than the temporary repeal that occurred in 2010. Should that occur, it might have ramifications for states with their own estate taxes. Will New York retain its estate tax if there is a complete repeal at the federal level? If there is a complete repeal of the federal estate tax, will the gift tax also be repealed? If so, there would be no impediment on wealthy clients transferring large portions of their wealth to irrevocable trusts. Those transfers might well serve (after the New York estate tax is fully phased in) to shift value outside those clients’ New York taxable estates, thereby circumventing any New York estate taxation. If that were to occur, New York might be more likely to repeal its own estate tax. If the federal gift tax is retained, however, wealthy taxpayers might find themselves constrained from making gifts, so the New York estate tax might remain an issue for their estates.
Although the New Jersey estate tax was repealed, there are many who believe that its estate tax repeal will itself be reversed by the next administration. The concern is that the repeal of the estate tax—which according to some estimates affected only approximately 3,500 decedents a year—will not be sustained in light of budget pressures. Many professionals have suggested that the $2 million 2017 exemption may be frozen and the repeal cancelled. The impact of a possible federal repeal may also affect the outcome of this political debate.
Who Might Benefit?
The repeal of the New Jersey estate tax might, subject to the uncertainties note above, present a valuable planning opportunity for certain individuals. The universe of those who might benefit, however, will be narrow. For a New York individual to benefit from the New Jersey estate tax repeal, he must be willing to move from New York to New Jersey. While many will simply refuse to do so for lifestyle reasons, the choice of moving to New Jersey may be far simpler and more palatable than moving to Florida or another faraway jurisdiction without an estate tax. A New Jersey émigré can remain within easy reach of family, as well as New York attractions, amenities, and events. For individuals looking to reduce income taxes as well as future estate taxes, however, New Jersey will not prove very attractive.
In addition, New York’s estate tax cliff is such that no estate tax will be due on a New York estate that is less than the exemption amount, which will increase over the next few years until parity with the federal exemption is reached in 2019. A modest excess over that amount triggers the New York estate “cliff,” such that the exemption is recaptured and tax is due on the full estate. Therefore, estate tax planning on a state level is only relevant for those wealthy enough to worry about the New York cliff, and it remains to be seen what will become of that cliff if the federal estate tax is repealed. For individuals of lesser means, estate taxation is likely not a meaningful concern.
Finally, the potential for benefit from a move to New Jersey depends on the nature of an individual’s family and relationships or the objects of the individual’s bounty. Whom does she wish to name as an heir? In addition to the estate tax that has been repealed, New Jersey also imposes an inheritance tax. This inheritance tax does not generally apply to transfers to a spouse, child, or grandchild, who are referred to “Class A” beneficiaries. But intact nuclear families account for only approximately 20% of the family units in the United States. For the many individuals with heirs other than a spouse or descendants, the recent New Jersey estate tax repeal legislation may have no impact. Siblings will be subject to New Jersey inheritance tax rates of 11%; other heirs could be subject to a 15% rate. The New Jersey inheritance tax may thus remain a costly trap for unsuspecting taxpayers. Nonetheless, there may still be a modest savings over the New York estate tax for some. On the other hand, the New Jersey inheritance tax has no large exemption amount, so depending upon the size of the estate, a move could be more costly in the aggregate.
For some New Jerseyans, such as New Jersey residents with a New York City pied-à-terre, planning in recent years entailed strengthening New York ties and reducing New Jersey ties. With New Jersey’s exemption seemingly stuck at a $675,000 level, the lowest in the nation, and New York’s on the rise to parity with the federal exemption, shifting domicile to New York had appeared advantageous. With New Jersey’s repeal, this paradigm will be reversed. Tax advisors should endeavor to identify affected individuals and suggest that they reevaluate their domicile decisions and planning.
CPAs should be careful to recommend that individuals evaluate some of the legal ramifications of changing domicile from New York to New Jersey with their estate-planning attorney. The spousal right of election and a host of other differences in state law might have important implications for some individuals.
An Uncertain Future
The repeal of the New Jersey estate tax will have significant planning implications for some New Yorkers. Although many individuals may remain focused on the possibility of federal repeal, the changing relationship of state estate tax laws might present valuable planning opportunities.