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What Happened While We Watched the Election Ads?

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With the election behind us, perhaps we can start thinking about other things and even focus on some events that we may have missed during the fall campaign.  On October 7, the New Jersey Legislature and Governor approved a tax deal that would raise the state gas tax and on November 8, New Jersey voters approved the application of that tax increase to the Transportation Trust Fund. There was another tax change in that agreement that may have missed your notice –  a repeal of the New Jersey estate tax.

This tax has long been called the stealth tax because it has taken many surviving heirs by surprise when they find they owe the State of New Jersey a tax on their family legacy. In 2017, the estate tax will begin to phase out, with its nontaxable threshold increasing to $2 million from its current $675,000, and will be completely eliminated in 2018.  This is good news for New Jersey families – especially for those who are inheriting from a surviving parent.

Before this repeal, the estate tax would kick in when there was no spouse to leave assets to and the pool of assets exceeded $ 675,000.  Living in New Jersey, it wasn’t difficult for a family to cross that $675,000 when that asset pool includes a personal residence, retirement funds, insurance proceeds, cars, jewelry and life savings. This potential tax exposure, with its low threshold, required many New Jersey residents to consider estate planning with an eye to minimizing that tax.  With the repeal of the tax by 2018 and the Federal lifetime exclusion at $5.4 million, the natural reaction is “Phew!  I don’t have to worry about that anymore!”

Although this is good news for New Jersey families, it is important to remember that there is still a state inheritance tax and many good non-tax reasons to revisit or prepare estate plans and wills.

New Jersey’s inheritance tax is a transfer tax that is based on the surviving person’s relationship to the person that passed away (the decedent) – creating beneficiary classes – with each class taxed differently.  The tax-free classes (Class A) include spouses, civil union partners, children, parents, grandchildren – basically anyone related directly above or below the decedent and charities (Class E). What generally comes as a surprise is that siblings, in-laws, nieces and nephews are considered in a taxable group (Class C), as well as anyone not related directly to the decedent (Class D), such as friends, cousins and more distant relatives. The tax rates that impact these groups range from 11% to 16% of the asset value transferred, net of a modest exclusion of $ 25,000 for Class C beneficiaries and no exclusion for Class D.

Consideration and planning for New Jersey inheritance tax is important, as is the need to be sure you have planned for non-tax issues.  Many wills have a common clause that allows spouses to save taxes in the first-to-die estate by funding what is commonly called a credit shelter trust.  With the repeal of New Jersey’s estate tax and the raising of the Federal exemption, most wills with a trust clause will not work as intended.  There are many non-tax reasons to leave your assets in trust – from protecting your children from being disinherited by remarriage to making sure your children control their inheritance at an appropriate age.  Other provisions, including naming a custodian for your minor children and a personal representative to wrap up your affairs, file your final tax returns and ensure the provisions of your will and last wishes are honored are also important parts of a will.

Updating, revisiting or creating your estate plan with these new developments in mind is a terrific New Year’s resolution for 2017!  Please contact me at mmount@mercadien.com or 609-689-9700 to further discuss these topics.

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