By: Martin M. Shenkman, CPA, MBA, JD
Don't die in New Jersey. New Jersey, along with many other states, has decoupled from the federal estate
tax system. While the Federal exclusion is $2M in 2008 and is to increase to $3.5M in 2009, it remains a paltry
$675,000 for the NJ estate tax. This means that in New Jersey, if the gross worth of your estate exceeds
$675,000, you will have to file a federal estate tax on it. Now NJ is seeking to backstop the revenue from this
lower exclusion in a manner that is complex, unfair, and troubling. The NJ Division of Taxation adopted new
regulations regarding commonly used marital trusts, called QTIPs-Qualified Terminable Interest Property trusts.
NJAC 18:26-3A.8. If an estate makes a tax election for Federal estate tax purposes a similar election must be
made for NJ estate tax purposes. If a QTIP election does not reduce the Federal estate tax liability, it will no
longer be given effect for NJ estate tax purposes. This means that unless the estate exceeds the federal
exclusion, $2M in 2008 and $3.5M in 2009, you cannot make a NJ QTIP. Therefore, the estate is forced
to pay NJ estate tax if it is below the federal exclusion amount. This precludes avoiding tax by only funding a by
pass to $675,000, the NJ exemption amount, which is a common approach in many wills.
Example: You die in 2008 with a $2.5M estate. Your will bequeaths $675,000 to a by pass trust and the balance to a marital trust (QTIP) which qualifies for the estate tax marital deduction. There is no federal tax and should be no NJ estate tax. But this new reg means that NJ will not recognize the difference between $2M and $675,000 as a marital deduction so that your estate will owe tax on this amount! Does this mean that you have to make an outright marital above the $675,000 for estates under the federal exclusion amount? Will another type of marital deduction other than QTIP qualify? Will the tax allocation clause of the will allocate taxes against the by pass trust undermining your intended dispositive scheme?
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