NY, NJ & AZ: Comments on the Estate Tax

New York overhauled its estate tax regime last year resulting in opinions galore. New Jersey, once again, rings in as the state with the lowest estate tax exemption amount in the country. As for Arizona, neither an estate tax nor inheritance tax exist in this hot and sunny state. Since our firm practices law in these three states, please find a brief commentary on the estate tax in each.

New York: The Tax Cliff & Portability

Since New York overhauled the estate tax, a number of state lawmakers and industry professionals have proposed “fixes” to the New York Estate Tax rules, specifically as it pertains to the tax cliff and lack of portability, which are explained below.

(1) Tax Cliff. Previously, the estate tax exemption amount in New York was $1,000,000 per person. This meant that $1,000,000 per person could pass free and clear of New York estate taxes. Today, the estate tax exemption amount is at $3,125,000 pursuant to a structured incremental increase, which is scheduled to periodically increase until January 1, 2019 at which point it will match the Federal estate tax exemption amount. Currently the Federal estate tax exemption amount is at $5,430,000 per person indexed for inflation. By the time the New York estate tax exemption matches the Federal amount, the exemption amounts are estimated to be over $6,000,000 per person.

At the Federal level, any portion of your estate that exceeds the exemption amount is taxed at the Federal level of 40%. Any amount below the exemption amount is transferred tax-free. In New York, however, if your estate exceeds the exemption amount by just 5%, the entire amount will be taxed up to 16% on the full value of your estate, not just the portion exceeding the exemption amount. This is known as the “tax cliff.”

Despite pressure from the public, trust and estate lawyers and other industry professionals, nothing has been done to address these issues. Careful estate planning for those with sizable estates that may be subject to New York estate tax may take advantage by implementing a credit shelter trust or other estate planning tool to help avoid the tax cliff to the greatest extent possible.

(2) Portability. Portability is a concept that exists at the Federal level. This allows the estate of a deceased spouse to transfer any portion of his or her unused Federal Estate Tax exemption amount to the surviving spouse. This is known as a doubling of the exemption amount. This does not happen automatically, but is a selection that must be made within nine (9) months of the date of death of the second to die. (Another important note is that the first deceased spouse must file a Federal Tax Return in order for the surviving spouse to take advantage of portability.) Prior to portability, each spouse was only entitled to their individual estate exemption amount and could not use of any portion of their spouses unused exemption amount. To resolve this, lawyers routinely integrated credit shelter trusts into estate documents to preserve the exemption amount for both spouses if their estate faced a potential federal tax issue—a technique still used at the state level for New York and New Jersey residents, as portability does not exist at the State level in these states.

New Jersey: Lowest Estate Tax Exemption Amount In The Country

In New Jersey, there are two taxes that may be assessed upon the death of a New Jersey resident, an estate tax and an inheritance tax. An estate tax is assesses on the value of a decedent’s estate over the New Jersey estate exemption amount. New Jersey’s current estate tax exemption amount is $675,000, the lowest in the United States.

Further, New Jersey is one of seven states that imposes an inheritance tax on certain classes of beneficiaries, depending on the relationship between the beneficiary and the decedent. For instance, spouses, parents and children are considered “exempt” takers, meaning they are not subject to the inheritance tax. Brothers, sisters, nieces, nephews, and friends are considered full or partial “non-exempt” takers, taxed at a rate ranging from 11% to 16%.

New Jersey collects more than $700 million a year from estate and inheritance taxes. This is more than the State collects from drivers paying gas taxes, motorists paying fees for licenses and vehicle registrations, and more than the taxes generated by the sales of homes and other real estate.

While we anticipate a change in New Jersey’s estate tax in the future, the low estate tax exemption amount and notion of an inheritance tax serve as key points to consider when planning your estate, such as the size of your estate and to whom you plan on leaving your assets.

Arizona: No Estate Tax

The State of Arizona does not have an Estate tax. Therefore, in addition to attractive weather and terrific scenery, there are tax incentives to move to Arizona – no estate or inheritance taxes!