FEDERAL ESTATE TAX


Hillary Clinton, in her aborted quest to become our 45th President, proselytized that she would reduce the federal estate tax exclusion from its 2016 level of $5,450,000 down to its 2009 level of $3,500,000; this would, in all likelihood, have increased the number of federally taxable estates from around 1 to 2% to 3 or 4%.  A true tempest in a teapot it seems unless you exceed that level due to increases in home values, pension plan accretions, business interests or life insurance; then the overage would be taxed at 40% – a true confiscatory tax.

Part of President Trump’s tax package calls for the elimination of the entire federal estate tax – a much better deal, no?  Well, actually yes and no!! A very important part of federal estate taxation was the “stepped-up” basis wherein most assets you die owning will no longer look to the original purchase price to determine your taxable basis (from which federally taxable capital gains are measured on a sale) to the new basis, i.e., the Date of Death value.  Since, as we’ve seen above, most estates are not federally taxable, it may logically be assumed that the “stepped-up” basis rules wouldn’t apply, BUT such is NOT the case.

Let’s use the instance of your home which you purchased as husband and wife in the early ’60’s for $50,000; your spouse predeceased you with no estate tax payable, federally or statewise, due to the unlimited marital deduction, and I do mean “unlimited” be your estate $100,000 or $100,000,000.  Your home at the time of your death is now $500,000 and passes via Will to your children, none of whom reside in  the marital home.  Were it not for the step up in basis your children would pay capital gains tax on the sale of the home – in our example the gain (forgetting minor costs of sales offsets) would be $450,000.  The income tax bite, state and federal, might amount to as much as 25% to 30% of the gain, or $112,500 to $135,000. Thank the Lord for the “stepped-up basis” wherein a sale for $500,000 on a home valued at $500,000 as of date of death would result in NO income tax whatsoever.  The “stepped-up basis” comes about even if your estate falls below the federal estate tax exclusion amount – this year $5,490,000 (2017). A very nice benefit for all taxpayers I think you will agree.  Of course certain items fall outside the “step up in basis” rules such as pensions where federal income taxes will be levied regardless on the original contributions and growth thereto since these items engendered income tax deductions when contributed to your retirement plans or IRA.

I feel sure that IF the Federal estate tax dies under the new President Trump tax bill, then so will the stepped-up basis – it’s too closely tied to the federal estate tax to survive as a separate death benefit though it would be nice, like having your cake and eating it too.  We can hope!



Now that we have briefly examined the federal estate tax picture as it is developing let us look at New Jersey’s death tax which are 2 in number – the Inheritance Tax and the Estate tax – both can exist in an estate but, luckily (?), only the highest of the two computed taxes is paid.  Let’s take a look at each tax individually.

The Inheritance Tax is based solely on bloodlines with A, C, D and E being the classes utilized to determine the extent of the tax, if any, for Class A beneficiaries (spouse, parents, grandparents, children, grandchildren,  great grandchildren, and now domestic or civil union partners (the latter two as defined by NJ statutes) are totally tax exempt from this tax.  Class C are essentially brothers and sisters, wife or husband of a deceased child, etc. with the tax here being exempt on the first $25,000 and 11% on the remainder up to $1,100,000 with excesses over that amount charged from 13% to 16%.  Class D beneficiaries are just about all others and are taxed at the rate of 15% up to $700,000 and 16% over that amount.   Class E are charitable beneficiaries paying  no tax.  As you can see, the most common beneficiaries – spouse and children/grandchildren  – pay no Inheritance Tax whereas others, save charities, do from 11% to 16%.

Now let us consider the New Jersey Estate Tax which came about in 2001 as a gradual disappearance of a federal deduction (State Death Tax Credit) which  credit was then paid over to the State of New jersey as a State Estate Tax.  The loss of this credit would have cost New Jersey approximately 5% of its total  tax revenue yearly. New Jersey put its foot down and, in essence said, “no way”, and the New jersey Estate Tax was born.  As the Federal estate tax exclusion was $675,000 at the time, that amount became the base deduction for the New Jersey Estate tax , meaning all estates passing to other than a surviving spouse (totally excluded) which exceeded $675,000 would be taxed at a rate of from 4.8% to 16%.  Bequests to children,  grandchildren and all others would be taxed once they exceeded $675,000 regardless of bloodline.  As you can see this impacted many more estates than would be taxed under the New Jersey Inheritance Tax which exempted all Class A  beneficiaries (see above) who are the usual recipients of a decedent’s estate.  By the way, though there is both a New Jersey Estate Tax and New Jersey Inheritance Tax, an estate only pays the higher of the two taxes – not both. I just finished a 2016 estate containing assets totaling $4,200,000 which passed solely to class C and D beneficiaries – the New jersey Estate Tax was $260,000, but the New Jersey Inheritance Tax was $537,000,  ergo, the larger amount was paid- a not inconsequential bite.

It was the New Jersey Estate Tax which mainly caused the “snowbird” factor, i.e., NJ Residents taking up residence in Florida to avoid the NJ death taxes – Florida has none.  New Jersey found itself not only losing the Estate Tax revenue but also the income tax one as well – a fairly untenable situation long term.  Even NY which had an estate tax with an $1,000,000 exclusion level (NY’s estate tax came into being a year later than did NJ’s, ergo, the difference in the exclusion amounts), realized it was losing its residents to Florida. New York for the past 4 years increased the annual exclusion amount each year from the $1,000,00 level to where it is now $5,250,000 thru 12/31/2018; thereafter it follows the Federal estate Tax exemption which is $5,490,000 (2017) adjusted for inflation each January 1st – a much more tenable situation, I think you will agree.

Now we’re left with New Jersey and its penurious $675,000 annual exclusion.  Finally New Jersey woke up and realized it had better do something for all of a sudden New York became a better place to die, tax wise, than did New Jersey. The New Jersey Legislature for 2017 immediately raised the Estate Tax Exclusion to $2,000,000 for this year (2017) further stating that, in  2018, the New Jersey Estate Tax will totally abolished. Common sense finally prevailed.  Now, in New Jersey, only those outside the ambit of Class A beneficiaries will be taxed via the Inheritance tax at the rates shown above depending on bloodline.  Lets hope New Jersey doesnt change its mind – time will tell.  It seems to me that tax laws are written in sand rather than concrete.