By Attorney James W. Collins, Borkus Collins Law, PA.  April 15, 2016

The manner in which the various states in the U.S. handle their state level estate tax (aka “death tax”) and inheritance tax, in addition to the federal estate tax realities that affect citizens in all states, is an ever changing circus of complexity.  One state that is currently considering changes in its approach is New Jersey, and we will return to that shortly.

Prior to the “first Bush tax act” in 2001 (the “Economic Growth and Tax Relief Reconciliation Act,” or EGTRRA) the federal government would essentially “share” a percentage of their federal estate tax revenues with the states, which was commonly known as a “pickup” system.  One eventual result of EGTRRA was that the feds were no longer required to be in such a sharing mood, and by the end of 2004 the federal government no longer shared such revenue with the states, instead replacing the pickup system with a credit against federal estate tax for actual state level estate taxes paid.

Faced with this loss of revenue, many states “decoupled” from the previous pickup regime that no longer did them as much financial good as they would like, and instead instituted their own state level estate taxes.  With many varieties and changes along the way, it has been common for these state level estate taxes to vary between 5% and 16%.  Some states have even imposed a “cliff” system where if a decedent’s assets are above a certain level, whatever credit or exemption for state level estate taxes that would otherwise apply is ignored and the state estate tax is computed from dollar one of the estate.  Yikes!

The result was that a number of states now had both a federal estate tax and a state level estate tax.  To add insult to injury, two states (Maryland and New Jersey) still have the distinction of also imposing an “inheritance tax” on top of these two estate tax bites, which results in three tax bites at the apple!  Note that while both federal and state estate taxes are imposed on the assets of a decedent, the inheritance tax, if applicable, is imposed on the recipient or beneficiary of the decedent’s assets.  It is important to keep our language straight here.

Fast forward to today.  We have now watched various states experiment with their responses to what unfolded under EGTRRA beginning in 2001 for some 15 years, and the pendulum has swung wildly. For example, a number of states in recent years have watched their retirees flee to other states that do not impose a state level estate tax.  As a result, a recent trend has been for individual states to “soften” this blow and either eliminate or significantly change their state level estate and inheritance tax regimes.

This brings us back to New Jersey, which currently has the distinction as mentioned above, along with Maryland, of imposing (1) the federal estate tax, (2) the New Jersey estate tax, and (3) the New Jersey inheritance tax.  Further, New Jersey has the lowest exemption amount for state level estate tax of any state in the nation.  When a decedent dies, only the first $675,000 of assets is exempt from New Jersey estate tax!  Compare this, for example, to the fact that for federal estate tax purposes in 2016 the first $5.45 million is exempt from federal estate tax.

The key point here is that estate planning attorneys, financial advisors, and other allied professionals absolutely must stay abreast of what is happening in our 50 states.  New Jersey is finally seriously considering changes, as a bill has recently been introduced that, if implemented as the bill has been presented, could phase out New Jersey state level estate tax in about 5 years.  See the following link for one example of information on this initiative:  http://www.njbiz.com/article/20160301/NJBIZ01/160309989/senate-panel-advances-estate-tax-phaseout-retirement-income-reform-bills

Another very helpful resource is the following state death tax chart which is regularly updated and helps to keep us abreast of what is going on in the states:  https://www.mcguirewoods.com/news-resources/publications/taxation/state_death_tax_chart.pdf   Note that changes are afoot and continue to unfold in D.C., Maryland, Minnesota, New York, and other states.  The words “stay tuned” seem to apply here.

As a kid, I loved roller coasters.  The ride itself was unpredictable, and if it was your first time on a particular roller coaster you were unaware of where the next turn or dip would take you.  Couple that with the sense of disorientation after you step off the roller coaster and you are in touch with what both attracts some to and repels others from roller coasters.  I have pretty much had this same sensation watching the wild and crazy ride outlined above over the last 15 years, and the ride isn’t over yet!