As I've mentioned on this blog before, even if your net worth is well below the threshold where the federal estate tax becomes an issue, the New Jersey Estate Tax may still be a problem. The New Jersey Estate Tax affects any person or married couple with net worth over $675,000. There is no exemption for assets you leave to your children; those assets are fully taxed. There is also no exemption for the value of your home and life insurance, so it is easy to hit the $675,000 threshold very quickly.
When an individual leaves his or her entire estate to a surviving spouse, the assets pass free of all estate taxes when the first spouse dies. However, when the surviving spouse dies, only the first $675,000 of assets pass free of New Jersey Estate Tax. The rest of the assets are taxed, resulting in less assets passing to the couple's children or other loved ones.
In a hypothetical scenario, assume Joe and Mary have $1.35M to their names. Joe passes away, leaving everything to Mary. Mary then passes way at a later date with $1.35M in assets. Tax would be owing on the difference between $1.35M and $675,000. At New Jersey rates, the tax owing at Mary's death would be $54,800.
In this hypothetical, the New Jersey Estate tax paid was higher than it needed to be. If the John and Mary had used a credit shelter trust (also called a bypass trust, nonmarital trust, or A/B trust), they could have effectively doubled the amount of assets passing tax-free to their children or other loved ones from $675,000 to $1.35M.
If a credit shelter trust had been in place in the situation above, when John passed away Mary would've had 9 months to choose which assets she would like to receive, and which assets she would instead like to be diverted into the credit shelter trust. Let's assume she chose to take $675,000, and divert $675,000 into the credit shelter trust. During Mary's life, she would have full access to the assets she chose to receive. If she also needed access to the assets in the credit shelter trust, there would be mechanisms in place for her to get to those assets as well.
Upon Mary's death, the assets in the credit shelter trust would be excluded from her taxable estate. That means that her taxable estate would only be $675,000 instead of the $1.35M in the first example. The New Jersey Estate tax on $675,000 is zero. The credit shelter trust saves $54,800 as compared to the first hypothetical.
Credit shelter trusts are just one New Jersey Estate Tax planning strategy. There are many more depending on your specific situation. If you have any questions about credit shelter trusts or the New Jersey Estate Tax, feel free to contact me.
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