03 Jan Changes to NJ’s estate tax and you

Q. I have a trust, but with the change in the New Jersey estate tax, I don’t think I will need it anymore. How can I decide if I should get rid of it and what do I do?
— Planning ahead

A. It sounds like you need a visit with your estate planning attorney.

Part of the question to consider is whether the trust has been funded. If it has, then before you terminate a trust that was established as part of your overall estate plan, you need to determine the tax consequences — income and transfer tax — of a termination, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

Even if there is no immediate tax consequence, Romania said there may be other reasons to maintain the trust even though New Jersey has repealed its estate tax effective Jan. 1, 2018.

For example, it’s possible that by 2018 or sometime after, the New Jersey legislature could reinstate the estate tax, Romania said. Another possibility is that you may move to a state that has an estate tax and then need to recreate the trust, while keeping the trust intact does no harm.

Alternatively, Romania said, the trust may have been established for reasons unrelated to taxes.

“Some trusts are created to allow management and creditor protection of assets, especially if the beneficiaries are young or otherwise unable to handle large sums of money,” she said. “If a beneficiary is disabled or is receiving certain government assistance, a trust may have been established as a special needs trust and therefore termination of such a trust and payment of monies outright to the beneficiary could cause a beneficiary to lose governmental benefits.”

In second marriages, sometimes trusts are funded to make sure the surviving spouse is cared for during his or her lifetime, but that any remainder passes to the children of the decedent’s first marriage and not to the surviving spouse’s children or other third parties, Romania said.

Although New Jersey has eliminated its estate tax effective Jan. 1, 2018, there remains a federal estate and gift tax subject to an exemption of $5.49 million as of Jan. 1, 2017.

“President-elect Donald Trump has proposed changes to the federal estate and gift tax law which may influence your decision with respect to retaining the trust and/or an attorney’s decision as to how to revise the trust, therefore, you may wish to wait until such proposed changes are specified before taking any action,” Romania said.

Also note that  New Jersey’s inheritance tax is sticking around, at least for now.

Because there are many reasons for creating a trust in an estate plan and not all of them are for reduction of the New Jersey estate tax, talk to an attorney experienced in estate planning before unwinding a trust that was created as part of an overall estate plan, Romania said.

“Failure to consider all of the consequences may result in taxes, additional costs, as well as other unanticipated outcomes,” she said.

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This post was first published in January 2017.