Federal Estate Tax Exemption to $2 million in 2006 - Effect on NJ Residents

Category: Estate Planning, Estate and Inheritance Tax

The Federal Estate Tax ("FET") Exemption amount is currently scheduled to increase from $1.5 million to $2.0 million on January 1, 2006. While Congress has a September agenda item to hammer out a permanent repeal of the FET, NJ residence should understand what impact the increasing FET exemption may have on them.

On one hand, a sign of relief can be made by those with more then $1.5 million in assets and less than $2.0 million ($3.0 million and $4.0 million for married couples with a properly planned estate) - FET will no longer be a worry. On the flip side, the New Jersey Estate Tax ("NJET") will play an even larger role. The Exemption from the NJET is frozen at $675,000. This means that only those estates valued at less than $675,000 escape estate taxation in New Jersey. In 2005, an estate of $1.5 million is exempt from FET, but owes NJET of $64,400. In 2006, an estate of $2.0 million will be exempt from FET, but owe NJET of $99,600.

There is no cap on the NJET. As your assets increase, so does the NJET. Also, the NJET does not depend on the FET. If there is no FET, a NJET will still be due and owing.

Many steps can be taken to reduce the bite of the NJET - including gifts, creating exemption trusts in the wills, life insurance planning, and more sophisticated techniques. Unfortunately, many New Jersey residents don't think ANY estate tax applies to them since their assets are below the exemption level for the FET. Or, they confuse the New Jersey inheritance ("NJIT"), which exempts lineal descendents and spouses from tax, from the NJET, which only exempts assets passing to spouses from taxation.

Many clients come to our offices thinking the NJET is not such a big deal - but starting 1/1/06, you can pay no FET and have to write a check to NJ for $99,600 - that is a lot of real money that could go to your family with proper planning instead of the State.