Articles

Disclaim and Save Taxes: A New Jersey Estate Tax Primer By Attorney, Tom McMahon

 As of January 1, 2009, you can pass upon your death $3,500,000.00 to anyone without having any Federal Estate Tax imposed. This exclusion amount is an increase of $1.5 Million Dollars over the $2 Million Dollar exclusion available in 2008. Thus, it is now possible for a married couple to pass a total of $7 Million Dollars to their children without triggering the Federal Estate Tax. That is the good news.

An unpleasant corollary to this is that in the State of New Jersey, an estate of more than $675,000.00 passing to anyone other than a surviving spouse will have that transfer subject to the New Jersey Estate Tax. Obviously, this is a much lower threshold for taxation than what is permitted to pass tax free under the Federal Estate Tax Law. 

Take this example. If the surviving spouse left an estate of $3.5 Million Dollars to the children, there would be no Federal Estate tax; but New Jersey would extract $229,200.00 in taxes before the assets reached the children.

Most people with estates of up to $3.5 Million Dollars are generally not concerned with Estate Taxes shrinking what they wish to leave to their children. However, as can be seen from the above example, tax planning is something that should be considered by most everyone.

Let’s say a husband dies leaving a $1 Million estate to his surviving spouse who subsequently dies leaving everything to their children. Instead of the children receiving the $1 Million, they would receive $966,800.00 because the New Jersey Estate Tax would be $33,200.00. With some modest estate planning, this tax could be avoided. 

There is available to the surviving spouse what is known as a Qualified Disclaimer. This would allow a surviving spouse to shelter up to $675,000.00 from the New Jersey Estate Tax when the estate ultimately passed on to the children. This planning device also provides the surviving spouse with the flexibility of postponing the decision of whether to make a Disclaimer until after the death of the first spouse.

In the example of the $1 Million Estate, the surviving spouse could Disclaim $325,000.00.   The surviving spouse would then have an estate of only $675,000.00, which avoids the New Jersey Estate Tax now and when it later goes to the children.         

What happens to the $325,000.00, which was disclaimed? It can pass to the children immediately or it can be placed in a trust during the life of the surviving spouse.

A Disclaimer is the formal action of the beneficiary indicating that the beneficiary does not wish to inherit what would otherwise come to her. The Will is then read as if the disclaiming beneficiary (Disclaimant) predeceased the Testator (the maker of the Will). 

The general rule is that the Disclaimant cannot benefit from that which is disclaimed. However, the tax law has a special provision, which allows a surviving spouse to make a Disclaimer and yet be allowed to benefit from that which she disclaimed. The surviving spouse is entitled to have a beneficial interest in the disclaimed property. 

   

This is accomplished by having the Testator’s Will create a Disclaimer Trust that would be funded by whatever the surviving spouse disclaims. The Disclaimer Trust can provide that all the income be paid to the spouse and have the principal be available to the surviving spouse for certain purposes, such as the surviving spouse’s health, education, maintenance and support. 

In a nutshell, the Disclaimed property passes into the Disclaimer Trust and is there for the benefit of the surviving spouse if she needs it. Yet, upon the death of the surviving spouse, the balance in the Disclaimer Trust passes to the children without being reduced by the imposition of any Estate Tax. In this example, the $325,000.00 going into the Disclaimer Trust is treated as having passed from the deceased parent directly to the children and not through the surviving spouse.

The added beauty of this Disclaimer Planning is that it allows the surviving spouse to wait to until after the death of the first spouse to make the decision as to whether, and how much should be disclaimed and placed into the Disclaimer Trust. It enables the surviving spouse to make this decision after considering her current financial circumstances, the size of the entire estate, and base it upon the tax laws existing at that time rather than when the Wills were originally drafted. The only time requirement is that the Disclaimer be made within nine months of the date of death.

In this case, the children would be grateful that you did a little planning to save them $33,200.00 when you pass on.

The author, Tom McMahon, is estate & tax attorney at Pellettieri, Rabstein & Altman specializing in New Jersey estate and tax planning.   For more information visit http://www.pralaw.com
 

Learn more about Estate Planning

Legal Resources:
Articles Blogs Video Center Glossary

1-800-432-LAWS