New Jersey collects both an inheritance tax and its own estate tax, separate from the federal estate tax. Under current law, the estate of every New Jersey resident decedent dying after December 31, 2001 shall be taxed as if the death occurred under the federal laws in effect on December 31, 2001. Because the applicable federal exclusion amount was $675,000 in 2001, a New Jersey estate tax will be due for estates in excess of $675,000 passing to someone other than a surviving spouse — even though the current federal exclusion amount is significantly greater ($5.34 million for deaths in 2014).
While it might seem unfair that the New Jersey estate tax is calculated as if the applicable federal exclusion amount is $675,000 rather than the actual amount in effect at the time of death, it’s something that all New Jersey residents have to live with, at least until the law is changed. On that front, there is good news. The governor has proposed raising the exemption to $1 million.
As if the estate tax wasn’t bad enough, New Jersey also has an inheritance tax. It’s different from the estate tax because it applies to estates of any size, but the tax rate is based on how closely each inheritor is related to the deceased person.
The combination of the estate tax and the inheritance tax is the equivalent of a “one-two punch” for New Jersey residents.
(1) When an Estate Tax Return is Required
If you are a New Jersey resident and leave assets – including adjusted taxable gifts – with a gross value of more than $675,000, the executor of your estate must file a New Jersey estate tax return. Federal estate tax returns, on the other hand, are required only for estates greater than $5.34 million for deaths in 2014. The New Jersey estate tax does not apply to out-of-state residents, even if they own valuable real estate or other property in New Jersey.
The value of your gross estate is calculated by adding up all of the assets that you own at death, including:
• Real estate in New Jersey;
• Bank accounts and certificates of deposit;
• Investment accounts and securities;
• Vehicles and other items of personal property;
• Proceeds from insurance policies on your life, unless you didn’t own the policy;
• Retirement account funds;
• Small business interests (sole proprietorship, limited liability company, or small corporation).
For tax purposes, it doesn’t matter whether or not any of your assets go through probate at your death. Real estate in a living trust, a retirement account for which you’ve name a beneficiary, a jointly owned bank account – it all gets counted.
Some other less obvious assets are also included:
• Taxable gifts you made during life (more than the federal gift tax annual exclusion amount, which is currently $14,000 per year per recipient);
• Proceeds of any life insurance policy you transferred to an irrevocable life insurance trust within three years before death.
Are transfers to a surviving spouse taxable? No. Property left to a spouse is exempt from the New Jersey estate tax, regardless of the amount.
(2) The Taxable Estate
The amount of your gross estate determines whether or not a tax return must be filed. The amount of your taxable estate – what’s left over after subtracting allowed deductions from the gross estate – determines whether or not your estate actually owes tax.
For many people, the big deduction is the marital deduction. The marital deduction allows you to subtract any amount that you leave to your spouse. So, if you leave all of your property to your spouse, your estate won’t owe any tax. Other deductions include attorney fees, funeral costs, and outstanding income tax bills, among others. If the deductions reduce the value of your taxable estate below $675,000, your executor won’t have to write a check for New Jersey estate tax.
Are transfers to a surviving domestic partner taxable? Under the federal estate tax laws, there is no provision authorizing a deduction for property that passes to a domestic partner. However, if a New Jersey decedent was a partner in a civil union, died on or after February 19, 2007, and was survived by his or her partner, then a marital deduction is permitted for purposes of the New Jersey estate tax. However, such a deduction is limited to the deduction that a surviving spouse would be entitled to under the provisions of the Internal Revenue Code in effect on December 31, 2001.
If there is a surviving civil union partner, the estate must prepare and submit a “dummy” Form 706, prepared as though the IRS treated a surviving civil union partner just like a surviving spouse.
(3) The Estate Tax Return and Payment
New Jersey has two types of estate tax returns. The first is a simplified form for estates that don’t also have to file a federal estate tax return, appropriately named the “Simplified Tax System.” And the second is the regular estate tax return, sometimes referred to as the “Form 706 Method.”
The Form 706 Method must be used if the taxpayer is required to file a federal estate tax return (IRS Form 706). As such, it is intended for larger estates. Under the Form 706 Method, the Form IT-Estate must be prepared and filed along with a 2001 IRS Form 706 completed in accordance with the provisions of the Internal Revenue Code in effect on December 31, 2001. This is in addition to IRS Form 706 for the year of the decedent’s death assuming one is required to be filed.
Why must a Form 706 be completed for 2001? Because the New Jersey estate tax is based upon the federal credit for state inheritance, estate, succession or legacy taxes as it existed on December 31, 2001 – and not as it existed on a decedent’s date of death.
If an IRS Form 706 is not required, then the taxpayer has two options: (1) the Form 706 Method or (2) the Simplified Form Method. If the Simplified Form Method is used, then it must produce a tax liability similar to the Form 706 Method. Under the Simplified Tax System, a Form IT-Estate must be prepared and filed along with a New Jersey Inheritance tax return (Form IT-R) completed in accordance with the provisions of the inheritance tax statute in effect on December 31, 2001.
How is the taxable value of the estate calculated under the Simplified Tax System? It’s the net estate, as determined and reflected on line 7 of the New Jersey inheritance tax return (Form IT-R), adjusted to reflect:
• Real and tangible personal property located outside of New Jersey; plus
• The proceeds of life insurance on the decedent’s life owned by the decedent (or transferred within three years of his or her death) paid to any beneficiary other than the estate, executor or administrator; plus
• All transfers made by the decedent within three years of death not included in the inheritance tax net estate; plus
• In the event that the decedent was a surviving spouse or a civil union partner and received qualified terminable interest property (QTIP) from the predeceased spouse or civil union partner for which a marital deduction was elected for Federal and/or New Jersey purposes, the full value of the QTIP property; plus
• Any other property includable in the Federal gross estate under the provisions of the Federal Internal Revenue Code in effect on December 31, 2001; less
• Property passing outright to the decedent’s surviving spouse or civil union partner who died on or after February 19, 2007 provided he or she was a U.S. citizen on the decedent’s date of death. This deduction does not include QTIP (Qualified Terminable Interest Property) or similar property. What is QTIP property? Property that passes from the decedent and in which the surviving spouse or civil union partner has a qualifying income interest for life. When does the surviving spouse or civil union partner have a qualifying income interest for life? When he or she is entitled to all or a specific portion of the income from the property payable annually or at more frequent intervals, or has a right to enjoy the property for life, and during the surviving spouse’s or civil union partner’s lifetime no person has a power to appoint any part of the property to any person other than the surviving spouse or civil union partner; less
• Property passing for charitable purposes.
The New Jersey estate tax is reduced by the portion of the tax that is attributable to property located outside of New Jersey.
When is the New Jersey estate tax return and any required payment due? Under the Simplified Tax System, Form IT-Estate must be filed and any tax due must be paid within nine months of the decedent’s death. Under the Form 706 Method, Form IT-Estate must be filed and any tax due must be paid within nine months and thirty days of the decedent’s death. In addition, a copy of any Federal estate tax return filed or required to be filed with the Federal government must be submitted within 30 days of the date it is filed with the Internal Revenue Service.
An extension of time to file Form IT-Estate may be requested. However, even if an extension is granted, it won’t delay the time for payment of any tax due. Indeed, any tax not paid within the allotted period – i.e., nine months for the simplified system and nine months plus 30 days for the Form 706 method – generally bears interest at the rate of ten percent (10%) per annum from the expiration of nine months (or nine months and thirty days) until paid. Payments are first credited in satisfaction of accrued interest.
Does New Jersey impose a lien on the deceased person’s property? For New Jersey residents dying after December 31, 2001, the New Jersey estate tax remains a lien on all property of the decedent as of the date of death until paid. No property may be transferred without the written consent of the Director of the Division of Taxation.
A tax waiver form releases both the inheritance and the estate tax liens and permits the property to be transferred. Waiver requirements for both the inheritance and the estate tax are set forth in N.J.A.C. 18:26-11.1 to N.J.A.C. 18:26-11.32.
The New Jersey Estate tax return, Form IT-Estate, and all other required forms should be mailed to: NJ Inheritance Tax and Estate Tax P.O. Box 249 Trenton, NJ 08695-0249.
Both the state and federal returns are complicated, and the executor should consider hiring an experienced professional to prepare them. The fee is paid from estate assets.