In the first article of this series, we discussed strategies for minimizing or eliminating the New Jersey Estate Tax (“NJET”) that can be utilized by all taxpayers. In this article, we concentrate on techniques applicable only to married taxpayers.
For married taxpayers, there is the additional option of utilizing the unlimited marital deduction, which exempts from the estate and gift tax transfers of property to US citizen spouses. As many of you know, before decoupling of New Jersey’s estate tax from the federal regime, the preferred method of maximizing FET avoidance was the use of either QTIP or Disclaimer Wills containing so-called “Bypass Trusts,” which were funded by formula with assets equal in value to the federal Applicable Exclusion Amount (formerly known as the Unified Credit Amount). In this way the assets in the Bypass Trust escaped taxation in both spouses’ estates and the tax on the assets passing to or in trust for the surviving spouse was deferred until his or her death. But, decoupling has created planning traps for the unwary who continue to employ the old formula.
Consider the following example: Husband and Wife have $2.5 million of assets, one-half owned by each. They have formula wills with Bypass Trusts. Assuming they both die in 2006, the formula would require that the Bypass Trusts be funded with $1.25 million. By doing so, however, the planner has inadvertently caused a NJET of $48,400 to be due from each estate. How, if at all, can this result be avoided, or at least ameliorated?
As the previous discussion reveals, one way to do so would be to make pre-mortem gifts in order to deplete the assets of the estate. However, where the taxpayer is disabled, this strategy requires the use of a properly drafted Power of Attorney, or the gifts will not be recognized.
Another way would be to employ Disclaimer Wills that leave the entire residuary estate to the surviving spouse with a proviso that if he or she disclaims (i.e. refuses to accept) all or part of the estate, the disclaimed portion would pass to a Bypass Trust. Thus, the surviving spouse is enabled to take a “snapshot” of the predeceased spouse’s (and of his or her own) estate and determine how much, if any, to disclaim in order to achieve a more favorable tax result. Thus, in the preceding example the surviving spouse could disclaim $675,000 of assets; as a result, the Bypass Trust would be funded with that amount and the NJET would effectively be avoided at the first spouse’s death. This strategy, however, would leave the surviving spouse with $1,825,000 which, if not reduced by gifting or expenditure prior to the surviving spouse’s death (or by devising a portion of the estate to a charitable organization) would generate a NJET of $87,000. Depending upon the health and life expectancy of the surviving spouse, as well as other factors, this approach might be advantageous.
Joseph M. Jacobs, a trusts and estates attorney, has offices at 5 Independence Way, Suite 300, Princeton. 609-514-5137.