New Jersey Exclusions

Don’t die in New Jersey. New Jersey,
along with many other states, has decoupled from the federal estate

tax system. While the Federal exclusion is $2M in
2008 and is to increase to $3.5M in 2009, it remains a paltry

$675,000 for the NJ estate tax. This means that in
New Jersey, if the gross worth of your estate exceeds

$675,000, you will have to file a federal estate tax
on it. Now NJ is seeking to backstop the revenue from
this

lower exclusion in a manner that is complex, unfair,
and troubling. The NJ Division of Taxation adopted new

regulations regarding commonly used marital trusts,
called QTIPs-Qualified Terminable Interest Property
trusts.

NJAC 18:26-3A.8. If an
estate makes a tax election for Federal estate tax purposes a similar election
must be

made for NJ estate tax purposes. If a QTIP election
does not reduce the Federal estate tax liability, it will no

longer be given effect for NJ estate tax
purposes. This means that unless the estate exceeds the
federal

exclusion, $2M in 2008 and $3.5M in 2009, you cannot
make a NJ QTIP. Therefore, the estate is forced

to pay NJ estate tax if it is below the federal
exclusion amount. This precludes avoiding tax by only funding a by

pass to $675,000, the NJ exemption amount, which is
a common approach in many wills.

Example: You die in 2008 with a $2.5M
estate. Your will bequeaths $675,000 to a by pass trust and the balance to a
marital trust (QTIP) which qualifies for the estate tax marital deduction.
There is no federal tax and should be no NJ estate tax. But this new reg means
that NJ will not recognize the difference between $2M and $675,000 as a marital
deduction so that your estate will owe tax on this amount! Does this mean that
you have to make an outright marital above the $675,000 for estates under the
federal exclusion amount? Will another type of marital deduction other than
QTIP qualify? Will the tax allocation clause of the will allocate taxes against
the by pass trust undermining your intended dispositive scheme?