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Estate Planning Article 1-B


Disclaimers May Solve an Estate Tax Conundrum


Couple two chooses to fund a non-marital trust upon the death of the first spouse with the maximum amount that can pass free of federal estate tax in the year of the death of that spouse by reason of the applicable credit amount, with any balance left to the surviving spouse. Upon the death of the second spouse, couple two’s assets pass to the children of the marriage.

In each case the first spouse dies in 2004 and the second spouse in 2007. Upon the death of couple one’s first spouse, the survivor will not owe either federal or New Jersey estate tax. A non-marital trust will be funded with $675,000 and the first spouse’s remaining assets, $825,000, will be distributed to the second spouse and added to his or her estate. Upon the death of couple one’s second spouse, their children will owe federal estate tax of $146,250 and New Jersey estate tax of $124,000, for a total tax liability of $270,250.

In the case of couple two, upon the death of the first spouse a nonmarital trust is funded with the entire $1.5 million of assets that comprised the first spouse’s estate. No federal estate tax will be due. However, since the amount distributable to the nonmarital trust will exceed the allowable $675,000 New Jersey estate tax exemption, New Jersey estate tax in the amount of $64,400 will be assessed. Upon the death of couple two’s second spouse there still will be no federal estate tax liability, the children of that couple only owing an additional $64,400 of New Jersey estate tax.

Accordingly, the total estate tax liability for the estates of couple two, consisting entirely of New Jersey estate tax, would be $128,800, while the federal and New Jersey estate tax assessment against the estates of couple one would total $270,250.

Use of Disclaimers

In many situations, payment of some New Jersey estate tax upon the first death will eventually lead to an overall Federal and New Jersey estate tax savings for the combined estates of a married couple. But this may not always be the case.

Examples where a married couple with sizeable estates should plan not to pay New Jersey estate tax upon the death of the first spouse would include but not be limited to the following: (a) where the surviving spouse is considering relocation to a state with a different estate tax statute; (b) where one spouse suffers an early untimely death; or (c) where there is a significant age disparity between the spouses.

In the latter situations, where it is likely that one spouse will outlive the other by many years, it may be possible for the surviving spouse by superior investment experience to recoup the projected eventual tax cost from the plan designed to eliminate New Jersey estate tax from the estate of the first spouse.

In addition, it is certainly possible that Federal and New Jersey estate tax laws will undergo further revisions in coming years. Amendments might include raising exemption levels or even outright repeal of one or both of these taxes. Such changes could make one regret the early payment of New Jersey estate tax which, had the taxpayer chosen to wait, might have been eliminated.

In light of the indeterminate estate tax consequences occasioned by the 2001 and 2002 changes in federal and New Jersey estate tax law, there would be little reason to recommend an estate plan for married persons with set formulas for the funding of the nonmarital trust and the marital bequest. Instead, a more flexible approach should be considered.

An appropriate plan might include wills with disclaimer provisions, in which assets are left to the surviving spouse but subject to the right of disclaimer, with the disclaimed assets to pass to a nonmarital trust. The disclaimer format would avoid locking the couple into a decision at the time they execute their estate plan, in the hope that at a later date they would be better able to decide whether New Jersey estate tax should be paid upon the death of the first spouse or deferred until the death of the second spouse. Provided that the Internal Revenue Code (Section 2518) and New Jersey (N.J.S.3B:9-l, et seq.), disclaimer rules are adhered to, the surviving spouse would have up to nine months from the date of death of the first spouse within which to make the decision.

A disclaimer may not afford a perfect method to address the problem of the uncertain Federal and New Jersey estate tax consequences resulting from recent law changes. It may be inappropriate to include a disclaimer in documents for individuals in complex marital situations (e.g. second marriages where one or both of the spouses have children from prior marriages). However, for persons in long-term primary marriages with substantial assets the disclaimer may be the best device available to solve an estate tax conundrum.

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