Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

Significant estate tax planning opportunities which are available under current legislation may be eliminated or severely restricted after December 31, 2012.  It is therefore critical to evaluate whether steps should be taken this year to maximize estate tax savings.

For the following reasons, 2012 is the year to implement tax reduction strategies:

1. The federal law provides for a $5.12 million gift tax exemption through year-end which creates significant gifting opportunities.  On January 1, 2013, the exemption is scheduled to be reduced to $1 million.
2. Powerful concepts available under current law such as valuation discounts for interests in family entities and transfers to Intentionally Defective Grantor Trusts (“IDGTs”) and short term Grantor Retained Annuity Trusts (GRATs) may be restricted under new tax legislation.
3. Lifetime gifts can achieve significant New Jersey or New York estate tax savings.  Neither state has a gift tax and, unlike the federal estate tax, lifetime gifts are generally not taken into account in the calculation of New Jersey or New York estate taxes.
4. Market conditions may produce lower asset valuations, particularly with respect to real estate, which is beneficial from a tax perspective.
5. The low interest-rate environment enhances the tax benefits of several planning strategies that are interest-rate sensitive.

This article published recently in the New York Law Journal highlights these important issues.

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In January, a bill was introduced in the New Jersey Legislature to increase the New Jersey estate tax exemption from $675,000 to $1 million.  The reasoning advanced by the sponsoring senators to increase the exemption is that the $675,000 threshold is “archaically” low, and is forcing small businesses and their owners to shut down and leave the state. 

The exemption amount sets the threshold amount of assets that can pass New Jersey estate tax free to someone other than a surviving spouse.  Under current law, assets in excess of $675,000 passing to someone other than a surviving spouse will trigger a New Jersey estate tax.  A New Jersey taxpayer who owns $1 million of assets at death and bequeaths them to a child would incur a $33,200 New Jersey estate tax under current law.  Under the proposed bill, this situation would produce no New Jersey estate tax.

The threshold for filing a New Jersey estate tax return also would be increased to $1 million under the proposed bill.   

Note that in 2012, the federal exemption amount is $5,120,000, but if Congress fails to act in 2012 and change the law, the exemption amount would be reduced to $1 million (adjusted for inflation).

We will keep you posted on the status of this bill.

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The IRS announced a third voluntary disclosure program for offshore accounts recently.  The IRS has conducted two prior voluntary disclosure programs – one in 2009 and one in 2011.  According to the IRS, it had 33,000 disclosures from the 2009 and 2011 programs.  The Service has closed approximately 95% of the 2009 cases and collected approximately $3.4 billion in payments.  The IRS also stated that it has collected approximately $1 billion in up-front payments as a result of the 2011 program. 

The third voluntary disclosure program does not have a set termination date and includes a top penalty rate of 27.5%, slightly higher than the top penalty rate in the 2011 program.  IRS Commissioner Douglas Shulman said that the Service’s focus on offshore tax evasion continues to produce strong, substantial results. 

The IRS has also pursued a number of international banks to disclose the names and records of customers with undisclosed offshore accounts, and now also requires the filing of a Form 8938 for taxpayers to disclose specified foreign financial assets. 

The third voluntary disclosure program may be a benefit to taxpayers who have not disclosed offshore accounts previously and were otherwise facing uncertainty as to how the IRS would treat their disclosures.  If you have questions about the program please contact us.
 

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After meeting with a lawyer who advised him about divesting himself of assets so that he one day would be able to qualify for Medicaid, Peter Muscle, age 88, made a gift to his girlfriend of PSE&G stock having a value just over $1 million.  He died six months later. 

As most readers know, New Jersey has both an estate tax and an inheritance tax.  The estate tax is triggered on a decedent’s assets that exceed $675,000.  The inheritance tax is imposed on assets that do not pass to a spouse or lineal descendants.  Since New Jersey does not have a gift tax, gifting assets away during lifetime under some circumstances can have the effect of saving New Jersey transfer taxes.

However, the inheritance tax law (but not the estate tax law) also contains a rule that gifts made in contemplation of death are pulled back into the decedent’s estate and subject to inheritance tax.  See NJSA 54:34-1(c).  Furthermore, if the decedent makes a transfer without adequate consideration of a material portion of the decedent’s estate within three years of death, then the burden of proof switches to the estate to prove that the gift was not in contemplation of death.   

In this relatively straightforward case, the court did not believe the estate’s explanation that the gift was made in celebration of marriage, and held that the estate failed to carry its burden of proof.  The gift was therefore made in contemplation of death and was subject to New Jersey inheritance tax. 

Gifts are an effective planning technique to reduce state level estate tax exposure, but advisors need to be aware of this risk in New Jersey inheritance tax cases.

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