New Jersey Stands to Benefit from the Repeal of its Estate Tax

Stuart Gladstone The phenomenon concerning the relation between taxation and behavior is observed in our everyday lives. Tax policy is one method that governments can use to control behaviors. If the government desires a business or individual to act in a certain manner or refrain from undertaking certain activities, the government may provide tax incentives or increase taxes. This is particularly true when it relates to the imposition of an estate tax. The New Jersey estate tax is affecting the behavior of New Jersey’s affluent residents. New Jersey’s estate tax is prompting many people, including the state’s top earners and business people, to move to Florida where no such tax exists.

Currently there is no federal estate tax, but New Jersey imposes an estate tax on resident decedent’s estates that are greater than $675,000. The New Jersey estate tax owed can be a significant chunk of money, ranging between 4% and 16% of the gross estate. For a $10,000,000 estate, the New Jersey estate tax owed is $1,067,600 or 10.68% of the total estate. That is serious money.

The New Jersey estate tax, however, does not apply to estates of nonresidents. For years as part of estate planning, counselors have advised clients to change their residence to a more tax favorable state such as Florida. Florida does not have an estate tax currently.

To establish residency in other states such as Florida, many families will purchase a residence in Florida, while still keeping a New Jersey property. To establish residency, the couple will spend more than 183 days outside of New Jersey in Florida. The couple will be taxed as non-residents and will not be considered residents of New Jersey for estate tax purposes. This planning option saves families thousands, if not millions, of dollars, which they can then pass to the next generation.

The effect of the estate tax on New Jersey’s decedents is causing revenue and other opportunities to flow out of the state. New Jersey is losing revenue from income tax because such individuals are no longer considered New Jersey residents and therefore are not subject to taxation on their worldwide income, only New Jersey source income. In addition, such affluent individuals may move their New Jersey businesses out of the state or close them. New Jersey is also losing sales tax revenues, as many affluent individuals are high spenders. You shop where you live.

In addition to the economic reasons for repealing the New Jersey estate tax, there are also non-economic reasons. Couples seeking to avoid the imposition of the New Jersey estate tax will retire to Florida for the winter and spend their summers in New Jersey. Upon the death of the first spouse, there is no estate tax either at the federal or the state level if everything passes in accordance with the marital deduction. However, on the death of the first spouse, the surviving spouse can suffer from depression as he or she feels extremely lonely while living in Florida away from his or her relatives. Generally, the family is back in the Northeast.

New Jersey is currently experiencing a fiscal crisis, so it may seem counterintuitive to repeal a revenue raising tax. Yes, money is collected, but one needs to examine the net effect. The net effect of this tax is that New Jersey is losing money in the form of sales tax, employment taxes and income taxes. Clients are receptive to opportunities outside of New Jersey to avoid the evil death tax. New Jersey should be striving to keep the high wage earners and affluent individuals within the borders of the state.