Now that New Jersey’s new tax and estate laws are in effect, many people are wondering if they need to make changes to their estate plan, and more specifically, if they need to continue to keep trusts in place. For most people, trusts are usually part of a larger strategy. Don’t do anything without discussing the trust with your estate planning attorney.
NJ.com’s article, “Biz Brain: Changes to N.J.'s estate tax and you,” says that part of the question to consider is whether the trust has been funded. If it’s been funded, then before you terminate a trust that was created as part of your overall estate plan, you must look into the tax consequences of the income and transfer tax of a termination.
Even if there is no immediate tax consequence, there could be other reasons to maintain the trust even though the state will repeal its estate tax effective in 2018.
It's possible that by 2018 or after, the state legislature could reinstate the estate tax.
Another possibility is that you could move to a state that has an estate tax. In that case, you'd need to recreate the trust. In the end, keeping the trust intact doesn’t hurt anything.
A trust may also be established for reasons unrelated to taxes.
Some trusts are designed for management and creditor protection of assets. If a beneficiary is disabled or is receiving certain government assistance, a trust may have been created as a special needs trust. Terminating that trust and the payment of monies outright to the beneficiary could cause a beneficiary to lose governmental benefits.
Although New Jersey will eliminate its estate tax effective January 1, 2018, there’s still a federal estate and gift tax subject to an exemption of $5.49 million effective January 1, 2017.
Your trust may have been created for a variety of reasons, some of which having little or nothing to do with reducing your estate tax. Best bet: speak with an experienced trust and estate attorney who is familiar with the laws in your state before making any changes. You don’t want to undo something that still works, and you don’t want to create unnecessary problems.
Reference: NJ.com (January 3, 2017) “Biz Brain: Changes to N.J.'s estate tax and you”