The upcoming changes to the federal estate tax exemption in 2026 represent a critical financial juncture for New Jersey residents. Currently, the federal estate tax exemption allows individuals to pass on a substantial amount of assets—millions of dollars, in fact—without incurring federal estate taxes. However, this exemption is set to decrease significantly in 2026, reverting to pre-2018 levels adjusted for inflation. This shift could expose a larger portion of an individual’s estate to federal taxes, thus affecting potential inheritances and necessitating proactive financial planning.
The Matus Law Group, with its deep understanding of both federal and New Jersey tax laws, stands ready to assist. Our New Jersey estate planning attorneys at The Matus Law Group can offer guidance and strategies tailored to your unique situation, helping you adjust your estate plan in anticipation of the 2026 changes. Whether it’s through the creation of trusts, the strategic gifting of assets, or other legal mechanisms, we are equipped to devise a plan that fits your needs. By doing so, you can mitigate the potential impact of the exemption decrease on your estate, providing peace of mind and financial security for your loved ones.
If you are concerned about how the 2026 estate tax exemption sunset may affect your estate, call The Matus Law Group today at (732) 281-0060 for a consultation. We offer the guidance necessary to make informed decisions, helping you to protect your assets and ensure a stable financial future for your family.
What is the 2026 Estate Tax Exemption Sunset?
The “Estate Tax Exemption Sunset” refers to the scheduled expiration or reduction of the current federal lifetime gift and estate tax exemption amounts. As of recent legislation, the tax exemption is set at a historically high level, allowing individuals to leave significant amounts behind without incurring federal estate taxes. However, this exemption is not permanent. In 2026, unless new legislation is enacted, the exemption is slated to revert to previous lower levels, adjusted for inflation.
For reference, the estate tax exemption in 2017 was $5.49 million. The current exemption for an individual is set to $13.61 million in 2024 which is 247% of the 2017 exemption. Suppose the tax exemption reverts to the 2017 level in 2026, a person with an estate of $20 million would have a taxable estate of $14.51 million compared to the $6.39 million they would have had under the 2024 exemption.
The Tax Cuts and Jobs Act and Its Effect on Estate Tax Exemptions
The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, significantly altered the landscape of federal estate taxes, which has direct implications for residents of New Jersey. One of the most notable changes was the substantial increase in the federal estate tax exemption amounts. Prior to the TCJA, the federal estate tax exemption was $5.49 million per individual. The TCJA effectively doubled this amount, setting the exemption at about $11.18 million per individual in 2018, with adjustments for inflation in subsequent years.
For New Jersey residents, this increase has temporarily eased the burden of federal estate taxes, allowing individuals to pass on a larger portion of their wealth without incurring federal estate taxes. This is particularly significant in New Jersey, which repealed its own estate tax in 2018. However, New Jersey still imposes an inheritance tax, which while unaffected by federal estate tax laws, can affect how an individual structures their estate plan to provide for their beneficiaries.
The TCJA provisions are scheduled to sunset after 2025, meaning the exemption amounts are set to revert to their pre-TCJA levels, adjusted for inflation. This reversion is expected to significantly lower the exemption threshold, potentially increasing the number of New Jersey estates subject to federal estate taxes starting in 2026.
For New Jersey residents, understanding these changes and preparing for the future is crucial. The temporary relief offered by the TCJA presents a window of opportunity for estate planning to mitigate future tax impacts, which will necessitate careful planning and possibly reevaluation of existing estate plans as the sunset approaches.
Key Dates and Timeline for the 2026 Sunset
The timeline leading up to the 2026 estate tax exemption sunset is critical for estate planning. Here are the key dates and milestones:
- 2024-2025: This period is crucial for reviewing and adjusting estate plans in anticipation of the sunset. Estate holders and their advisors should assess the potential tax impacts based on the projected lower exemption amounts.
- January 1, 2026: The exemption amount is expected to decrease to about half of its current amount, subject to inflation adjustments. This is the actual date of the sunset, when the higher exemption thresholds will no longer be applicable.
- Post-2026: After the sunset takes effect, ongoing monitoring and adjustments will be necessary as the economic environment and federal tax laws may continue to evolve.
For New Jersey residents, understanding these dates and preparing ahead is essential. Although the state does not impose its own estate tax, the changes at the federal level demand careful attention to ensure that estate plans are robust, flexible, and aligned with the forthcoming legal landscape. By staying informed and proactive, individuals can effectively manage their estate planning to accommodate these significant changes.
Impact of Reduced Estate Tax Exemption on New Jersey Residents
In New Jersey, understanding the local estate tax laws is crucial for effective planning, especially in light of the impending changes at the federal level. Despite the absence of a state estate tax, this does not eliminate the need for diligent estate planning as the federal estate tax changes still apply.
In addition, New Jersey residents still face the inheritance tax, which affects how assets are distributed based on the relationship of the beneficiary to the decedent. Close family members like spouses, children, and parents are typically exempt, but more distant relatives and non-relatives might incur taxes. This distinction makes understanding both federal and state tax implications critical for residents.
Potential Financial Impact on New Jersey Estates
The scheduled reduction in the federal estate tax exemption in 2026 could have a considerable financial impact on residents of New Jersey. For the year 2024, estates can transfer up to $13.61 million for individuals (and up to $27.22 million for couples) free of federal estate taxes, but once the exemption amount is reduced, more estates will likely exceed the threshold and be subject to higher taxes.
Financial Considerations:
- Increased Tax Burden: Estates that were previously exempt might find themselves liable for federal estate taxes, which can be substantial. This change increases the importance of strategic financial planning to mitigate potential tax liabilities.
- Asset Reevaluation: With the exemption reduction, the valuation of high-worth assets like real estate or business interests becomes more critical. These assets might push an estate’s total value over the lower exemption threshold, thereby increasing the taxable portion of the estate.
- Insurance and Trusts: Tools such as life insurance and various forms of trusts might see increased utilization as methods to manage potential tax liabilities and ensure financial security for beneficiaries.
For New Jersey residents, the reduction in the federal exemption requires a proactive approach to estate planning. With the state-specific tax landscape, particularly the absence of an estate tax but the presence of an inheritance tax, residents must carefully plan not only to address federal changes but also to optimize their estate’s tax position in regard to state laws. This dual focus will be essential in preparing for the financial implications of the 2026 estate tax exemption sunset.
Essential Estate Planning Tools and Techniques To Consider Before The Sunset
With the upcoming changes in the federal estate tax exemption, residents of New Jersey need to employ a variety of estate planning tools and techniques to effectively manage their assets. Key strategies include:
- Wills and Revocable Living Trusts: These basic tools ensure that an individual’s wishes are honored after their passing. A will is fundamental for directing asset distribution, while a revocable living trust offers the added benefit of avoiding probate, which can be time-consuming and costly.
- Irrevocable Trusts: These are crucial for estate tax planning as they remove assets from the taxable estate. Once placed in an irrevocable trust, assets are no longer owned by the individual, thus not subject to estate taxes upon their death.
- Annual Gift Exclusions: Making use of annual gift exclusions allows individuals to reduce the size of their estate over time by gifting up to $18,000 per person (under 2024 exemptions) without incurring gift tax liabilities.
- Life Insurance Policies: Life insurance can provide liquidity to an estate, helping to cover estate taxes and other expenses without the need to sell off assets.
Benefits of Early Planning and Strategy Adjustment
Initiating and adjusting estate plans well before 2026 offers several advantages:
- Tax Savings: By organizing and implementing strategies early, individuals can maximize the benefits of current tax laws, potentially saving significant amounts in future estate taxes.
- Flexibility: Early planning provides more time to adjust strategies as laws and personal circumstances change. This flexibility is crucial in responding to the evolving legislative landscape and personal or family needs.
- Peace of Mind: Knowing that one’s estate plan is in place and adaptable to upcoming tax changes can provide significant peace of mind to individuals and their families, assuring that their legacy and financial goals are secured.
| Benefit | Description |
|---|---|
| Tax Savings | Organizing and implementing strategies early to maximize benefits of current tax laws, potentially saving significant amounts in future estate taxes. |
| Flexibility | More time to adjust strategies as laws and personal circumstances change, crucial in responding to the evolving legislative landscape and personal or family needs. |
| Peace of Mind | Having an adaptable estate plan in place, providing significant peace of mind to individuals and their families, assuring that their legacy and financial goals are secured. |
Role of Trusts in Mitigating Estate Tax Changes
Trusts play a pivotal role in estate planning, especially with the anticipated reduction in the estate tax exemption:
- Credit Shelter Trusts: Also known as bypass or family trusts, these can be used by married couples to maximize their estate tax exemptions, ensuring that each spouse’s exemption amount is fully utilized.
- Grantor Retained Annuity Trusts (GRATs): These allow the grantor to transfer asset appreciation to beneficiaries, potentially reducing the taxable value of their estate.
- Charitable Remainder Trusts (CRTs): These provide a stream of income to the donor, with the remainder of the trust going to a charity, which can be an effective way to reduce the taxable estate while supporting charitable causes.
For New Jersey residents, utilizing these tools and strategies can be instrumental in preparing for the 2026 estate tax exemption sunset. By carefully planning and regularly reviewing their estate plans, they can protect their assets from excessive taxation and ensure their estate is managed according to their wishes.
Why Consult an Estate Planning Attorney?
Consulting with an estate planning attorney is crucial for New Jersey residents due to the intricacies involved in both federal and state laws affecting estate planning. An attorney with a focus in this area can provide several benefits:
- Up-to-date Knowledge: Attorneys keep current with the latest changes in both federal and state tax laws, which is particularly important with the impending adjustments in 2026.
- Customized Planning: Every estate is unique, and a qualified attorney can tailor an estate plan that fits the specific needs and goals of an individual or family while considering local law implications.
- Legal Validity: An attorney ensures that all documents and strategies comply with current laws to prevent future legal challenges or disputes.
How Legal Guidance Can Maximize Your Tax Benefits
An estate planning attorney not only assists in crafting a plan but also in maximizing potential tax benefits:
- Strategic Asset Allocation: Legal guidance helps in structuring asset ownership and beneficiary designations in a way that minimizes estate taxes and avoids probate where possible.
- Utilization of Tax Exemptions and Credits: Attorneys can guide clients on how best to use federal and state tax exemptions and credits effectively, particularly in timing the transfer of assets to benefit from existing tax laws.
- Advanced Techniques: Techniques such as the strategic use of different types of trusts, family-limited partnerships, or charitable giving can significantly reduce the taxable estate and enhance the financial benefits to heirs and beneficiaries.
Common Legal Pitfalls to Avoid in Estate Planning
Several common legal pitfalls can undermine the effectiveness of an estate plan:
- Improper Documentation: Failure to have all estate planning documents in order can lead to significant issues. An attorney ensures that wills, trusts, powers of attorney, and healthcare directives are properly drafted and executed.
- Failing to Update Estate Plans: Estate plans must be reviewed and possibly revised due to changes in law, financial status, or personal circumstances. An attorney can provide ongoing support to keep estate plans current and reflective of a client’s wishes.
- Overlooking Potential Conflicts: Without professional advice, there’s a risk of creating an estate plan that could lead to family disputes or litigation. An attorney can foresee potential conflicts and address them before they arise.
For New Jersey residents, the value of legal advice cannot be overstated, particularly with the significant changes expected in estate tax laws. By engaging with competent legal counsel, individuals can protect their assets, ensure their wishes are honored, and provide for their heirs in the most effective manner possible.
How State Residency Affects Estate Tax Obligations
The impact of a decedent’s residency is significant in shaping estate tax responsibilities. For New Jersey residents, while there is no state estate tax to contend with, the federal estate tax still applies. Additionally, New Jersey imposes an inheritance tax, which could affect estates if the recipients of the estate are not classified as exempt relatives, such as a spouse or children. This means that New Jersey residents need to prepare for these potential taxes when planning their estates.
On the other hand, non-residents who own property in New Jersey face a different scenario. Even though they do not have to worry about New Jersey’s estate or inheritance taxes on their New Jersey property, they are not exempt from the federal estate tax. Moreover, they must also consider the estate tax laws of their own state.
This could mean navigating multiple sets of regulations, depending on where they reside and where their assets are located. Thus, for non-residents, a clear understanding of both New Jersey’s tax rules and those of their home state is essential for effective estate planning.
Planning for Multistate Estate Tax Challenges
For individuals with assets in multiple states, estate planning can become more complex due to varying state laws:
- Understanding Various State Laws: It is crucial to understand the estate tax laws of each state where your properties are located. Each state may have different exemption thresholds, tax rates, and rules regarding non-residents.
- Use of Trusts: Employing trusts can be an effective strategy to manage estate tax liabilities across different states. Certain types of trusts can help minimize the overall tax burden by properly allocating assets.
- Consultation with Legal Professionals: Engaging attorneys who are knowledgeable about the estate tax laws of the relevant states is important. They can provide guidance tailored to the specifics of an individual’s multi-state assets and help devise a comprehensive plan that addresses potential interstate tax issues.
For New Jersey residents, while the state may not impose its own estate tax, the interplay of federal estate tax and potential multi-state tax considerations necessitates a well-thought-out strategy to manage estate tax burdens effectively.
Estate Planning Checklist for 2024-2026
Employing tax-efficient strategies is crucial for minimizing the estate tax burden and maximizing the value transferred to beneficiaries. When creating or updating your estate plan, consult your estate planning attorney to determine whether incorporating the following measures can allow you to further maximize the exemptions and secure the financial future of your family and beneficiaries:
- Utilization of Lifetime Gift Exemption: Make full use of the lifetime gift exemption before the anticipated reduction in 2026. This involves transferring significant assets out of the estate while still alive.
- Establishing Grantor Retained Annuity Trusts (GRATs): These allow the grantor to transfer asset appreciation to beneficiaries over time, potentially reducing the taxable value of their estate.
- Forming Family Limited Partnerships (FLPs): These can be used to transfer business interests to family members at reduced tax costs due to valuation discounts for lack of marketability and control.
Importance of Regular Review and Update of Estate Plans
Continuous review and updates are necessary to adapt an estate plan to personal changes and evolving legal landscapes:
- Annual Reviews: Conduct annual reviews of your estate plan to adjust for changes in your financial situation, family dynamics (such as marriages, births, or divorces), and changes in your health.
- Legal Updates: Stay informed about both federal and New Jersey legal changes that could impact your estate plan. This includes changes in tax laws, which can significantly alter the effectiveness of your current estate planning strategies.
- Professional Consultations: Regular consultations with a legal professional can help identify opportunities for adjustments and improvements in the plan, ensuring that it remains robust and aligned with current laws and personal circumstances.
For New Jersey residents, adhering to these practical tips can help effectively manage estate planning in a proactive and informed manner. This structured approach not only facilitates tax efficiency but also ensures that the estate plan remains relevant and effective, reflecting the latest legal standards and personal wishes.
Preparing for the Future with Informed Estate Planning
As the tax exemption sunset looms, it becomes increasingly important for New Jersey residents to take thoughtful actions today to protect their financial legacy tomorrow. The anticipated reduction in the federal estate tax exemption could expose many to higher tax liabilities, making it essential to review and possibly revise your estate plan with a knowledgeable attorney who understands both the nuances of federal and state tax laws.
The Matus Law Group offers comprehensive estate planning services tailored to meet the specific needs of New Jersey residents. With their insightful guidance, you can adapt your estate plan to accommodate the upcoming changes, potentially saving significant amounts in future taxes and securing the financial well-being of your family.
If you are concerned about how the upcoming changes in estate tax exemptions might affect your estate, contact The Matus Law Group at (732) 281-0060 today. Our attorneys are ready to help you prepare a robust estate plan that aligns with your wishes and financial goals, providing peace of mind that your legacy will be preserved according to your specifications. Schedule a consultation today and take proactive steps towards securing your family’s financial future.
