Reasons to Leave New Jersey That Have Nothing to do With Reality TV

As previously discussed on this blog, in addition to the federal estate tax, the State of New Jersey imposes its own estate tax on individual estates larger than $675,000.  In client meetings, we spend a lot of time discussing and developing solutions that revolve around the New Jersey estate tax.  At the end of this discussion, clients usually say something along the lines of “isn’t there an easier way?”  My answer is always simple: “yes, you can become a resident of a state without a state estate tax.”  Now, for most people, leaving the state is not an option, but to be a resident of a state for estate tax purposes, you only have to reside in that state for 6 months and 1 day.  So if you’ve ever considered a beach house in Florida or a ski cabin in Colorado, here’s one more incentive to go for it: you won’t have to pay estate taxes to New Jersey or any other state from the list below.  The only caveat here is that you actually have to live in the state in which you are claiming residency for the 6 months and 1 day.  The New Jersey Division of Taxation has gone to great lengths to determine whether a taxpayer was a resident of another state at the time of his or her death, including looking into phone records, electricity bills, airplane tickets and other similar records.

States that do not impose an estate tax as of this writing*:

1. Alabama                  13. ***Kansas               25. North Dakota

2. Alaska                     14. **Kentucky            26. ***Oklahoma

3. Arizona                   15. Louisiana                 27. **Pennsylvania

4. Arkansas                 16. Michigan                 28. South Carolina

5. California                17. Mississippi               29. South Dakota

6. Colorado                 18. Missouri                  30. Texas

7. Florida                     19. Montana                  31. Utah

8. Georgia                   20. **Nebraska             32. Virginia

9. Idaho                       21. Nevada                    33. West Virginia

10. **Indiana              22. New Hampshire      34. Wisconsin

11. ***Illinois             23. New Mexico           35. Wyoming

12. **Iowa                  24. ***North Carolina           

* Please be advised that with the future of the federal estate tax uncertain, some states may alter their state estate tax laws once the federal estate tax situation is resolved.

** These states do not collect a state estate tax, but do collect a state "inheritance tax."

*** Estate taxes in these states were repealed on January 1, 2010 due to the repeal of the federal estate tax and are may return once the federal estate tax uncertainty is resolved.

George Steinbrenner's Estate Escapes Taxation

On July 13, 2010, George Steinbrenner passed away.  Steinbrenner’s estimated worth was approximately $1.15 billion according to multiple media outlets.  However, unlike Joe Robbie, the former owner of the Miami Dolphins, whose family had to sell the Dolphins to pay estate taxes, Yankee fans have nothing to worry about. Why?  Because as of January 1, 2010, federal estate taxes have been repealed.  Since there is no federal estate tax this year, Mr. Steinbrenner’s estate will not be subject to a tax bill that in 2009 could have equaled approximately $500 million (a 45% rate). 

Mr. Steinbrenner joins three other billionaires who have died this year during the temporary estate tax repeal.  The largest estate is that of Texas energy mogul Dan Duncan, co-founder, chairman and majority shareholder of Enterprise Products.  His estate was estimated at nearly $10 billion, a potential tax bill of approximately $4.5 billion.  Another noted billionaire to die this year is Mary Janet Morse Cargill, whose family owns food and fertilizer conglomerate Cargill, who left behind an estimated estate of $1.6 billion.  Also, commercial real estate titan Walter Shorenstein died in June, with a net worth similar to Mr. Steinbrenner’s.

Although these billionaires likely engaged in significant estate planning, which would have reduced their ultimate tax bill, their passing has generated debate on the estate tax repeal and the cost to the government from repeal.  Senators Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) issued a press release on July 14, 2010 describing their estate tax proposal: a 35% rate; a $5 million exemption phased in over ten years and indexed for inflation.  USA Today ran opposing stories in July 19’s edition debating whether there should be an estate tax at all – see Our view on death and taxes: Loopy estate tax policy highlights D.C. dysfunction and Opposing view on death and taxes: End the 'death tax'.  Now that the estate tax repeal is front and center, Congress may begin to take action.

A few more notes on repeal:  Remember, that during the repeal, there is only a limited step-up in basis for inherited assets; before repeal the basis of all inherited assets was stepped-up to date of death fair market value.  While it is impossible to determine what Mr. Steinbrenner’s basis in the Yankees was, he paid a mere $10 million for a controlling interest in the team in 1973.  Should the family choose to sell the team after Mr. Steinbrenner’s death (which, I assume is unlikely to happen), there would be a significant capital gains tax that would be due.  While this tax would no doubt be significant, it is far less than the estate taxes that would have been due had he died in 2009 or 2011.