We New Jerseyans could be paying 23 cents more for a gallon of gas as soon as the end of this week. Governor Christie and the Legislature agreed in principle to the tax increase, which is to be dedicated entirely to the Transportation Trust Fund. The Legislature will meet in a special session on Wednesday to vote on the matter, and it is expected to pass both houses.
The agreement also includes some tax offsets, including a reduction in the sales tax, tax breaks for veterans, retirees, and the working poor via the earned income credit. It also eliminates the estate tax, which is the subject for today.
Currently, only 15 states have an estate tax, and only six have an inheritance tax. New Jersey has both! (In fairness, so does Maryland.) While many states couple their estate tax exemption with the federal exemption, New Jersey has left their exemption unchanged since 2001, at $675,000. That means that any resident dying with assets in excess of $675,000 will owe Trenton a tax.
But those who can hang on until January 1, 2017 will get a $2 million exemption while those dying after December 31, 2017 will not be subject to a New Jersey estate tax. Of course Governor Christie will be leaving office at that time, so the new administration could try to reinstate it.
Life insurance has long been used as a method to deal with estate taxes. Typically, someone who is anticipating her estate to be subject to taxes will make tax free contributions to an irrevocable trust, which will buy life insurance on her. This technique keeps the proceeds out of the estate where they would otherwise be subject to taxation.
It should be noted that this technique doesn’t actually reduce estate taxes, but rather just creates the dollars to pay them, so that the rest of the estate may pass in total to the beneficiaries.
The question becomes what to do with life insurance that was procured for this specific purpose, but now is no longer needed? Well, the obvious answer is to just cancel the policy. While certainly an option, it could be a bit hasty. As mentioned, there is nothing preventing future legislatures from reinstating the estate tax.
Another option would be to keep the policy and increase the inheritance to the heirs. Or change the beneficiary to a favorite charity. Changing the beneficiary can be difficult if it’s in an irrevocable trust, so leaving an amount of the estate equal to the face amount to the charity can accomplish the same thing.
The point is, having the life insurance provides options. Sure, it may not be used for purpose it was procured for, but that’s true of a lot of life insurance. A policy originally procured to pay the mortgage and educate the kids can be used for many different things should the insured survive those events. And so can the policy that was procured to pay estate taxes, but is no longer needed for that purpose. Like a parachute, it is better to have it and not need it than to need it and not have it.