Despite permanent spousal portability in the federal estate tax after resolution of the "fiscal cliff," credit shelter trust planning in New Jersey will likely remain popular due to the lack of portability in the state estate tax. While little publicized, both the recent American Taxpayer Relief Act (ATRA) and the Affordable Care Act (ACA) greatly increased the taxes on all trusts taxed under Internal Revenue Code (IRC) Subchapter J. ATRA increased the trust tax rate for income above an inflation adjusted $11,950 threshold to 39.6 percent for ordinary income, and 20 percent for capital gains and qualified dividends. The ACA implemented IRC 1411, which imposes a 3.8 percent surtax on trust investment income above the same threshold. Both of these provisions increase the income tax cost of credit shelter trust planning.
Fortunately, there are two ways to reduce the tax bite of these new ACA/ATRA taxes in New Jersey credit shelter trusts. The first involves applying IRC 678, and the second involves modifying trust Distributable Net Income (DNI).
