Tax on a Phantom Tax

, By Joseph C. Mahon

Practitioners in all decoupled states must be careful

By Joseph C. Mahon

A recent decision out of New Jersey — Estate of Stevenson v. Director, Division of Taxation¹ — illustrates a novel issue arising under the decoupled estate tax systems adopted by many states: the potential imposition of state death taxes on federal taxes that are never paid!

In Stevenson, the residuary estate actually passed to the surviving spouse at the decedent's death in 2005. Nonetheless, in determining the decoupled New Jersey estate tax due, a court reduced the marital deduction by the amount equal to a hypothetical federal estate tax payable from the residue determined by applying the Internal Revenue Code in effect in 2001.²

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