We practice law in the state of New Jersey. People who live here are well aware of the fact that we pay more than our fair share of taxes, and as you may imagine, New Jersey inheritance laws not favorable when it comes to death taxes.
Though it may not sound fair since your estate is comprised of assets that you were able to retain after paying taxes all of your life, there are death taxes. We have a federal estate tax that is applicable in all 50 states. This death tax carries a 40 percent maximum rate, and the exclusion is $5.45 million in 2016.
The federal estate tax exclusion is the amount that can be transferred free of taxation. Any portion of your estate that exceeds this amount would potentially be subject to the tax, unless you are transferring assets to your spouse. There is an unlimited marital estate tax deduction, and this allows you to transfer unlimited assets to your spouse tax-free, as long as your spouse is an American citizen.
To provide an example, let’s say that $7.45 million is being transferred in 2016. The first $5.45 million could pass tax-free, because this is the amount of the exclusion. The remaining $2 million would be subject to the estate tax.
New Jersey Estate Law & Taxation
There are a number of states in the union that have state-level estate taxes, and of course, New Jersey is one of them. The exclusion on the state-level is considerably lower than the federal estate tax exclusion. As a result, you could be exposed to the New Jersey estate tax even if you are exempt on the federal level.
The New Jersey exclusion is the lowest state-level exclusion in the entire country at just $675,000, and the maximum rate is 16 percent.
Many people think that an inheritance tax and an estate tax are one and the same. In fact, this is a misconception.
An inheritance tax is a tax that is levied on transfers to each individual nonexempt inheritor. It would be possible for the tax to be imposed multiple times when the same estate is being transferred.
Fortunately, there is no inheritance tax on the federal level. However, there are a small handful of states that have state-level inheritance taxes, and we are among the unlucky few. The good news is that close relatives are exempt from the New Jersey inheritance tax.
Other than New Jersey, the states that have inheritance taxes are Pennsylvania, Maryland, Nebraska, Kentucky, and Iowa. Maryland and New Jersey are the only states that have estate taxes and inheritance taxes.
Gift Tax
When you hear about taxes on postmortem asset transfers, you may think about giving gifts while you are living to avoid death taxes. This is a logical approach, but the powers that be do not want people to sidestep the estate tax. To close this window, there is a federal gift tax in place.
The federal gift tax is unified with the estate tax. The $5.45 million exclusion that we have in 2016 is a unified lifetime exclusion. It applies to large gifts that give while you are living along with the value of your estate. So, if you were to give $5.45 million in tax-free gifts while you are living using your unified lifetime exclusion, there would be nothing left to apply to your estate. The entirety of your estate would potentially be subject to the estate tax after you pass away.
Tax Efficiency Strategies
If you are exposed to taxation, there are legal steps that you can take to ease the burden. The optimal course of action will vary depending upon the circumstances.
Irrevocable trusts of various types are often used by people who are seeking estate tax efficiency. These wealth preservation trusts would include generation-skipping trusts, grantor retained annuity trusts, qualified personal residence trusts, and charitable lead trusts.
There are other techniques that can be implemented to gain estate tax efficiency as well. If you contact our firm to schedule a consultation, we can explain your options to you. If you decide to go forward, we can help you craft a wealth preservation plan. Ultimately, your legacy will be preserved optimally, and your family will have resources to draw from after you are gone.
Attend a Free Estate Planning Seminar
If you would like to obtain added layers of information about New Jersey estate law and other important topics before you schedule a consultation, attend one of our free seminars. There are a number of sessions being held over the coming weeks, and you can visit our seminar schedule page to get all the details.
Alan Augulis, Estate Planning Attorney
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