When you are planning your estate, you must determine whether or not you have any estate tax liability. To do this you could prepare a statement of net worth. This is simply a balance sheet that you utilize to inventory your assets and your debts. When you do the math, you can see where you stand with regard to estate taxes.
New Jersey State Estate Tax
In New Jersey we have a state-level estate tax. We are in rarefied company on this front, because there are just 13 other states in the union that have state-level estate taxes.
The exclusion or exemption is the amount that you can transfer before the estate tax would become applicable. In New Jersey, the exclusion is the lowest in the United States among these 14 states that have their own estate taxes. Our exclusion is just $675,000, and the maximum rate of the New Jersey state estate tax is 16 percent.
Federal Estate Tax
In addition to the state-level estate tax that we have in New Jersey, there is a federal estate tax to contend with as well. The federal exclusion is considerably higher than of the state-level exclusion, so you could be exposed on the state level even if you are federally exempt.
For the remainder of the 2016 calendar year, the federal estate tax exclusion is $5.45 million. There can be inflation adjustments at the beginning of each year, so you can keep your eye open when 2017 rolls around to see the adjusted figure for that year.
The federal estate tax rate is higher than the state rate. At the present time, the top rate of the federal death tax is a rather attention-getting 40 percent.
Federal Gift Tax
You can’t discuss the federal estate tax without mentioning the federal gift tax. It would be logical to consider giving gifts while you are living to avoid the estate tax. This is not an option because of the existence of the federal gift tax.
The gift tax and the estate tax are unified. The $5.45 million exclusion applies to your estate along with the taxable gifts that you give while you are living. Both taxes carry the same maximum rate.
Unlimited Marital Deduction
We should touch upon the existence of the unlimited marital deduction so that you have a firm understanding of the death tax dynamic. If you are married to a United States citizen, you can transfer unlimited assets to your spouse free of transfer taxes. This is true on the federal level and the state level.
The unlimited marital deduction does not concern the tax man. If you were to use the unlimited marital deduction to leave a tax-free bequest to your spouse, the estate tax would still be a factor. Your surviving spouse would then be in possession of a taxable estate. The tax collectors would still be in a position to get their share.
On the other hand, if the unlimited marital deduction was afforded to a non-citizen spouse, the tax man could be left out in the cold. The surviving spouse could return to his or her country of citizenship with a tax-free inheritance.
New Jersey State Inheritance Tax
An estate tax is applied on the portion of an estate that exceeds the amount of the exclusion or credit. There is another type of death tax called an inheritance tax. This type of tax can be applied on transfers to each inheritor who is not exempt. So, there could potentially be multiple impositions of an inheritance tax when one estate is being distributed among the heirs.
We do not have a federal inheritance tax, and there are only six states with state-level inheritance taxes. You guessed it, New Jersey is one of them. Maryland, Pennsylvania and New Jersey are the only three states with both a state-level estate tax and a state level inheritance tax.
The good news about the New Jersey state inheritance tax is that close relatives are completely exempt from the tax. These would include spouses, parents and grandparents, children, and grandchildren.
Schedule a Consultation
Death taxes can be a significant cause of concern for you, especially if you are a resident of the state of New Jersey since the state exclusion is so low. There are steps that you can take to ease the burden if you are going to be exposed on any level.
If you would like to discuss your options with a local Central New Jersey estate planning attorney, call us at (908) 222-8803 or send us a message through our contact page to set up a consultation.