Estate Planning FAQ 7 – Taxes | Monmouth, Middlesex, Union County, NJ
What about taxes?
Apart from income tax, the estate of a New Jersey resident may be subject to New Jersey Inheritance Tax, New Jersey Estate Tax or Federal Estate Tax. In some cases the estate of a New Jersey resident with out of state property may also owe tax to that state. The good news as far as New Jersey is concerned is that either the Inheritance Tax or the Estate Tax but not both will apply, but the bad news is that the tax which is the greatest is the one that will be due. Here is how these taxes currently work:
New Jersey imposes a tax on inheritances based upon the legal relationship of the deceased to the beneficiary. Spouses, registered civil union partners, parents, children, step-children, grandchildren and charities do not pay New Jersey Inheritance Tax. In addition, certain transfers, such as life insurance proceeds payable to a designated beneficiary, payments of state benefits to certain New Jersey retirees are not subject to inheritance tax. Inheritances by more collateral relatives such as brothers and sisters, sons-in law or daughters-in-law, nieces, nephews, cousins and by unrelated third parties are taxed. Where the tax applies it is assessed at 11% for siblings and in-laws (after a $25,000 exemption per applicable recipient) and at 15% for nieces, nephews, cousins and non-relatives. When the New Jersey Inheritance Tax applies a tax return and the tax itself are due to be filed and paid within 8 months from the date of death.
New Jersey also imposes its own version of an estate tax. This tax applies on all estates where more than $675,000 passes to beneficiaries other than a surviving spouse or a charity. This is a graduated tax, which originally was equivalent to a credit for state death taxes allowed under the Federal Estate Tax system but which has functioned independently since Federal Estate Tax laws were amended in 2001. When the New Jersey Estate Tax applies a tax return and the tax itself are due to be filed and paid within 9 months from the date of death. Where both the inheritance and the estate tax apply the larger of the two taxes, which usually but not always is the inheritance tax, will be due. Extensions of time for the payment of the inheritance or estate taxes will be granted, but at a price, 10% interest is imposed upon the late payment, unless there is some really good reason for lateness, in which case application may be made to reduce the interest on the unpaid tax from 10% to 6%. These taxes are liens on New Jersey property until they are paid. When the deceased had New Jersey bank accounts or securities registered in New Jersey, generally the accounts cannot be closed and the securities sold until the state issues consents to transfer, also called waivers. Some beneficiaries have had the experience of having a bank or other financial institution allow the withdrawal of up to half the balance in an account of a deceased family member until these waivers are issued. The restricted withdrawal results from New Jersey law which allows the state taxing authorities to charge the financial institution up to half the value of the account if the funds are withdrawn and thereafter the state is not able to collect the tax due from the Executor or the beneficiary. New Jersey now has a form called a self-executing waiver or Form L-8 which banks are allowed to give to the families of depositors to allow the accounts to be closed where the beneficiaries are all exempt from inheritance tax (usually spouses and children) and the total estate is valued at not more than $675,000.
It should be noted that there are significant differences among the states about state level transfer taxes. Some states are like New Jersey with both inheritance and estate taxes. Some states, like Pennsylvania, have only inheritance taxes, some states, like New York and Illinois, have only estate taxes, and some states, like Florida and Georgia, do not have either tax at this time. In addition, where one or both of the taxes apply the rates of tax and the property taxed may be different.
While state taxes are important and may be the only taxes to apply to a given estate, depending upon the size of the estate and the identity of its beneficiaries, the federal tax may be the larger issue because when it does apply it is at a much higher rate. The Federal Estate Tax laws, originally enacted in the early 1900s, have been modified many times over the years. It is likely that further significant changes will take place, probably starting in 2012. The changes have involved what is subject to tax, what is allowable as a deduction from the tax, what amount can pass exempt from the tax and what can pass to a surviving spouse free of the tax. Many techniques have been developed to eliminate or minimize Federal Estate tax. Most of them center on maximizing the value of each person’s exemptions. Frequently trusts are employed to get the most out the exemptions while preserving. The availability and utility of one trust format or another will depend upon the size of a person’s estate, the assets owned, the person’s personal family situation, the applicable tax rates and exemptions, both federal and state, and other factors. There are certain assets that upon transfer have multiple consequences, for estate and gift taxes, for income tax and for long term planning. These would include but not be limited to life insurance and retirement accounts. These items need to be considered as part of an integrated estate plan in order to minimize taxes and to maximize what can be retained in the family. For example, life insurance may be owned in a separate trust which, if drawn and administered properly could be entirely excluded from estate tax. Retirement accounts could be set to benefit not only spouses and children but also grandchildren in what are sometimes referred to as stretch accounts, it being the principal concept that the longer money stays invested on a tax deferred basis the greater the overall return is likely to be.
Call (732)-972-1600 today to speak to one of our skilled Estate Planning Attorneys. Located in Manalapan (Monmouth County, NJ), Cranford (Union County, NJ) and Midtown Manhattan (New York, NY); Drescher & Cheslow represents clients throughout the State of New Jersey & New York including but not limited to Mercer, Middlesex, Monmouth, Essex, Somerset, Morris, Hudson and Ocean counties.
Ten Frequently Asked Estate Planning Questions
First: What happens if someone dies without a Will?
Second: What is probate and how much time and money does it cost?
Third: What are the different ways property can be owned and what problems can these different forms of ownership create?
Fourth: Must a parent treat all children equally?
Fifth: How should property be left for someone unable to manage it?
Sixth: Who should be named Executor or Trustee?
Seventh: What about taxes?
Eighth: What about lifetime gifts?
Ninth: How can clients safeguard their affairs in the face of physical or mental infirmity?
Tenth: How are health care decisions to be made if a person becomes unable to express his or her wishes?