Estate and Inheritance Tax
Estate and Inheritance Taxes
“Estate” has different meanings for probate and tax. In probate, your “probate estate” is everything that passes under your will when you die, rather than by survivorship or to a named beneficiary outside your will. In tax, your “gross estate” is all of the property you own when you die, including cash, investments, interests in real estate and other assets. Your gross estate may even include property given away with strings attached or within a few years of dying. Your taxable estate is the gross estate minus the deductions that are allowed for tax purposes. For instance, if you have a house and $500,000 and leave the house to your kids and the money to a qualified charity, the house and $500,000 are your gross estate, but the charitable deduction is subtracted in computing your taxable estate.
When you pass away your gross estate may trigger New Jersey inheritance tax and/or state and federal estate tax. However, we can use a variety of techniques to help minimize your tax liability and pass more of your estate to your loved ones.
Federal Estate Tax
The federal government imposes a tax on the value of your estate. The bad news is that the tax rate is very high, with a top rate of 40% in 2015. The good news is that most people don’t have to pay it, unless they have the pleasant “problem” of being very wealthy.
The exemption for federal estate tax as of 2015 is $5.43 million. In other words, if the total value of your estate as of the day you die is less than $5,430,000, you shouldn’t have to pay federal estate tax. Even if your gross estate exceeds the federal exemption amount, we may be able to reduce your taxable estate below $5,430,000 with various tax planning techniques.
Marital Deduction & Portability
Even if the value of your estate is above the exemption amount, your estate may still owe no federal estate tax if you’re married.
First off most amounts passing to or for a spouse qualify for a marital deduction, which reduces the taxable estate. Even limited kinds of marital trusts may qualify for the marital deduction.
In addition, “portability” can eliminate tax when the surviving spouse dies. Portability is complicated and subject to limitations and requirements we don’t discuss in the following brief explanation. Estate tax portability is intended to permit typical married couples to use each spouse’s $5,430,000 (in 2015) federal estate tax exemption, for a total exemption of $10.86 million in 2015.
If Husband dies leaving his entire estate to Wife, because of the marital deduction there is no federal tax on husband’s estate. If Wife dies a widow with a gross estate of $10.43 million (including Wife’s inheritance from Husband), there is no marital deduction to shelter the extra $5 million beyond Wife’s own federal estate tax exemption of $5.43 million (ignoring inflation adjustments after 2015). However, with portability, Wife’s estate also can claim Husband’s unused federal estate tax exemption to avoid federal estate tax because Wife’s taxable estate is under the combined $10.86 million federal estate tax exemption.
While it was possible to take advantage of both spouses’ exemptions before portability, it was harder. To qualify for portability, a federal estate tax return must be filed by the estate of the spouse who dies first and the surviving spouse must meet various requirements.
We can help ensure that your estate qualifies for portability. With millions of dollars in taxes at stake, it pays to get professional guidance.
The federal estate tax shares its exemption with federal gift tax. In other words, if you make a gift of $1 million, you may not have to pay federal gift tax, but your federal estate tax exemption will be reduced by $1 million. If you make large gifts during your lifetime, you may owe federal gift and estate taxes even if the value of your estate is under the exemption amount.
New Jersey and New York Estate Tax
If you die a resident of New Jersey, your estate is subject to NJ estate taxes. Like federal estate tax, this is a tax imposed on the value of your estate. The NJ estate tax rate is much lower than federal rates but it applies to many more New Jersey residents because the New Jersey exemption is only $675,000. So if the total value of your estate on the day you die is more than $675,000 you may have to pay New Jersey estate tax.
For both federal and estate tax, no tax is owed on any property that passes to a surviving spouse. However, this only defers taxes, because estate tax must still be paid on the full estate when the second spouse dies. And unlike the federal government, New Jersey doesn’t allow spouses to benefit from portability. However, for married clients we can minimize or avoid NJ estate taxes through disclaimer trust or credit shelter trust planning that lets spouses use both spouses’ $675,000 exemptions to shelter a total of $1,350,000 that passes to children or other heirs.
In April 2014, New York overhauled its state estate tax to a complex “cliff”exemption system. The new law changes how New York estate tax is calculated and increases the exemption amount over coming years, but only for estates that are modest to moderate. If your New York taxable estate is within limits, an exemption leads to no New York estate tax being due. However, larger estates fall off a cliff and lose most or all of the exemption, which can lead to substantial New York estate tax. Fortunately, techniques are available to reduce or eliminate potential New York estate tax. Therefore, if you are a financially successful New Yorker, we suggest you contact us to discuss your options.
New Jersey Inheritance Tax
Residents of New Jersey and non-residents who own property in New Jersey may owe NJ inheritance tax when they die.
Unlike estate taxes, inheritance tax is based not on the value of your estate, but on who receives (inherits) assets when you die. It’s not about how much you have; it’s about who you leave it to. If you leave anyone other than a spouse, parent, descendant (e.g. child or grandchild), or step-child (called a Class A beneficiary) more than modest a modest amount, inheritance tax will be due.
In other words, if you leave much of anything to a sibling, son-in-law, daughter-in-law, romantic partner to whom you are not married, or friend, inheritance tax may be levied on the value of that property.
For advice on tax planning, call or email us today.