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Plan Your Estate to Benefit Your Loved Ones– Not the Taxman

Posted on: August 3rd, 2013 by Guest Blogger

[The following article is by guest blogger Julie Donald, a freelance writer with a strong background is finance.  Julie obviously knows her stuff and FriedmanLaw/SpecialNeedsNJ.com are proud to feature her work.]

While we’ve come a long way since The Beatles sang about the 95% tax rate England then charged certain high earners, Estate tax planning still is an important part of financial planning. Since New Jersey has an inheritance tax as well as a separate estate tax, understanding when these taxes apply is an important step toward minimizing the amount you will have to pay when a loved one dies. Estates with a value of $675,000.00 or more are subject to the estate tax. The inheritance tax applies to any estate. The rate depends on the relationship of the beneficiary to the person who has passed away.

When an Estate Tax Return is Required

When a New Jersey resident leaves an estate with a gross value of $675,000.00 or more, the executor of the estate must file an estate tax return. Federal estate tax returns are only required if the estate is worth more than $5.25 million (inflation adjusted after 2013). New Jersey estates of non-residents are not subject to the NJ estate tax.

The gross value of the estate is calculated by adding up all the assets a person owned as of the date of his or her death, including the following:

  • New Jersey real estate
  • Funds held in bank accounts or certificates of deposit
  • Investment accounts and securities
  • Funds from retirement accounts
  • Cars, trucks, and personal property
  • Any small business interests (small corporation, sole proprietorship, limited liability company)

Tax is based on the total assets less most property that is left to a spouse or civil union partner, debts, and certain expenses.

Proceeds from life insurance policies may be taxable even if the decedent did not own the policy. By the same token assets that pass outside probate may be subject to New Jersey inheritance and estate tax. However, FriedmanLaw can help you develop an estate plan that avoids or minimizes tax on life insurance and other assets.

Paying Estate Tax

If a New Jersey estate tax return is required, it must be filed within nine months after the date of a person’s death.  While the filing date can be extended, if the estate tax isn’t fully paid within the nine-month period, interest will be charged at the rate of 10 percent per year from the nine month anniversary of the date of death until the amount is paid. The Director can choose to extend the time for filing the estate tax return but not the time for paying the tax. Rather than having the amount of the estate reduced by the amount of the estate tax, some people may choose to fund a financial product which will pay this amount on their death. A separate life insurance policy could be bought and the proceeds used toward the estate taxes.  However, these life insurance and other tax funding products will generate additional tax unless properly designed.  Therefore, it is advisable to get legal advice before making a purchase.

New Jersey Inheritance Tax

Under state law, close relatives are exempt from the inheritance tax. They are classified as Class A. The following people are included in this group:

  • Spouse, civil union or domestic partner
  • Parent or grandparent
  • Child (includes biological or adopted) or other descendant stepchild

Class B was eliminated when the law was updated.

Class C includes the following:

  • Brother or sister
  • Spouse or civil union partner of the deceased’s child
  • Surviving spouse or civil union partner of the deceased person’s child

For Class C relatives, the first $25,000.00 in property is not taxable. For amounts over $25,000.00, the tax rates are as follows:

  • Next $1,075,000: 11%
  • Next $300,000: 13%
  • Next $300,000: 14%
  • Over $1,700,000: 16%

Anyone else is placed in the Class D category, for which there are no special exemptions. The tax rates are 15 percent on the first $700,000.00 and 16 percent on any amounts higher than that.

Gifts Made During a Person’s Lifetime

Any gifts transferred in the three years before a person’s death are presumed subject to the state’s inheritance tax unless the recipient is exempt from having to pay. The gifts will not be taxed if it can be shown that the person did not transfer the money or property “in contemplation of death.”

Since New Jersey inheritance tax laws and estate planning matters can be very complicated, you should consider options very carefully to avoid leaving your beneficiaries with a large tax bill.  FriedmanLaw has years of experience helping families plan estates to minimize tax and accomplish non-tax goals.  We look forward to working with you.

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As this website provides general information and isn’t tailored to your particular situation, it doesn’t constitute legal advice and may not take into account rules and exceptions that affect you. Although updated from time to time, this website may not take account of recent legal developments or differences in laws from state to state. For safety sake, obtain individual legal advice before you act! You assume all risk of acting on information contained in this website. This website doesn’t constitute legal advice, and no attorney-client relationship exists unless FriedmanLaw and you execute a written engagement agreement. Please contact us at 908-704-1900 to discuss engaging FriedmanLaw to help resolve your legal concerns.
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