New Jersey Death Taxes
By Dennis C. McAndrews and Alissa B. Gorman
McAndrews Law Offices, P.C.
A majority of decedents currently escape the Federal Estate Tax due to the high exemption amount, as only those individuals with $5.43 million or more in their estate at their death are subject to the Federal Estate Tax. However, that does not mean that a decedent will avoid all death taxes. In addition to the Federal Estate Tax, some states, including New Jersey, assess their own estate tax. New Jersey’s Estate Tax taxes the estates of deceased New Jersey residents who die with more than $675,000.00 of assets.
To estate planning professionals, the $675,000.00 exemption amount seems like an heirloom, as that amount was the Federal Estate Tax Exemption in 2001. Why then, does this antiquated number have meaning and importance in New Jersey? The New Jersey Estate Tax law continues to be tied to the Federal Estate Tax paradigm as it existed in 2001. Thus, for estates over $675,000.00, in order to determine the proper amount of New Jersey Estate Tax, an IRS Form 706 must be computed as the tax code existed in 2001. New Jersey’s Estate Tax therefore maintains the same exclusions and exemptions as the Federal Estate Tax, but uses a much lower threshold number to determine which estates are subject to tax.
In addition to the Estate Tax, New Jersey also maintains an inheritance tax, which taxes the transfer of assets upon the death of any individual – New Jersey resident or not. Unlike the Estate Tax, the Inheritance Tax only applies to assets that are located in New Jersey. The rate of inheritance tax is based on the relationship between the decedent and the person inheriting the asset. Inheritance tax will also be assessed if New Jersey property is transferred to anyone outside of a Class A beneficiary. Class A beneficiaries include a spouse, parent, child, and grandchild, along with several other individuals. Where an individual other than a Class A beneficiary receives a transfer of New Jersey property, the New Jersey inheritance tax, with rates ranging from 11% to 16% depending on relationship of the recipient to the decedent, must be paid.
Due to the complex web of federal and state death taxes, estate planning is alive and well in New Jersey. Just as tax planning trusts such as Credit Shelter Trusts benefit married individuals, gifting can benefit single, elderly individuals who wish to transfer assets to their loved ones during their lifetime. Gifting may be used to significantly decrease any estate or inheritance tax due at death since New Jersey does not have a stand alone Gift Tax, and does not limit the amount of gifts that may be made during life.
Care should be taken when gifting, as certain federal estate tax rules will bring some gifts back into the estate (for instance, if an individual transfers a life insurance policy within 3 years of their date of the death, the insurance policy will be included in the decedent’s estate). Additionally, the New Jersey estate tax calculation is a complex formula, which takes into consideration the net taxable estate plus all taxable lifetime gifts to determine the tax due. It does not directly tax lifetime gifts, but even if an individual makes gifts that lower his taxable estate to under $675,000.00, estate tax might still be due. Even though taxable gifts are factored into the estate tax calculation, most individuals will benefit from gifting.
While estate planning should be done for individuals on all income levels, a planning opportunity arises where a single, elderly individual possesses an estate in excess of $675,000.00 and has federal estate and gift tax exemption available. For example, assume an 80 year-old client has a current estate of $1,000,000.00, has not made any prior taxable gifts, and has the full federal estate and gift tax exemption available. If the client dies with a taxable estate of $1,000,000.00, the New Jersey estate tax liability would be $33,200.00. However, if the client makes taxable gifts of $500,000.00, and then dies with a taxable estate of $500,000.00, the New Jersey estate tax liability would be $10,000.00. Therefore, this client would benefit by making gifts during his lifetime.
Particular attention must be paid to the type of assets that are available for gifting, and to whom the assets are being gifted. If the client owns highly appreciated stock and prefers to gift cash instead of the stock, then capital gains tax will be due when the stock is sold. Likewise, if the client prefers to gift the stock in-kind, the person receiving the gift of stock will eventually be subjected to a capital gains tax at the time of sale (assuming the stock has appreciated since the time of purchase). Additionally, the New Jersey inheritance tax pulls back into the estate any gifts made in contemplation of death, which is presumed to be any gifts made within 3 years of the date of death. There is a 0% tax rate on assets passing to Class A beneficiaries, and therefore it would not matter when the gift was made if it passes to those individuals. However, if the asset passes to anyone outside of Class A beneficiaries (siblings, cousins, friends, etc.), then the 3 year rule would apply, and inheritance tax would be due on the gift.
While individuals of all income levels benefit from proper estate planning, careful consideration should be paid to single, elderly New Jersey clients who possess sufficient resources to live out their lives in an appropriate manner, and have excess resources to be considered for gifting. While some estate tax liability could still be due after instituting a gifting plan, the net tax due under the New Jersey estate tax scheme will usually be less by virtue of the lifetime gifts than if the assets had been retained until death. Should you wish to discuss the impact of the estate and inheritance taxes on your estate, please contact our office at 610-648-9300.