Articles Tagged with “New Jersey Estate Tax”

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Except in the case of spouses, civil union partners and domestic partners, when a New Jersey resident dies owning a jointly held asset, whether it is real estate, stocks, bank accounts, etc.,  the entire value of the asset will be taxed as if it belonged to the decedent.  If the surviving joint tenant can prove that a portion of it actually belongs to the surviving joint tenant and not the decedent, the New Jersey Division of Taxation may grant an exemption from taxation for that portion of1387291_decorative_house_in_sunlight-thumb-170x127-52807 the value of the asset.  This makes selecting an estate administration and tax planning attorney extremely important.

In order to prove that a portion of the asset actually belonged to the surviving joint tenant, you must be able to show the surviving joint tenant’s financial contribution to the asset or that the surviving joint tenant inherited their portion of the asset from another.  Depending upon the relationship between the decedent and the surviving joint tenant, the asset will be subject to inheritance tax at a rate between 11 percent and 16 percent.   Class A Beneficiaries (which include spouses, civil union partners, registered domestic partners, parents, grandparents, and children) do not pay any tax on inheritances.  Class C Beneficiaries (which include siblings of the decedent and spouses/civil union partners of a child of the decedent)  receive $25,000 free from inheritance tax, are taxed at a rate of 11 percent on the next $1,075,000 of inherited assets and the rate increases as the amount inherited increases – up to 16 percent.  While bequests to charities are not taxed, inheritances received by all other non-charitable beneficiaries not included in Class A or C are Class D beneficiaries and their inheritances are taxed at a rate of 16 percent for the first $700,000 and 17 percent for the remaining balance of the inheritance.

Many people list another person as a joint owner on an account or an asset because they believe it simplifies the estate administration and probate of the estate.  But, it actually can result in a significant tax burden which might not have been due or would have been significantly lower if assets were not jointly held.  Moreover, in New Jersey probate and estate administration are not difficult or expensive so it is not usually necessary to attempt to avoid it.

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The New Jersey Estate Tax is being phased out beginning with residents dying on or after January 1, 2017.  Governor Christie signed a new law calculator-385506__340[1], the new tax laws reduce the estate tax for resident decedent’s dying in 2017 by increasing the exemption amount to $2,000,000.00, and then eliminating the New Jersey Estate Tax altogether for resident decedents dying on or after January 1, 2018.  New Jersey is no longer one of the worst states in which to die, and New Jersey resident seniors may no longer feel the need to establish domicile elsewhere. Those New Jersey decedents dying in 2016 with estates exceeding $675,000 will remain subject to New Jersey estate tax. Further, the federal estate tax will continue to apply to estates greater than the federal exemption amount, currently $5,450,000, which increases annually based on inflation.  And, after the recent elections, we need to keep an eye out for new laws enacting changes to the tax code.

However, while the New Jersey Estate Tax is being phased out, the Inheritance Tax will remain.  New Jersey is one of only six states which impose an inheritance tax on transfers from a decedent to a beneficiary.   Whether an estate is subject to inheritance tax is determined by the relationship between the decedent and the beneficiary.  Bequests to “Class A” beneficiaries (i.e. spouses/domestic partners, parents, children) are not subject to inheritance tax.  The tax rate on transfers to non Class A beneficiaries depends on the “Class” of the beneficiary and the value of the asset transferred to that beneficiary.  Likewise, non-resident decedents who own New Jersey real estate or tangible personal property will continue to be subjected to the New Jersey Inheritance Tax.  Additionally, New Jersey Inheritance Tax Waivers will still be required in order to transfer title to real estate, brokerage accounts, securities and bank accounts.

Please call or e-mail the attorneys at McLaughlin & Nardi, LLC to create an estate plan or  review and update an existing plan.

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stock-photo-15852330-elderly-couple-talking-and-smiling.jpgThe American Bar Association Task Force on Real Property Probate and Trust Law issued a report discussing the following shortcomings of drafting your own estate planning documents using the services of a “Do It Yourself” package. Some of those short comings are as follows.

  • Things are often more complicated than they seem. When a person writes their own will, often the results are not what she intended. For example, an elderly widow wants to divide her assets equally between her two adult children. Her assets consist or a house worth $500,000 and an IRA worth $500,000. She decides to write her own will giving one child the house and the other the IRA. Then after her death, it comes to light that the IRA, which has designated beneficiaries, is to be shared equally by her two children. Moreover, at the time of her death, her IRA is valued at $200,000 and the value of the house has appreciated to $600,000. So, one child receives the house and $100,000 from the IRA house, a total value of $700,000 and the second child receives $100,000 from the IRA. This was not what she intended. Having an experienced estate planning lawyer can help prevent this.
  • An estate planning lawyer offers more than the expertise in drafting your documents. A significant role of an estate planning lawyers is to counsel clients when making these important and personal decisions, for example, guidance on whom to choose as a guardian for minor children. While this may seem simple, it is complex decision on who is best suited to nurture children, but consideration must also be given the ability to provide financial support. Moreover, when a couple makes decisions, it may be important to have an attorney help the couple chose guardians who are acceptable to both parties.
  • In the event of a dispute after a person’s death, the court will often hear a wide variety of allegations about the decedent’s intentions – all from family members who have an interest in how the court will decide. This is a difficult role for a judge who will look to hear from a person who had discussion with the decedent while she was alive about how she wanted her assets to be distributed. Often, that person is the estate planning lawyer.
  • Technical issues with your will can render it void. A will must unequivocally state the decedent’s intentions. If you draft your own will, you might inadvertently use words which are meaningless in the probate court. For example, if you state “I would like my niece to have my car” would be an unenforceable provision. Moreover, the will must be executed in accordance with New Jersey probate and estate law in order to be admitted to probate and enforced.
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fishing.jpgThe irrevocable life insurance trust (“ILIT”) provides an accessible means of avoiding New Jersey and federal estate taxes on life insurance proceeds. The potential savings often outweigh the disadvantages of what you give up.

The New Jersey and federal “estate taxes” are taxes on the transfer of property at your death. Life insurance proceeds are among the types of property that are subject to estate tax. The taxable status of life insurance proceeds is determined by ownership of the policy and payment of the proceeds. If you own a life insurance policy, upon death, your estate will be fully subject to tax if: (1) The proceeds of the policy are payable directly or indirectly to your estate; or (2) if you, while alive, held any ownership rights in the policy, such as the right to change a beneficiary, surrender or cancel the policy or borrow against the policy.

If you leave life insurance proceeds to someone other than a spouse, such as a child, relative, or friend, the proceeds will be taxed as being part of your estate. On the other hand, if you leave life insurance proceeds to a spouse, the proceeds will not be part of your estate at your death, but the surviving spouse’s estate may be taxed. An ILIT can avoid taxes not just on your own estate, but also on the estate of your surviving spouse.

The ILIT itself would own the life insurance policy and is named as its beneficiary. Each year, you gift an amount sufficient to pay the policy premiums to the trust. Then, the trust pays the premiums. You can gift up to $13,000 per year to the trust, per beneficiary named in the trust, without incurring any gift tax liability. Upon your death, the insurance proceeds are paid into the trust. The ILIT is drafted to ensure that the insurance proceeds will not be taxed as part of your estate; however, the beneficiaries of the trust will be able to access the monies held by the trust for health, education, maintenance and support. Typically, the trust is drafted so that the surviving spouse also has a right to receive the income from the trust and perhaps even a limited right to invade principle. This will also protect the monies held in the trust from creditors of the beneficiaries, or in the event a beneficiary becomes divorced. On the death of the surviving spouse, the monies held in trust can either be paid outright to your children, or the trust can continue.
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Estates of New Jersey residents are potentially subject to two types of state taxes: New Jersey Estate Tax and New Jersey Inheritance Tax.

First, an estate is subject to New Jersey Estate Tax if the value of the estate is more than $675,000.00. This tax is based solely on the value of the assets held by a person when they die, whether held individually or jointly with another person. If the value of the estate exceeds $675,000 a New Jersey Estate Tax Return (NJ IT-E) must be filed within nine months after death.

Second, the requirement to file New Jersey Inheritance Tax Return (NJ IT-R) is triggered by the classification of the estate’s beneficiaries. The NJ IT-R must be filed within eight months after death. The tax is determined by the relationship of each beneficiary to the decedent. Class “A” beneficiaries are not required to file or pay New Jersey Inheritance Tax. Class “A” beneficiaries are spouses, children (or lineal descendants), parents, grandchildren, grandparents, or stepchildren. There is also no inheritance tax on bequests to a qualified charity. Since, these are usually who most people leave their estates to, most estates are not subject to the New Jersey Inheritance tax.

If a person leaves property to a brother, sister, son-in-law or daughter-in-law (these are class “C” beneficiaries), the New Jersey Inheritance Tax Return must be filed. The first $25,000 of the bequest is not subject to inheritance tax. However, the next $1,075,000 is subject to tax at a rate of 11%; amounts in excess of that are taxed on a sliding rate scale ranging from 13% to 16%.
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