OK, just when you thought you would no longer have to worry about taxes. Yes, upon your death, your assets may be subject to estate taxation by the State of New Jersey and the U.S. Internal Revenue Service. In addition, beneficiaries inheriting from your estate may be subject to a New Jersey inheritance tax. The amount of the tax varies of course on the size of your estate. It can, however, drastically reduce the amount of the assets actually received by your beneficiaries. The combined tax rate can, in fact, be as high as 55%. A properly drafted Last Will & Testament with included trusts may, however, help eliminate or at least reduce these potential tax liabilities.
Potential Tax Liabilities
There are three distinct tax liabilities to which New Jersey decedents’ estates and beneficiaries may be subject; the federal estate, New Jersey estate and New Jersey inheritance tax. Both the federal estate and New Jersey estate tax are imposed upon the value of a decedent’s estate. The New Jersey inheritance tax is assessed against and based upon the blood relationship, if any, of the decedent to those inheriting under the estate.
Federal Estate Tax
The American Taxpayer Relief Act of 2012 makes permanent certain features that had previously caused difficulty for long term estate tax planning. One feature that the new law makes permanent is the concept of portability of the deceased spousal unused exclusion (DSUE) amount. This is a feature available between spouses only. Portability of the DSUE is an election made by the estate of a decedent who is survived by a spouse that gives the surviving spouse the authority to apply the decedent’s unused exclusion amount to their own transfers during their life and at the death of the surviving spouse. Additionally, the 2012 Taxpayer Relief Act continues the deduction for state estate, inheritance, legacy or succession taxes. It also retains many of the Generation-Skipping Transfer (GST) tax-related requirements. Conversely, the act repeals the five percent (5%) surtax on estates larger than ten million dollars. Passage of the 2012 Taxpayer Relief Act kept the estate and gift tax rates and exemption amounts unified. The result was to reset the federal estate tax exemption amount to $5,000,000 and to raise the maximum tax rate to 40%. In addition, the exemption amount is adjusted for inflation annually beginning in 2014 based upon the standard formula of Internal Revenue Code section 1(f). Regarding the GST the act also provides for a top tax rate of 40% and an exemption amount of $5,000,000.
Federal and New Jersey estate taxes are each due nine (9) months after the decedent’s death. Those taxes are collected and due from estates with a net value (the estate’s value after taking all allowable deductions) at the time of a decedent’s death that exceeds the applicable exemption. The law is actually much more complex. For example, if you gave away your house while alive, but retained the right to live there, known as a “life estate,” the value of your house will be included in your estate. There are a host of other rights which most people would not consider to be assets, which the tax laws may consider part of your estate and subject to estate tax.
Individuals and families with assets over $675,000 can face large estate tax liability which can be reduced by having a properly drawn Last Will & Testament, durable power of attorney with gift provisions, and other planning steps. Recognizing the uncertainty of the law as it now stands, every executor should consider at least having a consultation with an Estate Attorney to ascertain the status of the law at the time of any decedent’s death.
New Jersey Estate Tax
The New Jersey estate tax is a complex statute. It utilizes as an exemption threshold of a decedent’s federal estate tax liability as if the person died on December 31, 2001. At that point in time the federal estate tax exemption was $675,000. If an estate’s value exceeds $675,000, you should certainly at least consult with an estate attorney in order to assure compliance with New Jersey estate tax requirements.
New Jersey Inheritance Tax
In addition to the aforementioned New Jersey estate tax, New Jersey also has an inheritance tax. An inheritance tax means that when a New Jersey resident dies, his or her assets will be taxed on the basis of who inherits those assets.
For most estates, there will be no inheritance tax. If a decedent’s estate goes to a spouse, child, grandchild, parent, grandparent or stepchild, no tax is due. These beneficiaries are called “Class A” beneficiaries. If a decedent leaves money to a charity, an educational institution, a church, a hospital, a library or the State of New Jersey or its political subdivisions, no tax is due. In addition, transfers of decedent’s property less than $500 are exempt from inheritance tax.
If property is given to other family members, such as the decedent’s brother, sister, son-in-law or daughter-in-law the first $25,000 is not taxed (an exemption applies). The balance of the inheritance is presently taxed at 11% for the next $1,075,000 and thereafter at rates that range from 13% to 16%.
All other beneficiaries (persons not included in the above definitions of family) are presently taxed at 15% for the first $700,000 and at 16% on amounts over that figure.
Approvals Required to Transfer Certain Assets – Forms
Some assets (real estate, stocks and bank accounts) require the written consent of the director of the New Jersey Division of Taxation before they can be transferred by an Executor or Administrator of an Estate. This consent is commonly known as a “tax waiver.” Tax waivers are not generally required to transfer cars, personal property such as household goods and jewelry and most employee benefits. In most cases for decedents leaving estates valued at less than $675,000 to “Class A” beneficiaries (spouse, child, parent, grandchild, grandparent or stepchild), the Executor may transfer bank accounts, stocks and bonds by utilizing a “Self-Executing Tax Waiver,” form L-8. The self-executing waiver is filed with the bank, financial institution or broker where the asset is located. Decedents leaving estates valued at less than $675,000 can typically transfer real estate by the filing of form L-9, “Real Property Tax Waiver.” The L-9 form must be filed with the individual Tax Audit Branch, Inheritance and Estate Tax office in Trenton. If a husband and wife own real estate as tenants by the entirety, the surviving spouse need not file a form L-9; the property may be transferred at any time. If a decedent does not leave all assets to “Class A” beneficiaries, a formal inheritance tax return will have to be filed.
It is important to remember that you will need to attach to the tax return a copy of the decedent’s Last Will & Testament and any amendments (codicils), a copy of the decedent’s last full year’s federal income tax return (Form 1040), and a certified check for any tax due. Formal inheritance tax returns are due eight (8) months after the decedent’s death. If the inheritance tax is not paid within eight months, interest will accrue and no tax waivers will be issued until payment is received. Caution: this is one month earlier than the federal and New Jersey estate tax returns are due.
Who Should Pay any Estate or Inheritance Taxes liabilities
A Last Will & Testament allows the testator to decide whether any taxes owed should be paid from the assets of the estate before distribution to the beneficiaries or whether the tax should be paid proportionally from each beneficiary’s share. This is particularly important for individuals leaving property to brothers and sisters and/or nieces and nephews.
Tangible Personal Property
A Last Will & Testament may make separate provisions for tangible personal property. Tangible personal property is comprised of assets like jewelry, furniture and art. Stocks and bonds are not considered tangible personal property. Pursuant to New Jersey law, the Last Will & Testament may state that you will leave a list of instructions as to how tangible personal property, that is not required to be registered, should be distributed. Registered tangible personal property such as an automobile cannot be disposed of on such a list. This list, which should be kept with your Last Will & Testament, may be changed as often as you like without an attorney or witnesses.