Strategies to avoid the inheritance tax

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Q. Charitable donations are not deductible from New Jersey income tax. Are they exempt from the inheritance tax? I’m talking about charitable contributions in one’s will and made upon death.
— Giver

A. First, you’re correct that donations to charities are not deductible for calculating New Jersey income tax.

But transfers made to charities at the time of death as specifically directed in your will are not subject to the New Jersey inheritance tax.

In addition to charities, transfers made to a spouse, domestic partner, civil union partner, parent, grandparent, descendant or stepchild are exempt from New Jersey inheritance tax. Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

And, she said, a deduction is permitted for transfers to charities via a will in calculating the New Jersey estate tax — which is repealed effective Jan. 1, 2018 — and the federal estate tax, she said.

“Although all assets owned by a taxpayer are included in calculating the value of the taxpayer’s estate for purposes of computing the estate tax, not all assets are included for purposes of calculating the inheritance tax,” she said.

Romania offered this example: Life insurance owned by the decedent and transferred to a named beneficiary or to a trust for the benefit of the beneficiary are exempt from the inheritance tax regardless of the beneficiary named. But life insurance payable to the decedent’s estate is not exempt from the imposition of inheritance tax. In addition, she said, payments under certain New Jersey pension systems — including the Teachers Pension and Annuity Fund, Public Employees’ Retirement System, and Police and Firemen’s Retirement System — are exempt from inheritance tax regardless of the beneficiary named.

Therefore, she said, you may be able to reduce the inheritance tax owed by directing that specific beneficiaries receive specific assets.

“For example, a transfer to a sibling in excess of $25,000 up to the first $1.1 million would incur an inheritance tax at the rate of 11 percent, with rates up to 16 percent for greater amounts,” she said. “If you name your sibling as the beneficiary of a $100,000 life insurance policy on your life, the transfer to your sibling would not be subject to the inheritance tax.”

That’s because life insurance payable to a named beneficiary is exempt from inheritance tax. But had your sibling received the same $100,000 as a bequest under your will, that amount would be subject to the tax, she said.

Romania said property transferred at death is not the only property subject to the inheritance tax, and that transfers intended to take effect at death are also taxed.

“Gifts made more than three years before death are presumed not intended to take effect at death and will not be subject to the tax, but gifts made within three years of death, to anyone not in the exempt class, may be subject to the inheritance tax,” she said.

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.