Q. My beneficiary is my cousin, who lives in New York. I’m in New Jersey. I have two IRAs, one savings account and my home. What inheritance taxes do we have to worry about and how can I lower what he will owe?
— Planning ahead
A. It sure does take planning to avoid all the death taxes that could be levied on your estate.
It looks like you may escape some, but not all.
First, if you make it until Jan. 1, 2018, you won’t face the estate tax. It’s being repealed on that day.
But unfortunately, the state still has an inheritance tax.
The New Jersey inheritance tax is levied against certain bequests, and also on transfers within three years of death, based on the relationship between the deceased and the beneficiary and the value and nature of the assets, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
She said there is no inheritance tax imposed if the beneficiary is a spouse, domestic partner, civil union partner, grandparent, parent, descendant or stepchild of the decedent or a charity.
The value of the bequest is irrelevant, she said, provided the beneficiary falls within one of these categories, because those relationships are exempt from inheritance tax.
If the beneficiary does not fall within one of these categories, then the relationship to the beneficiary and the value and/or nature of the bequest must be considered.
“Certain assets are exempt from the imposition of New Jersey inheritance tax, such as life insurance, but only when paid to a named beneficiary or a trust for the benefit of such beneficiary regardless of the relationship of the beneficiary,” Romania said. “Unfortunately, real estate, IRAs and savings accounts are not exempted assets.”
Here’s how it works:
Transfers to a sibling or son-in-law or daughter-in-law, referred to as Class C beneficiaries, are not taxable up to the first $25,000. Transfers in excess of $25,000 up to $1.1 million are taxable at the rate of 11 percent. Transfers in excess of $1.1 million up to $1.4 million are taxed at the rate of 13 percent. Transfers in excess of $1.4 million up to $1.7 million are taxed at the rate of 14 percent, and transfers of greater amounts are taxed at the rate of 16 percent.
All other beneficiaries are referred to as Class D beneficiaries.
“Bequests to Class D beneficiaries under $500 are exempt from tax,” Romania said. “Otherwise, all transfers are taxed at the rate of 15 percent on the first $700,000 and 16 percent for any amount in excess of $700,000. Your cousin would be a Class D beneficiary.”
Romania said you cannot avoid the inheritance tax merely by moving to New York or a neighboring state if you maintain your New Jersey real property. But there are ways to reduce it.
Romania said the New Jersey inheritance tax is imposed on the intangible property, such as bank accounts, investment accounts and IRAs, wherever located. It also imposes the tax on tangible and real property located in New Jersey of resident decedents, and on the tangible and real property located in New Jersey of nonresident decedents.
“Thus as a New Jersey resident, all of your named assets will be assessed New Jersey inheritance tax when they pass to your cousin but if you were a nonresident decedent, only the New Jersey real property would be subject to the inheritance tax while the IRAs and savings account will pass inheritance tax free,” she said. “Of course then you must consider your new resident state’s estate and inheritance tax ramifications.”
Romania said there are many other estate planning techniques but they generally involve losing control of the assets in advance of death and/or involve substantial cost. That may not make the strategies recommended or advantageous when compared to the 15 or 16 percent tax savings.
She recommends you consult with an experienced estate planning attorney to analyze your specific circumstances.
Email your questions to moc.p1505820866leHye1505820866noMJN1505820866@ksA1505820866.