How couples can save on estate taxes

Ask NJMoneyHelp

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Q. My husband and I have an estate worth $4 million. If my husband was to die in 2017, the $2 million New Jersey exemption would be effective. Is the balance of $2 million subject to the New Jersey estate tax at the progressive rate or is the tax owed by my estate when I die?
— Not dead yet

A. Confusion about the federal and New Jersey estate tax is rather common. Unlike income taxes, which pretty much everyone understands because they have to pay every year, estate taxes are only paid at death, and not everyone has had experience with them.

So let’s dive into your question.

Both federal and New Jersey estate tax law permit a full deduction for bequests and inheritances by surviving spouses, provided that the surviving spouse is a U.S. citizen, said Gary Botwinick, an estate planning attorney and chair of the taxation/trusts and estates department at Einhorn Harris in Denville.

He said any amounts payable to individuals other than a spouse will be subject to either federal or New Jersey estate tax if the total inheritances by non-spousal beneficiaries exceed the exemption amounts.

The federal exemption amount for 2017 is $5.490 million, and it’s expected to be at least $5.5 million in 2018. For New Jersey, the exemption for 2017 is $2 million.

We’re going to work with your hypothetical, assuming that you and your husband, who is presumed die in 2017, have combined estates of $4 million.

Assuming that you are a U.S. citizen and that you inherit your husband’s entire estate in 2017, there would be neither a federal or New Jersey estate tax because inheritances by spouses are completely exempt from estate tax, Botwinick said.

But if instead, at your husband’s death, he leaves $2 million from his separate assets to his children, and you inherit the remaining $2 million, the result will be the same — but for different reasons.

“The reason that there is no estate tax in this situation is that even though you are not inheriting the entire estate, the children are inheriting only $2 million, which is equal to New Jersey’s estate tax exemption for 2017,” Botwinick said. “Because the excess over $2 million is inherited by you — the surviving spouse — this amount is completely exempt from estate taxes.”

This would be true regardless of how large an amount you inherit, he said.

If you inherit the entire $4 million and then pass away, leaving the entire amount to your children, only the first $2 million would pass free of New Jersey estate tax at your death, Botwinick said, and the balance is subject to the New Jersey estate tax.

But wait: the situation is not hopeless. New Jersey’s estate tax is scheduled to be repealed effective Jan. 1, 2018.

“This means that regardless of the amount you inherit from your husband, and regardless of the size of your own estate at the time of your death, so long as you do not die in 2017, there should be no New Jersey estate tax at your death,” he said.

If, however, your husband dies in 2017 and leaves more than $2 million to beneficiaries other than you, there will be a New Jersey estate tax at his death, he said.

Even if you believe that your husband will pass in 2017, with some careful planning, his estate may be able to avoid that estate tax, Botwinick said.

For federal estate tax purposes, the amount that can pass free of tax at death is much larger — $5.49 million — and the federal estate tax is not currently scheduled for repeal.

“This means that with some careful planning, a couple should be able to pass $5.49 million to the children at each spouse’s death, or up to $10.98 million at the second spouse’s death, if only the surviving spouse inherits at the first spouse’s death,” he said.

Consider seeing an estate planning attorney who can help with the specifics of your situation.

Email your questions to moc.p1506274353leHye1506274353noMJN1506274353@ksA1506274353.

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.