Q. When my father died, all his assets went into my mother’s name. She now has – I think – more than the $2 million cutoff for the New Jersey estate tax. She hasn’t been well. I know the estate tax is repealed on Jan. 1, 2018, but I think my mom may not make it that long. Is there anything we can do to avoid the estate tax?
— Trying to help
A. We’re sorry to hear about your dad, and we hope your mom stays healthy.
It seems that your mom should seek the advice of an experienced estate planning professional who can make recommendations tailored to her specific circumstances.
Here’s what you need to know about the estate tax.
A New Jersey estate tax return must be filed in 2017 if the deceased person’s gross estate exceeds $2 million, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
But, deductions are permitted to be taken for certain expenses and debts, which may reduce the estate below the $2 million exemption amount.
So even if a tax return must be filed because the gross estate is over $2 million, a tax may not be owed, Romania said.
She said gifts before death can reduce the New Jersey estate tax.
“It is extremely important that before gift giving to reduce the New Jersey estate tax is undertaken, the income tax ramifications are considered,” Romania said. “Donees of gifts take the donor’s basis in the assets transferred, and if that basis is substantially lower than market value the donee will pay income tax on the gain upon a later sale.”
Beneficiaries receiving property at death obtain the property with a basis at its date of death value, she said, therefore, are less likely to incur a taxable gain — or will incur a significantly reduced gain — when the asset is subsequently sold.
An experienced estate planning attorney can assist with gift giving techniques to avoid negative income tax ramifications, Romania said.
If your mother has a traditional IRA, she may consider converting all or a portion of it to a Roth IRA, Romania said.
“The conversion results in income tax being owed as a result of the conversion thereby reducing her estate, hopefully below the estate tax exemption amount,” she said. “Such a conversion would benefit the beneficiaries, since their future withdrawals from the Roth IRA will be income-tax fee.”
Romania said the savings can be significant if the beneficiaries are in a higher income tax bracket.
Depending on when your mother executed her estate planning documents and assuming your mother is competent, it may be beneficial to have such documents reviewed to ensure the specific documents as well as the overall plan still meet her personal objectives and there will not be any issues in probate or to make any recommended changes to the documents, Romania said.
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