22 Dec Estate taxes, my kids and my assets
Q. My home is valued at $450,000 and my stock funds worth $700,000. My three children are the sole beneficiaries of the estate. What New Jersey taxes will be due when I die?
A. The good news is that no federal estate tax would be due upon your death.
But you’re right about the New Jersey estate tax. As we’ve said before, New Jersey is an expensive place to die.
The state has both an estate tax and a transfer inheritance tax.
A New Jersey Estate Tax return must be filed if when you die, your gross estate, plus adjusted taxable gifts — which are gifts in excess of the annual exclusion amount, which is $14,000 per person per year in 2014 — exceeds $675,000, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
She said the tax is imposed at a graduated rate between 4.8 percent and 16 percent.
“In order to compute the taxable estate, certain deductions may be taken from the gross estate,” she said. “For example, funeral expenses, mortgages on the real property owned, costs of administering the estate, and debts owed by the decedent at the time of death are considered permissible deductions on a New Jersey Estate Tax return.”
Romaina said if your taxable estate at the time of your death is $1,15 million, and assuming you made no adjusted taxable gifts, the New Jersey Estate Tax would be $42,000.
To reduce the taxes owed, you might want to consider gifting funds to your heirs, even if it’s shortly before your death. This could lower the total tax due.
“For example, if you gave your children $250,000 shortly before death, leaving a balance of $900,000 in your estate, the tax would be reduced to $27,600,” she said. “However, beneficiaries of a gift take the basis of the gift giver, whereas property included in your estate at death receives a new basis equal to its value at the date of death.”
That means when a beneficiary later sells the property received as a bequest, there is usually less taxable gain realized.
New Jersey also has an inheritance tax, but your children wouldn’t be subject to that one.
The state’s inheritance tax ranges from 11 to 16 percent on all real estate and personal property valued at $500 or more that is transferred upon death of a New Jersey resident to certain beneficiaries, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.
There are five classes of beneficiaries referred to as A, B, C, D and E, although Class B was eliminated in 1963, she said.
“A transfer inheritance tax is not imposed against inheritances received by Class A beneficiaries including parents, grandparents, spouses, domestic and civil union partners, children, grandchildren and stepchildren of the person who died,” she said.
Class C beneficiaries include brothers, sisters, spouses and civil union partners of the decedent’s children and surviving spouses and civil union partners of the decedent’s children. Those beneficiaries pay a graduated tax ranging between 11 and 16 percent on inheritances in excess of $25,000, Whitenack said.
Everyone else is a Class D beneficiary with the exception of the State of New Jersey, its political subdivisions for charitable or public purposes, and certain charities and non-profit organizations, which are Class E beneficiaries and are exempt from the payment of transfer inheritance tax.
“Class D beneficiaries pay a tax of 15 percent on inheritances of $700,000 or less and 16 percent on inheritances in excess of $700,000,” she said.
Given that you plan to give your estate to your kids, they’re off the hook for inheritance taxes.
Consider meeting with an estate planning attorney to explore estate tax savings options.
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This story was first posted in December 2014.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.