08 Jan Gifting assets to lower estate tax burden

 Q. My husband and I are very senior citizens and we decided that it was time to check our financial holdings every December and “gift” our three children who really need money now. This is with an eye on the New Jersey estate tax. We will have no problem with the federal limits. From reading your past columns, I am aware that certain amounts may be given by each of us to each of our children every year. What form do we complete to register our gifts so that our estate for New Jersey tax purposes stays within the allowable boundaries?

A. Let’s first cover some basics about what happens to your money when you die.

Each spouse may leave to the surviving spouse an unlimited amount of property free of federal and state estate taxes. This is called the unlimited marital deduction, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.

“This has the effect of deferring federal and state estate taxes on all property until the death of the second spouse to die,” she said. “In addition to the unlimited marital deduction, each spouse currently has in 2015 a $5.430 million federal applicable exclusion amount, which is exempt from federal estate and gift taxes.”

New Jersey is a different story.

The New Jersey applicable exclusion amount for each spouse is only $675,000.

Accordingly, while up to $5.43 million in 2015 is exempt from federal estate and gift tax, only $675,000 is exempt from New Jersey estate tax, Whitenack said.

New Jersey has no gift tax, and there is no limit on the amount of assets that can be given to children each year, Whitenack said.

You’re probably referring to annual exclusion gifts. The amount of such gifts are set by the Internal Revenue Service each year and are excluded from federal gift taxes, Whitenack said.

“In 2015, each person can give up to $14,000 during the year to an unlimited number of people and couples can combine their exclusions and give up to $28,000 to as many people as they desire,” she said. “When gifts exceed the annual exclusion amount, the donors should file a federal gift tax return but gift tax will not have to be paid so long as the aggregate lifetime gifts that are in excess of the annual exclusion amounts are under the federal applicable lifetime exclusion amount.”

To record your gifts, you can file a federal gift tax return, Form 709, just to have a record of your gift, said Mary Scrupski, a Robbinsville-based estate planning attorney. The form 709 is due April 15 of the same as your income tax return.”

There is no form to complete for New Jersey.

Even if you went over this amount for federal purposes, there would be no gift tax due because in addition to the annual exclusion, you each have a lifetime exclusion amount of over $5 million which can be applied to the excess over the annual amount, Scrupski said.

However, it gets a little trickier for New Jersey. While the state doesn’t have a gift tax, when you file an estate tax return for the state, you must include certain lifetime transfers on the estate tax return, Scrupski said.

“To make it even more complicated, New Jersey has two methods for filling out the New Jersey estate tax return, namely a `simplified method’ and a `Form 706 method’ and the rules for lifetime transfers are slightly different under each method,” she said.

The Form 706 method is mandated under certain circumstances and in fact, you can only use the simplified method if it results is a tax similar to the 706 method, Scrupski said. So if you have made lifetime gifts, most likely you will use the Form 706 method.

Under the Form 706 method, even if the value of all of your assets is less than $675,000, when you add in the adjusted taxable gifts, this can sometimes result in some New Jersey estate tax, Scrupski said, offering this example:

If your estate is valued at $650,000 but you made adjusted taxable gifts of $100,000, your estate tax will be $16,000. This is true even though you died with less than the threshold amount of $675,000.

“Note that adjusted taxable gifts do not include gifts below the annual exclusion amount which is 2001 was $10,000,” she said. “So if the gift amount is less than $10,000, you should not have to pay any additional estate tax. The New Jersey rules are very clear that you have to apply the law in effect on Dec. 31, 2001.”

These complications are all the more reason to talk to an estate planning attorney about your particular situation.

And one more warning: While giving assets away to children to reduce New Jersey estate taxes may be a good idea, seniors should know that such gifts could adversely affect their eligibility for Medicaid benefits to pay for custodial long-term care if such gifts are made within five years of applying for Medicaid benefits, Whitenack said.

Just be sure to plan ahead and talk to a pro.

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This story was first posted in January 2015.