15 Mar Moving to avoid estate and inheritance tax

Q. Estate taxes as a New Jersey resident drive me crazy. Clearly Florida seems to be the most tax-friendly place to move to, but I don’t like heat. What other options exist? I thought Pennsylvania would escape New Jersey’s estate tax, but then I learned that Pennsylvania has an inheritance tax that can be just about as high. As they say, taxes and death can’t be avoided. Can they?
— Wanting out

A. New Jersey is an expensive place to live, but it’s also an expensive place to die.

Our state is one of the few to still impose an estate tax.

The estate tax is based on the amount of assets transferred at death over a certain threshold, called the exemption amount, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.

The New Jersey exemption amount is $675,000 per person, which is the lowest among all of the states that have an estate tax.

“If you are a homeowner with some retirement savings and a life insurance policy, it’s likely that you will owe some New Jersey estate tax,” Novick said. “Transfers to spouses are exempt, but without proper planning, the surviving spouse could be hit hard when he/she dies. The estate tax rates in New Jersey range from 4.8 to 16 percent depending on the transfer amount.”

New Jersey is also one of only a few states that has an inheritance tax, Novick said.

The inheritance tax only applies if assets are not left to a close relative — spouse, parent, grandparent, child, or grandchild — and you only have to pay the greater of the New Jersey estate tax or the inheritance tax – not both, he said. Still, the inheritance tax can be a big problem when assets are left to friends or other family members, such as siblings, cousins, and nieces/nephews. The inheritance tax rates in New Jersey range from 11 to 16 percent, depending on the amount and who is inheriting the asset.

Before exiting New Jersey, it is important to know the estate tax rates in the other states, Novick said.

The Tax Foundation provides a nice map of the estate taxes across the country.

“Based on this information, it is easy to see that Florida is not the only option – there are many states with no estate or inheritance tax,” Novick said.

To understand more about states with an estate tax, Novick recommends you check Nolo.com’s explanation of the tax laws.

Whatever state you choose, you may still be subject to federal estate taxes, but with the federal exemption amount currently at $5.45 million, Novick said, state estate taxes are now a bigger concern for most people.

If estate and inheritance taxes are your only worry, then your research is complete. However, it may also be wise to consider a state’s income tax, sales tax, and property tax before making your residence in a new state. You can get a nice comparison here.

Novick said when he sits with clients to discuss how to keep estate taxes to a minimum, the possibility of relocating to out of New Jersey often comes up.

“I always remind them that taxes are only one factor in the decision – weather, closeness to family and friends, and other social factors can be even more important,” Novick said. “While Florida is typically the top rated state for retirees, if you are not going to enjoy the heat, then it may not be the best place for you.”

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This story was first posted in March 2016.