02 Feb Is the estate tax exemption per person?
Q. I read your article about the estate tax and whether people who planned to leave the state should stay. The story said the exemption amount increased from $675,000 to $2 million for 2017 and will be repealed completely for 2018. Is the exemption amount per person? How does that work?
— Planning ahead
A. The estate tax is complicated, so let’s take a closer look at how it works and what’s changing.
The exemption amount is the amount each individual can pass free of estate tax so yes, it is per person, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
Romania said the New Jersey estate tax exemption was $675,000 for a decedent dying prior to 2017. For anyone dying in 2017, the amount that such individual can pass free of estate tax is $2 million, she said. And come Jan. 1, 2018, the New Jersey estate tax is eliminated.
This will allow someone who dies — the decedent — to pass an unlimited value of assets free of New Jersey estate tax.
There were other tax changes in the bill that changed the state’s estate tax.
There is also a federal estate tax.
Each taxpayer can pass $5.49 million federal tax-free to anyone cumulatively during life or at death. This is known as the federal exemption or unified credit, Romania said.
It’s different if you’re leaving everything to your surviving spouse.
In that case, even if your assets exceed your exemption amount, there will be no estate tax.
“This is referred to as the marital deduction and is recognized by the Internal Revenue Code and the state of New Jersey,” Romania said. “If your surviving spouse is not a U.S. citizen, there are certain restrictions and limitations.”
The IRS also recognizes a concept known as “portability.”
“This means a surviving spouse may be able to utilize the unused federal estate and gift tax exemption of his or her `last deceased spouse,'” Romania said.
To preserve portability, an executor is required to make an election on a timely-filed IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return upon the death of the first spouse to die, Romania said.
“For example if the first spouse dies this year leaving everything to the surviving spouse without either of them having used any of their exemption and portability is preserved, the surviving spouse will have a $10.980 million exemption remaining,” Romania said.
But, portability is not a concept that New Jersey has recognized, she said.
Even with the changes to the state’s estate tax, note that there have been no changes to the inheritance tax.
“This is a tax at rates of up to 16 percent which is levied against certain bequests, and gifts within three years of death, based on the decedent’s relationship to the beneficiary,” Romania said.
She said there is no inheritance tax if the beneficiary is a spouse, grandparent, parent, descendant or stepchild of the decedent. And while stepchildren are exempt from inheritance tax, step-grandchildren are subject to New Jersey inheritance tax.
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This post was first published in February 2017.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.