03 Mar Can I avoid the inheritance tax?
Q. I have no kids and I want to leave my estate to my nephews. I will have about $1.5 million including my house. How can I save the inheritance tax for them?
A. The good news is that your estate won’t be subject to the New Jersey estate tax now that changes have been made.
In 2017, estates worth less than $2 million won’t be subject to the state’s tax, and in 2018, the tax is scheduled to be eliminated completely.
The inheritance tax, though, remains.
You are correct that the New Jersey inheritance tax will apply if you leave your estate to your nephews, who are considered Class “D” transferees for inheritance tax purposes, said Frederick Schoenbrodt, an estate planning attorney with Bressler Amery Ross in Florham Park.
He said the transfer of assets to a Class “D” beneficiary is taxed at the highest rates under the state’s inheritance tax law – 15 percent on amounts up to $700,000 and 16 percent on any amount in excess of $700,000.
Based on the numbers you provided, your inheritance tax exposure may exceed $200,000, Schoenbrodt said.
“A similarly situated individual who was leaving her estate to a child would pay no state estate or inheritance tax,” he said. “This difference in result — which will become even more significant in 2018 when the state estate tax is repealed — has been reasonably characterized as inequitable and unjustified.”
Planning options to avoid the inheritance tax are somewhat limited.
Generally, lifetime gifts to your beneficiaries will be effective to reduce future inheritance tax liabilities, he said. But for inheritance tax purposes, gifts made within three years of death are presumed to be made “in contemplation of death” and such gifts may be subject to inheritance tax.
“That is a rebuttable presumption, however, and the specific facts of an estate may be effective in rebutting that presumption,” he said.
For example, the continuation of a pattern of giving established over many years — including many healthy years — a sudden and unexpected death, or other circumstances may bolster an estate’s argument that certain gifts made within three years of death were not in fact made in “contemplation of death,” he said.
Another important rule to keep in mind is that life insurance proceeds payable directly to a named beneficiary are exempt from inheritance tax, Schoenbrodt said.
“This can be helpful in reducing inheritance tax, provided that the individual is named directly in the insurance contract,” he said. “The exemption will not apply if the proceeds are made payable to the decedent’s estate and the estate is subsequently distributed to the beneficiary.”
Good luck with your planning!
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This post was first published in March 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.