21 Jun Can we avoid the inheritance tax?
Q. I have only siblings – no kids or spouse – so my estate will go to my brother and two sisters. I want to avoid the inheritance tax. Can I do that with a trust or something else?
— Hating that tax
A. You’ve got some possibilities, but it will take some careful planning.
First, some background.
New Jersey remains one of the few states that imposes an inheritance tax.
The inheritance tax is not based on the size of the estate, but on who receives the estate, said Richard Miller, an attorney and chair of the elder law department at Mandelbaum Salsburg in Roseland.
He said while there is no inheritance tax imposed on transfers to a parent, grandparent, spouse, domestic partner, child or step-child — so- called Class “A” beneficiaries — there is an inheritance tax is imposed on transfers to siblings, or Class “C” beneficiaries.
The first $25,000 passing to each sibling is exempt from tax, but after that, the tax rate is between 11 and 16 percent, depending on the amount transferred, Miller said.
Miller said there are a number of ways to avoid the inheritance tax.
“Life insurance paid directly to a sibling — or any beneficiary, including a testamentary trust — is not subject to inheritance tax,” he said. “As a result, it is advisable to designate siblings as the beneficiary of a life insurance policy rather than the estate.”
Inheritance tax can also be avoided through the use of an irrevocable trust under certain circumstances, Miller said, but this would require giving up control and use of the assets placed in trust.
“You cannot have the right to revoke, amend, modify or regain a beneficial interest in the trust,” he said. “Likewise, the transfer of the trust property to your siblings cannot be specifically triggered by your death.”
That’s because transfers intended to take effect at or after death are included in one’s estate for inheritance tax purposes, he said. Plus, transfers made within three years of death are presumed to be “in contemplation of death” and may also, be subject to inheritance tax.
Miller said the inheritance tax is imposed on residents of New Jersey and non-residents owning real or tangible personal property in New Jersey, not based on where the beneficiary lives.
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This post was first published in June 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.