20 Dec Can I avoid the inheritance tax for nieces and nephews?
Q. I’m not married and I have five nieces and nephews and I will want to leave my estate to them. I have a home, several retirement accounts, a brokerage account and an online savings account. What strategies can I use to get around the inheritance tax?
— Uncle Moneybucks
A. 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.
There is no inheritance tax imposed on transfers to a parent, grandparent, spouse, domestic partner, child or step-child, who are known as Class “A” beneficiaries, said Richard I. Miller, co-chair of the elder law department at Mandelbaum Salsburg in Roseland..
As you know, the inheritance tax is imposed on transfers to nieces and nephews, who are Class “D’ beneficiaries, he said.
The tax rate is between 15 and 16% depending on the amount transferred, Miller said.
“Transfers made within three years of death are presumed to be `in contemplation of death’ and may, also, be subject to inheritance tax,” he said. “In addition, transfers intended to take effect at or after death are included in one’s estate for inheritance tax purposes.”
For all these reasons, Miller said it would be financially advantageous to gift funds to your nieces and nephews during your lifetime — if you can afford it and the gifts do not compromise your own standard of living.
This could be accomplished by outright gifts or the payment of your nieces’ and nephews’ medical costs or educational expenses, he said.
Inheritance tax can also be avoided through the use of an irrevocable trust under certain circumstances, Miller said, and can be used to pay expenses for the benefit of your nieces and nephews.
“This, however, requires 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,” Miller said. “Likewise, the transfer of the trust property to your nieces and nephews cannot be specifically triggered by your death.”
Another option could be to purchase life insurance that would be paid directly to your nieces or nephews upon your death. This is not subject to inheritance tax, he said.
“As a result, if you designate your nieces and nephews as a beneficiary of a life insurance policy no inheritance tax will be imposed,” he said. “If you are insurable, you can use a portion of your liquid assets to fund a life insurance policy.”
Another option — but a more drastic one — would be to change your domicile to a state that doesn’t have an inheritance tax. That would include everywhere except Iowa, Kentucky, Maryland, Nebraska, and Pennsylvania, he said.
The tax is based on where the deceased was living, not on where the beneficiary resides, he said.
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This story was originally published Dec. 20, 2019.
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.