New Jersey Death Taxes Explained
New Jersey has two kinds of death taxes: (1) estate tax; and (2) inheritance tax. Estate taxes are based on the value of the estate while inheritance taxes are based on the relationship between the deceased individual and the beneficiaries of the estate.
The New Jersey Estate Tax
New Jersey has an estate tax for those estates that exceed $675,000 in net taxable assets. Any estate with assets less than that amount will not have to pay an estate tax. As the size of the estate increases the tax on the estate, expressed as a percentage, also increases. This tax, and how it is structured, impacts the smaller estate much more than the larger estate.
For example, with a taxable estate of $1,000.000.00 the New Jersey estate tax is $33,200.00. The tax represents 3.32% of the total estate and 10.215% of the $325,000.00 excess. Compare that to a taxable estate of $750,000.00 for which a tax in the amount of $20,400.00 is due. The tax is 2.72% of the total estate but 27.2% of the $75,000.00 excess. With the $1,000,000.00 estate the tax payer retains $291,000.00, or 89.78%, of the excess ($325,000.00 - $33,200.00 = $291,000.00) while the tax payer with the $750,000.00 estate retains $54,600.00, or 72.8%, of the excess ($75,000.00 - $20,400.00 = $54,600.00).
This result, while it may seem at first incorrect, comes about because once the taxable estate exceeds $675,000.00 the tax is calculated from "dollar one." Thus, smaller, taxable estates in reality pay a disproportionately higher tax.
And, if in 2015 the estate is in excess of $5,430,000.00, although very few are, a federal estate tax could also be due. The first $5,430,000.00 is the federal "unified credit" to which all tax payers are entitled. It is this credit which keeps estates of less than $5,430,000.00 from paying federal estate taxes. It is also important to bear in mind that estates passing between spouses do not incur any state or federal estate tax.
About the New Jersey Inheritance Tax
In addition to the previously described estate tax, New Jersey also collects an inheritance tax on all estates. An inheritance tax differs from an estate tax in that the inheritance tax is imposed on the gift passing to certain categories of beneficiaries. Inheritances by spouses, children, grandchildren and parents of the deceased do not result in the imposition of an inheritance tax. Similarly, gifts to charities and gifts of less than $500.00 do not result in inheritance tax liability. All other gifts, subject to certain allowances, result in imposition of the tax.
For example, gifts to a brother or sister require payment of an inheritance tax, subject to a $25,000.00 deduction. In other words, and for example, a gift of $50,000.00 to a brother results in a tax of 15% (the current tax rate applicable to siblings) on the second $25,000.00 or a liability of $3,750.00. In this example, the brother would inherit, either by will or intestacy (this means the deceased died without a will), $50,000.00, but would receive $46,250.00 after the tax was paid.
It is important to understand that an estate tax is the obligation of the estate while an inheritance tax is the obligation of the person who receives the gift. In both cases, however, the tax is actually paid by the executor of the estate. And, both taxes could be due in any given estate depending on how the deceased planned for his or her demise.
An Example of Tax Planning for Couples - The Credit Shelter Trust
Proper planning can, in many cases, entirely eliminate the estate tax and, in all cases, planning can reduce the tax obligation. Merely passing all assets to one's spouse will eliminate all estate and inheritance taxes. The potential problem with this approach is that passing all assets to the surviving spouse can result in creation of a taxable estate at the death of the second spouse.
Use of credit shelter trusts and proper allocation of assets can, in all cases where a married couple have up to $1,350,000.00 in total assets, eliminate the New Jersey estate tax in its entirety. This approach uses to maximum advantage the first $675,000.00 of the estate which will generally pass tax free with proper planning. And, assuming the ultimate beneficiaries of the estate are children of the deceased (or even grandchildren), then no inheritance tax will be due either.
Other approaches to tax planning (and saving) may also be available depending on the particular facts of the case. Therefore, one should seek the advice of an estate planning specialist before drafting estate planning documents.
Get Help Planning for Death Taxes
New Jersey death taxes are confusing and require careful attention. If you are concerned that you might have to pay them at the time of your passing and want to try to avoid them you should seek help from Price and Price. On the other hand, if your loved one has passed away and you are concerned about death taxes and how to properly manage the estate then, again, contact Price and Price for help with that issue. The attorneys at Price and Price have years of experience helping plan to avoid death taxes and managing estates where death taxes might be due.