In this column, John W. Callinan, certified elder law attorney and author of New Jersey Elder Law: A Planning and Resource Guide, tells readers how they can avoid hefty “death taxes” on their estate.
I often have clients ask me how they can save “death taxes” for their children when they die. For many clients the answer is simple–your estate is not subject to any death taxes.
Unlike most states, New Jersey has two death taxes that it may impose against a decedent’s estate. There is the New Jersey estate tax, which is a tax imposed if the gross value of the estate exceeds $675,000, and there is the New Jersey inheritance tax, which is a tax imposed against an estate if the beneficiaries of the estate are not closely related (spouse, children, grandchildren) to the decedent.
If your estate does not exceed $675,000 in value and if you are leaving your entire estate to close relatives, then your estate will not have to pay any death taxes.
For those individuals who are leaving part of their estate to a more distant relative (brother, cousin, nephew) or a friend, then there are few viable planning options to avoid the New Jersey inheritance tax. You could move to another state. You could leave your estate to someone or something else (for instance, a charity). Or, you could gift your money to your intended beneficiary, but even then you must live another three years before the gift would not be included in your estate for purposes of calculating the inheritance tax.
For those individuals whose estate exceeds $675,000, there are a few options available to reduce or eliminate the estate tax, but the primary planning technique involves married clients, not a single client. When I help a married couple, I am dealing with two people and each of those clients has a $675,000 credit exemption against the estate tax.
By placing trusts into each spouse’s last will and testament, I can preserve the $675,000 credit exemption of the first spouse to die. When the second spouse dies, she also has a $675,000 credit exemption. Using this relatively painless, simple technique, I can preserve each spouse’s credit exemption and sheltered $1,350,000 ($675,000 times two) from estate tax. This technique does not work for a single person.
For a single person and for married couples looking to shelter more than $1,350,000, the primary remaining option is to gift a portion of their assets; however, making gifts is not always the best solution. When you make a gift, the recipient of the gift receives your basis in the asset. So, for instance, if you purchased Exxon stock for $20 a share and it is now worth $90 a share and you gift that stock to a child, your child has a basis of $20 per share. When your child sells the stock, he will have to pay capital gains tax on $70 of each share’s sales price.
If you had left the stock to your child as an inheritance instead of as a gift, his basis in the stock would have been stepped up to $90 a share, and when he sold the stock, he wouldn’t have to pay any capital gains tax.
The rate of the New Jersey estate tax on the value of the estate in excess of $675,000 is about 10%, so for instance, a $1,000,000 estate would pay about $33,000 in estate tax. But, as noted, many of the decedent’s assets might receive a step up in basis (for instance, the decedent’s house, his stock accounts, etc.), so the savings in capital gains tax to his family might far outweigh the cost of the estate tax.
Furthermore, if you gift in excess of the annual exclusion amount (currently $14,000 per year, per person), the amount you gift over the annual exclusion amount reduces your $675,000 lifetime exemption. What I mean by this can best be explained by example. Assume Mr. Smith gifts $14,000 to his son in 2014 then passes away in 2015; Mr. Smith would die with a $675,000 exemption equivalent against New Jersey estate tax. Now assume that Mr. Smith gives his son his house worth $414,000 in 2014 then passes away in 2015. Mr. Smith will now die with a credit equivalent of $275,000 ($675,000 – $400,000 = $275,000).
Moreover, Mr. Smith’s son will receive Mr. Smith’s basis in the house instead of a stepped up basis. When the son sells the house, he’ll have to pay capital gains tax. Aggressively gifting could cost your family more in taxes than paying a little estate tax when you die.
John W. Callinan is a certified elder law attorney, as certified by the National Elder Law Foundation and approved by the American Bar Association. He is the author of New Jersey Elder Law: A Planning and Resource Guide. He is the immediate-past Chair of the Elder and Disability Law Section of the New Jersey State Bar Association. He has won a Top 100 Lawyer Award in the state of New Jersey in 2014 and 2015. He has won a Super Lawyer Award-Elder Law in the past five years.
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