New Jersey is an expensive state. Housing prices are sky high, and property taxes are enough to cause some residents to leave the state permanently. It’s a difficult place to live – and die – in. Estate tax is applied on all estates that are valued over $675,000, and in the state of New Jersey, many people meet this threshold.
Proper estate planning can alleviate or help your heirs avoid this costly tax burden. There are many tactics residents can use to relieve this tax burden or avoid it altogether. The most common tactics are:
1. Gift Cash to Beneficiaries
If you’re sitting on a pile of cash and plan on leaving it to your estate, it may be better to gift it to beneficiaries while you’re still alive. New Jersey residents can gift $14,000 per year to their heirs without triggering federal gift tax.
This can also be used strategically to lower the value of your estate.
For example, if your estate is valued at $680,000, you can gift $14,000 to your son every year if you wish.
And if you gifted this amount before your demise, the value of your estate would fall to $666,000. At this level, the estate tax would not be initiated, saving your heirs from having to sell or give up assets to pay for estate tax.
What many residents don’t know is that New Jersey doesn’t tax items that were gifted before a person dies. Taxes are only levied on the assets a decedent owned at the time of his or her death. In effect, the state cannot force you to pay taxes on gifted items as part of the estate.
Of course, if capital gains tax kicks in, it may be more feasible to forego gifting an asset and pay the estate tax instead.
These circumstantial situations are best discussed with an attorney or accountant.
2. Move Before Death
The wealthy want to keep their money in the hands of their family members. It’s not uncommon for residents of New Jersey that are older or know that they’re going to die soon to move out of the state.
A move to New York, for example, would require an estate of $4.18 million before estate taxes are applied to an estate.
In the event that a person owns many homes, they’ll be taxed based on their “domicile.” This is a hard situation to deal with because a person with many residences will need to prove that they live in a “permanent” home.
There are a few ways to do this:
- Change licenses
- Change all bills
- File state income tax in a new state
And there are other options, too. The plan is to ensure that your main residence is not New Jersey at the time of your death. The “rush” of New Jersey residents to Florida was partly due to the state exempting a higher portion of a person’s estate. The rate which is exempt is $5.34 million, but if a person does have estate tax applied in the state, it is taxed at a rate of 40%.
New Jersey, instead, applies a 16% tax for any amount over $675,000.
So, this tactic only works in some circumstances.
3. Estate Trusts
A competent attorney can setup trusts that are able to circumvent estate taxes. This is a complicated matter to discuss, but let’s consider a testamentary trust. This trust would be included in the will of a married couple.
Let’s assume the couple had an estate worth $800,000.
Spouses don’t pay estate taxes, so this isn’t a concern. But kids and other family members will have to pay estate taxes.
With this trust, let’s assume that the husband died first. The husband’s half of the assets would be put in the trust wherein his wife is the trustee. The wife can distribute the trust’s assets as she sees fit.
Since the assets are in a trust, her estate is really worth $400,000 if the assets were divided evenly.
Upon her death, the children would receive the entirety of their mother’s estate, valued at $400,000. The remaining $400,000 of the estate, placed in the trust, would not be assessed in the value since the husband used his tax credit and put his assets in a trust.
There are many sophisticated measures, such as these, that can alleviate tax burdens.
The Micklin Law Group, LLC is a New Jersey law firm specializing in family law and estates. Attorney Brad Micklin was recently named to The National Advocates list of Top 100 attorneys from each state. Brad has a special expertise in working with high asset divorce. You can read more on this topic by visiting our divorce blog. To set up a consultation, call 973-562-0100.