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Estate Tax Planning

Without careful planning, much of your life’s legacy could be lost to estate taxes. While a simple will can provide for the transfer of your estate to your loved ones, it does not include special provisions for advanced estate tax planning.

The Federal Estate Tax: Exemptions and Rate

Federal estate tax laws were updated in 2014 as part of the American Taxpayer Relief Act which provides for an exemption of $5.43 million. This means that each individual can transfer either during lifetime or at death up to $5.43 million in assets free of federal estate taxes. The federal estate tax exemption, also referred to as applicable exclusion amount is adjusted annually for inflation.  To the extent that one gifts in excess of the annual exclusion amount, discussed below, the estate tax exemption is reduced at death.

The taxable value of the estate is calculated by adding up all the assets owned by the individual and subtracting from that total any of his or her liabilities.  Additional deductions can be taken for qualified charitable deductions as well as administrative and legal costs involved in settling the deceased’s estate.

The tax rate for estates exceeding the exemption amount is 40%.  The rate is applied to the taxable estate value that is in excess of the exemption amount.

The Federal Estate tax: Understanding Portability

In addition to the individual exemption, married couples enjoy an unlimited deduction for transfers to one another.  While this is great news for many couples who choose to leave their estate to each other, without proper planning, it can result in a forfeiture of some of the individual estate tax exemptions after the passing of the second spouse.  

To address this issue, the current estate tax law allows for “portability” or transfer of individual exemptions between spouses.  Stated another way, portability enables the surviving spouse to utilize the unused portion of the first-to-die spouse’s estate tax exemption for his/her estate tax purposes.

If the estate of the first spouse to die makes the appropriate portability election, the surviving spouse’s applicable exclusion amount may be calculated as follows:

Surviving Spouse Basic Applicable Exclusion Amount                 (Currently $5.43M)

+ Aggregate Deceased Spouse Unused Exclusion (DSUE)        (Can be up to $5.43M)

= Applicable Exclusion Amount

Deceased Spouse Unused Exclusion

For further explanation, the DSUE or excess applicable exclusion amount that carries over to the surviving spouse is the lesser of the following:

  • The basic exclusion amount ($5.43M)
  • The excess of the applicable exclusion amount of the first deceased spouse (up to $5.43M) 

Example:

A husband and wife are married. The husband dies and his estate makes the portability election. Assume the husband left $3 million (DSUE) of his individually-owned assets to his surviving wife who already has $5,340,000 million herself, bringing her estate’s total net worth to $8,340,000 million. After some time, the wife also passes away, leaving everything to the children.

The applicable exclusion amount available to Barbara’s estate equals $8M.

+ 5,340,000      Surviving spouse’s basic applicable exclusion amount

+ 3,000,000      Aggregate DSUE amount

= $8,340,000    Applicable exclusion amount

Portability is not automatic and in order to take advantage of it, an estate tax return must be filed with the IRS within 9 months of the passing of the first spouse, even if there are no taxes due at the time.

An alternative to relying on portability is to utilize a special planning tool referred to as a credit shelter trust (also referred to as a bypass or A-B trust).  If properly established, such trusts work much in the same way as portability, but do not require filing of an estate tax return after the passing of the first spouse.  

*The bequest to the surviving spouse is not subject to estate taxes because it qualifies for the unlimited marital deduction.

New Jersey Estate Tax

Under current NJ law, estates with a total value of more than $675,000 are subject to estate tax.

The tax rate can typically fluctuate from 4.87% to 16%.

Property you leave to your spouse is exempt from state estate tax, no matter the amount. Spouses are protected by Unlimited Martial Deduction.

New Jersey Inheritance Tax

NJ Inheritance Tax applies when someone who lived in NJ, or owned property in the state, leaves property to someone who isn't a close relative.

The tax rate is dependent upon how closely the inheritors and deceased person were related. NJ law categorizes based on their family relationship:

  • Class A: Beneficiaries are exempt from inheritance tax. They include the deceased person’s spouse, domestic partner, parent, grandparent, child, stepchild, and/or grandchild.
  • Class C: Beneficiaries include siblings and/or son/daughter in-laws. The first $25,000 of property is not taxed. Amounts exceeding $25,000 start at an 11% tax rate.
  • Class D: Beneficiaries include everyone else. The first $700,000 is taxed at 15%. All amounts exceeding are taxed by 16%.
  • Class E: Beneficiaries include the state of NJ or any political subdivisions for public or charitable purposes, an educational institution, church, hospital, public library, and some other nonprofit agencies. They are exempt from inheritance tax. 

Hiring an attorney is an important decision which should not be based solely on advertising. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.



© 2019 Suzanne M. Kourlesis, Attorney at Law | Disclaimer
212 West Route 38, Suite 360, Moorestown, NJ 08057
| Phone: 856-235-9881

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