by Darren M. Baldo, Esq., CPA, LLM
You generously included your brother and sister in your will, leaving them each $500,000. You could have given them $500,000 each now but you didn’t want to be too generous. Four years later, you die but your brother and sister only receive $447,750 each. Why? Because they had to pay NJ inheritance tax of over $100,000. That’s right! NJ has an inheritance tax for bequests to brothers and sisters.
However, NJ does not have a gift tax. But NJ requires that gifts made within 3 years of death are subject to the inheritance tax. By gifting the $1 million to your brother and sister and surviving 3 years thereafter you would have saved them $104,500. Gifting inter-vivos (Latin for "during life”) is a simple but frequently overlooked estate tax planning technique. And, for wealthier people, the amount of tax that could be saved by inter-vivos gifting is more impressive.
I recently advised a wealthy individual to give to his brother and sister each $2.5 million now instead of waiting until he died. If he survives three years, my advice will have saved his brother and sister over $650,000. If he does not survive the three years, then I advised keeping some money in the estate to pay the tax, which can be accomplished by simply putting some assets aside for the next three years or purchasing a life insurance policy to cover the tax.
There are two death taxes in New Jersey, estate tax and inheritance tax. This article addresses only the inheritance tax. NJ imposes an inheritance tax of up to 16% of the amount of assets transferred as a result of your death to anyone who is not part of an exempt class.
Exemptions include inheritances to spouses, children, grandchildren and parents. Civil union partners are also exempt. These exempt beneficiaries are called Class A beneficiaries. Other full exemptions are available for bequests to charities, under Class E.
Under Class C, an exemption of only $25,000 is available. Class C beneficiaries include brother or sister of the decedent, including half brother and half sister, wife/civil union partner or widow/surviving civil union partner of a son of the decedent, or husband/civil union partner or widower/surviving civil union partner of a daughter of the decedent. For Class C beneficiaries the tax rate starts at 11% and climbs to 16% for all inheritances over $1.7 million.
All other beneficiaries fall under Class D, which has only a $500 exemption. Class D beneficiaries include cousins, nieces, nephews and friends. For Class D beneficiaries the tax rate starts at 15% for the first $700,000 and then is 16% for all amounts over $700,000.
Tax savings should be a primary objective in any estate plan. It’s not just about generosity; it’s about smart tax planning. With a careful estate plan, you can save your family thousands if not hundreds of thousands of dollars in taxes.
Darren M. Baldo, Esq., CPA, LL.M. is an attorney who focuses on wills, trusts and estates, taxation, business law, corporate law, bankruptcy and employment law. Visit www.dbaldolaw.com for more information or call 609-799-0090.