Estate Tax Planning in New Jersey & New York

Serving Individuals and Families Throughout Morristown, NJ and Midtown Manhattan, NY


Historically speaking, the federal estate tax is an excise tax levied on the transfer of a person's assets after death. In actuality, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax. There are three distinct aspects to federal estate taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal planning to avoid or minimize federal estate taxes is both a prudent and an important aspect of comprehensive estate planning.

The most recent iteration of the federal estate tax was signed into law on January 2, 2013, as part of the American Taxpayer Relief Act of 2012 (ATRA 2012). There are a few things you ought to know about this law, as regarding your estate planning. Specifically, you should know the "numbers" governing transfers subject to estate, gift and generation-skipping transfer taxation.

Federal Estate Tax Exemption

The $5 million exemption signed into law on December 17, 2010, under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010), is now permanent under ATRA 2012, as indexed for inflation. Accordingly, the federal estate tax exemption for 2013 was $5.25 million, 2014 was $5.34 million, 2015 was $5.43 and for 2016 is $5.45 million, thanks to that inflation indexing (and a nearly "automatic"* $10.9 million for married couples who follow very specific requirements at the death of the first spouse).

Annual Gift Tax Exclusion and Lifetime Gift Tax Exemption

The ATRA 2012 continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. Your unified lifetime gift and estate tax exemption in 2016 is $5.45 million, as indexed for inflation up from $5.43 million in 2015. Likewise, the top tax rate is 40%. Note: Gifts made within your annual gift exclusion amount do not count against your unified lifetime gift and estate tax exemption.

The annual gift exclusion is currently $14,000 for 2016, just as it was for 2013, 2014 and 2015. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $28,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect "gift-splitting" for the tax year in which such gift was made.

New Jersey has no gift taxes.

Generation-Skipping Transfer Tax Exemption

The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT) is unified with the federal estate tax exemption and the lifetime gift tax exemption at $5.45 million, as indexed for inflation up from $5.43 in 2015. As with estate and gift taxes, the top tax rate is 40%.

So, what is this GSTT? Basically, it is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the transferor.

Properly done, this can transfer significant wealth between generations.

New Jersey has no generation skipping transfer taxes.

*"Portability"

The ATRA 2012, makes "permanent" a new concept in estate planning for married couples, ostensibly rendering traditional estate tax planning unnecessary. This concept, called "portability," means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without use of "A-B Trust" planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 706 Estate Tax Return and complies with other requirements, portability may be unavailable.

In addition, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use "portability" as the means to secure their respective estate tax exemptions. Furthermore, reliance on "portability" in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.

If you are concerned about how your current estate and gift planning may function in light of ATRA 2012, and thereafter, then we encourage you to schedule a consultation.

New Jersey Estate Taxes

New Jersey imposes a separate state estate tax, which is calculated generally in the same manner as the Federal estate tax but with a lower applicable exclusion of $675,000 for assets passing to non-spouse heirs. .
Unfortunately, the difference between the Federal and New Jersey exclusion amounts has complicated the traditional goals of estate planning to fully utilize your tax exclusions, and to postpone (or avoid) the payment of tax.
New Jersey does not allow portability.

New Jersey Inheritance Taxes

The New Jersey inheritance tax is a separate tax imposed on the transfer of assets to “non-Class A” beneficiaries, such as siblings, nieces and nephews, friends, aunts, uncles, and the like. The tax ranges from 11% - 16%. A transfer to a spouse, children, grandchildren, parents and grandparents are exempt. (Considered “Class A” beneficiary.)

Fortunately, there are exemptions from this tax. Transfers up to $25,000 to a “Class C” beneficiary (brother/sister) are exempt. Transfers up to $500 to a “Class D” beneficiary (niece/nephew/friend) are exempt.

New Jersey also imposes a three year “look back rule” for purposes of the New Jersey Inheritance Tax.

John M. Tassillo, Jr.

John M. Tassillo, Jr.

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Education Series

Estate planning is very personal, yet the issues can be complex. During our meetings, we often use our whiteboard to illustrate techniques, and summarize family information. I believe it important that every client understand the options that may be available, and that all planning ideas be presented in an easy to understand manner. My 10 years of experience teaching as an adjunct professor at Fairleigh Dickinson University, in New Jersey has helped me develop a unique style of presenting materials to clients and their advisors. As a courtesy to friends and clients, we also conduct workshops on current estate planning and business topics. Please sign up for our next workshop.
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John M. Tassillo, Jr. Estate Planning and Business Attorney serves clients throughout New Jersey and the Surrounding Areas.

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