New Jersey Estate and Inheritance Taxation An Ongoing Concern, Says Estate Planning Attorneys

The estate planning attorneys of the New Jersey law firm Begley Law Group, PC, find that one of the first issues many clients wish to address, either when meeting to discuss estate planning or estate administration, is the nature of taxation on an estate.

There are two types of possible tax assessments against an estate. First, there is estate tax, which can include, based upon the assets attributable thereto, an assessment from the state(s) in which the individual passed away or owned property, as well as the imposition of federal tax, based upon those assets in which an individual would otherwise direct for distribution to heirs from his or her estate. The estate tax is calculated in consideration of the net value of the property owned by the decedent at the time of their passing. Second, an estate, depending on the relationship of the heirs who are to be receiving a distribution from the decedent, may be subject to inheritance tax. The inheritance tax is a type of state tax calculated based on who receives property, and how much they receive.

On January 1, 2010, the federal estate tax was officially repealed. In December, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, which reinstated the estate tax retroactively to January 1, 2012 and also set new rules for estates of those passing in 2011 and 2012. At the end of 2012, unless a new law is enacted, the estate tax reverts back to the laws in effect in 2001/2002. Presently, in 2012, the federal estate tax exemption is $5,120,000, with those estates exceeding such amount taxed at a rate of 35%. If no action is taken, the federal estate tax exemption shall drop to $1,000,000, with estates with assets over such amount, taxed at a rate of 55%.

As of 2012, a New Jersey estate tax return must be filed if the decedent’s gross estate, plus adjusted taxable gifts, exceeds $675,000. The New Jersey estate tax is calculated by either taking the maximum credit for state inheritance, estate, succession or legacy taxes allowable under the IRS code in effect on December 31, 2001, called the 706 method, or an amount determined pursuant to the simplified tax system, prescribed by the Director of the Division of Taxation, State of New Jersey. The form 706 method must be used if the taxpayer is required to file a federal estate tax return, IRS form 706. If the taxpayer is not required to file the IRS form 706, then, in addition to the form 706 method, the simplified form method may be used, so long as it produces tax liability similar to the form 706 method. The New Jersey estate tax rate is progressive and maxes out at 16% for estates above $10,040,000. The estate return, as well as the corresponding estate tax due, must be filed and paid within nine (9) months of the decedent’s death, or nine months plus thirty (30) days if the firm 706 Method is used. An extension of time may be requested, although, even if granted, the payment is not extended for the corresponding tax due.

For those individuals directing assets to beneficiaries in New Jersey, it is important to understand that tax considerations applicable thereto. New Jersey now defines three distinct classes of individuals for inheritance tax purposed. Class A beneficiaries, which include spouses, civil union partners, domestic partners, parents, grandparents and descendants, are all exempt from New Jersey Inheritance tax. Class C beneficiaries, which include siblings, the spouse or widow(er) of a child of the decedent, and the civil union partner or surviving civil union partner of a child of the decedent, receive an exemption equal to the first $25,000 of an inheritance, with transfers exceeding $25,000, taxed at a rate between 11%-16%. Class D beneficiaries, which include all other beneficiaries, receive an exemption equal to only the first $500, with transfers exceeding such amount taxed at a rate between 15% and 16%. Additionally, all charitable organizations are exempt from the payment of New Jersey inheritance tax. A New Jersey inheritance tax return must be filed and the tax paid within eight months after the decedent’s date of death.

It is of note that life insurance paid to a named beneficiary, regardless of the Class, as defined by the State of New Jersey, is exempt from New Jersey inheritance tax. Moreover, although a Class A beneficiary is not required to file a New Jersey inheritance tax return, they must file a form L-8 to secure the release of a New Jersey bank account, stock, bond or brokerage account held in the decedent’s name. Further, if there is any New Jersey real estate titled in the name of the decedent, then form L-9 or form L-9NR, for a nonresident decedent, must be filed in order to obtain a release from the State’s lien on the real estate.

Accordingly, in order to best understand what steps can be taken to plan to take advantage of planning available to clients as well as further updates regarding changes to the law, or if assistance is needed regarding the administration of an estate or as a beneficiary thereof, it is important to consult an attorney regarding any specific needs. The Begley Law Group, P.C. is more than willing to discuss these and other matters affecting their clients.

To learn more or to contact a New Jersey special needs planning attorney, New Jersey estate planning lawyer, or New Jersey Medicaid planning lawyer, call 1.800.533.7227 or visit http://www.begleylawyer.com.