Estate and inheritance taxes have been in the news lately, both in New Jersey and nationwide. In a recent, highly partisan vote, the U.S. House of Representatives recently called for the complete repeal of the federal estate trinax. Here, estate and inheritance taxes were a hot topic dug budget negotiations. Some lawmakers would consider expanding the tax to fill up the neglected Transportation Trust Fund. Others argue for limiting their application to fewer people.
With everything seemingly up in the air, do you need to worry?
We tend to think that worrying isn't nearly as effective as setting up an estate plan to minimize estate and inheritance taxes. And, the fact is that a cash-strapped state very well might raise the tax rate or lower the exemption, either of which might increase those taxes. An administration might very well come in which opposes all such taxes, and they might go down or eliminate them altogether.
If you're a New Jersey resident, your heirs could theoretically be subject to three separate taxes: the federal estate tax, the New Jersey estate tax, and the New Jersey transfer-inheritance tax. New Jersey is one of only two states that levy both an estate tax and an inheritance tax (the other is Maryland). Here are a few basics:
- Estate taxes are paid by the estate itself, via the executor, before it gets distributed to heirs and beneficiaries.
- Inheritance taxes are paid by the recipient of an inheritance.
- In both cases, only certain assets are subject to taxation, and only the portion of assets above a given threshold are taxed. For example, if your estate were worth $1 million, only $325,000 of it would be taxable at all, since New Jersey's exemption is $675,000. The highest estate tax rate is 16 percent so, assuming all of the assets were subject to the tax and were taxed the highest rate, the New Jersey taxes on your estate might be around $52,000.
- Legal spouses and some other close family members are exempt from the tax.
- Trusts are taxed differently, and setting up an irrevocable trust is one strategy to reduce estate and inheritance taxes.
When it comes right down to it, you don't have any control over what the state or federal government might do, and you can't exactly choose to die under the most favorable circumstances. A good estate plan can weather the changes.