Estate Planning In New Jersey

The primary purpose of estate planning is the get your financial assets in order to make sure your heirs are provided for. This includes planning for your golden years as well as what happens to your assets after you die.

One aspect of estate planning is avoiding the estate tax. The IRS defines the estate tax as a tax “on your right to transfer property at your death”. Basically, it is a tax on the net worth of the deceased individual. The 2016 exemption for the federal estate tax is $5.45 Million. This means that only someone who has assets valued at over $5.45 Million will be subject to tax.  Double that for a married couple.  This amounts to approximately 2 out of every 1,000 people. So the chances that you will be subject to the estate tax are very small.

State estate taxes are a different story. Especially if you live in New Jersey. The exemption for New Jersey’s estate tax is $675,000. This means that if your estate is worth more than $675,000, you will owe NJ estate tax. The estate tax rates in New Jersey can go as high as 16%.  Your gross estate includes any real estate you own, as well as bank accounts, investment accounts, vehicles, funds in retirement accounts, small business interests, and proceeds from insurance policies on your life.

Thus, it does not take much to be subject to the NJ estate tax.  Fortunately, NJ has a marital deduction for the estate tax which means that any amounts left to your spouse are not counted towards the $675,000 mark. But property left to anyone else will be subject to the tax.

As if this wasn’t enough, New Jersey also has an inheritance tax. The inheritance tax is a tax on money or property which is left to someone other than a close relative. New Jersey divides inheritors into three categories:

Class A Beneficiaries are exempt from the inheritance tax. They include parents, grandparents, spouse, child, stepchild and adopted children of the decedent.

Class B was deleted when the NJ Law changed.

Class C beneficiaries include the decedent’s siblings, or the spouse or civil union partner of the deceased person’s child. The tax rate for each of these beneficiaries is as follows:

First $25,000 No tax

Next $1,075,000: 11%

Next $300,000: 13%

Next $300,000: 14%

Over $1,700,000: 16%

Class D beneficiaries are everyone else. The tax rate for each of these beneficiaries is as follows

First $700,000 @ 15%

Over $700,000 @ 16%

Class E beneficiaries are exempt from the NJ Inheritance tax. These beneficiaries include State of New Jersey or any of its political subdivisions for public or charitable purposes, an educational institution, church, hospital, orphan asylum, public library, and some other nonprofit agencies.

The Estate Tax and Inheritance Tax are two reasons why it is essential to do estate planning if you live in NJ. Estate planning can give you many methods on how to lower your potential estate and inheritance Tax Bill.

One way would be to start gifting assets to your children. Federal law allows you to gift up to $14,000 to each child ($28,000 if married couple) without any federal gift tax consequences. Two parents could put this money into the NJ 529 plan for their children. Although NJ does not offer a state tax deduction for contributions to a 529 plan, the money does grow tax free until the time it can be withdrawn for college education purposes.

There are also various kinds of trusts one can use to lower the value of your estate. Consult a good estate planner to find out how you can plan for your future.