Abandonment of the Child

When a person dies without a Will, he is said to have died intestate. When a person dies with a Will, he is said to have died testate.

When a person dies testate, the terms of his Will govern how his assets pass to his beneficiaries. When a person dies intestate, a series of statutes, commonly known as the Intestate Succession Statutes, govern how his property passes to his heirs.

A “beneficiary” is a person or entity, such as a charity, who the decedent named in his Will to receive a portion of his estate after his death. Because the assets of the estate were the decedent’s, the decedent can leave his assets to whomever he wants.  When a person has a Will, it is important to ascertain who the beneficiaries of his estate are.

When a person dies intestate, his “heirs” inherit his estate. Heirs are relatives of the decedent:  his spouse, children, parents, brothers/sisters, grandparents, aunts/uncles, cousins, and stepchildren.  The closer the relation of the heirs to the decedent, the more likely it is that an heir will receive some or all of the decedent’s estate.  For instance, if an individual dies with a spouse and with children who are also the children of his spouse, then his spouse will inherit his entire estate.

If a child dies without a Will and without ever having married or have children of his own, then his estate will pass to his parents in most instances. Several years ago, the New Jersey Legislature learned of cases where parents abandoned or abused their children and sought to inherit from their now-deceased child’s estate.

In order to prevent a parent who abused or abandoned his child from receiving any portion of the deceased child’s estate, the Legislature passed a law that essentially prohibits a parent from inheriting from his deceased child’s estate if the parent abused or abandoned the child during the child’s lifetime. In a very recent case, the Superior Court of New Jersey, Appellate Division, had an opportunity to interpret this statute for the first time.

In that case, the mother and father of the child were divorced. In addition, the father had some criminal issues.  The father paid child support, but not all of his support.  There was a restraining order entered against the father that prohibited him from freely visiting with his son.  The father also had health issues and had to move to another state.  So, the father’s contact with his son was extremely limited.

The son died, and although the case doesn’t say much about the issue, I assume there was a medical malpractice case that resulted in the son’s estate having a value. The mother of the child attempted to preclude the father from inheriting any portion of the son’s estate under the abandonment statute, claiming that the father abandoned his son.

In essence, the Appellate Division held that there was insufficient evidence to prove that the father abandoned the son in such a manner as to rise to the level of willfully forsaking the child, which is the requirement of the abandonment statute. The court noted that the father did attempt to have contact with his son and did pay some of his child support obligation.  The father also attended his son’s funeral.

In this case, since the child was a minor, he would not have been able to make out a last will and testament. So, the child had to have died intestate.  An individual must have attained the age of eighteen in order to make a Will.

If you have attained the age of eighteen, and I assume that you have if you are reading this article, then I would strongly recommend that you have a Will. While there are a series of statutes that govern who will receive your estate if you did without a Will, it is always easier for your family if you die with a Will.

Is the New Jersey Estate Tax Dead?

There is a story brewing that says the New Jersey Legislature is considering revising the New Jersey estate tax law.  Over the past few years, there have been various proposals to either repeal the estate tax or raise the applicable exemption credit against the estate tax.

According to the recent story, a deal to modify the estate tax has widespread support if the modification comes with an increase in the New Jersey gas tax. In other words, the Legislature is considering raising the credit against the estate tax very high if it can increase the gas tax.

Gas prices are nearly at an all-time low on an inflation adjusted basis. Meaning that if you take into consideration the value of a dollar today versus the value of a dollar in 1970, gas prices are nearly as low as they were in the 70’s.  So, why not raise the gas tax?  After all, gas prices are so much lower than they were a few years ago that a few pennies per gallon aren’t going to be noticed.

And eliminating the estate tax is something politicians can tout. “I killed the death tax!”  For politicians, this is a perfect scenario, raising a tax that no one will notice but is ubiquitous and eliminating a tax that many people fear yet few people pay.

Here’s reality. New Jersey has two “death taxes”—the New Jersey estate tax and the New Jersey inheritance tax.  We are one of two states that have two death taxes.

The New Jersey inheritance tax is a tax that is imposed primarily based upon the relationship of the beneficiary of the asset to the decedent. The more remote the relationship, the higher the tax.  For instance, spouses, children, grandchildren do not pay inheritance tax.  More remote relatives (aunts, uncles, cousins) and friends pay tax at about 15%.

To my knowledge, the New Jersey Legislature is not considering modifying or eliminating the inheritance tax. The Legislature is only looking at the estate tax.

The New Jersey estate tax is a tax that is based upon the gross value of the estate. “Gross value” includes all assets the decedent owned (his home, 401(k), IRA, stocks, bonds, bank accounts) and the death benefit of any life insurance policy that he may have owned.  If the gross value of his estate exceeds $675,000, then his executor must file a New Jersey estate tax return.  If the net value (gross value less expenses) exceeds $675,000, then an estate tax is owed.

The federal government imposes an estate tax, but the applicable exemption equivalent (that’s the technical name for the $675,000 threshold) is $5,450,000 in 2016. So, in order to ever pay federal estate tax, the net value of your estate would have to exceed $5,450,000.  For all intents and purposes, there is no federal estate tax for 99% of us.

The average rate of the New Jersey estate tax is 10%. On a $1,000,000 estate, which is an estate that exceeds the $675,000 credit by $325,000, the executor will pay a tax of $32,500, or 10% of the amount by which the value of the estate exceeds $675,000.  (If an estate has to pay federal estate tax, the rate is 40%, so the federal rate is much higher.)

Now, $675,000 is a rather low credit amount.  In fact, I believe it’s the lowest in the nation.  In my opinion, the credit should be closer to $1,500,000.  But here’s why I think killing the estate tax as a quid pro quo to increase the gas tax is wrongheaded.

The gas tax affects all of us—rich and poor alike.  While gas prices may be low today, we all know that can change tomorrow.  The estate tax affects what people inherit from the estates of individuals who were relatively well-off.

As I say, if the applicable exemption equivalent were $1,500,000, it would be difficult for people to say that such an estate wasn’t a valuable estate.  Few of us will ever inherit from such an estate.

Politicians claim that people are fleeing New Jersey to avoid the estate tax. This is absolute bunk.  I meet with people on a continuous basis to discuss estate tax.  None of them have ever agreed to take up residence in another state, such as Florida, to avoid the estate tax, and I have directly discussed that technique with many of them.  And many of the people with whom I discuss this option already have a second home in Florida.  Most say, “That’s my kids’ problem.”

It’s tantalizing to some people to say “Kill the death tax!” but the revenue that tax generates constitutes 3% of the State’s revenue. From where is that lost money coming?

Is There a Federal Estate Tax

A new year is upon us.  Another year is passing.  So I thought it was a good time to write about death.  Well, more specifically, the tax associated with death.

Most years, the federal government raises the applicable exemption amount against federal estate tax.  Recently, I wrote about federal gift tax, and the premise of my article was that for all intents and purposes, there is no gift tax, because an individual would have to give away at least $5,450,000 in the new year before he would ever pay gift tax.  (The receipt of a gift is never taxable.)

Many people still come to my office asking about gift tax.  For some reason, many (many) people believe that they will be subject to gift tax if they give away some amount (and the amount varies from person-to-person) of money, but no one has ever met a person who actually ever paid gift tax.

I have to say that the number of people who ask me about federal estate tax has dropped off quite a bit.  I assume that is because people have received the message about federal estate tax.  That message, much like my message about federal gift tax, is that very few people will ever pay federal estate tax.  (By the way, as I mentioned in last week’s article, the state of New Jersey does not impose a gift tax, so there is only federal gift tax for New Jersey residents.)

In 2015, the applicable exemption equivalent against federal estate tax is $5,430,000.  What that means is, a person can die with any amount less than $5,430,000 and his estate will not have to pay federal estate tax.  The value of the estate includes all assets that the decedent owned—his house, 401(k), IRA, brokerage accounts, and the death benefit of any life insurance policies that he may have owned.

Obviously, the vast majority of us do not have an estate worth more than $5,430,000.  So, the vast majority of us will never have to pay federal estate tax.  As with the federal gift tax, it is fairly safe to say (for most people) that from a practical standpoint, there is no federal estate tax.  Stop worrying.

And if $5,430,000 was enough to shelter the entirety of your estate from federal estate tax, if you are married, you and your spouse can easily shelter $10,860,000, or twice the value of the applicable exemption equivalent.  In other words, $5,430,000 times 2.  That’s because both you and your spouse receive an exemption equivalent of $5,430,000; accordingly, both you and your spouse can shelter that amount of assets.

Congress has made it exceedingly easy for a married couple to shelter both spouses exemption equivalent.  When the first spouse dies, the surviving spouse (whom I assume is the executor of the deceased spouse’s estate) merely has to make an election on a properly filed federal estate tax return to use the deceased spouse’s unused exemption equivalent.  Stated otherwise, the surviving spouse simply checks a box saying, when I die, please apply my spouse’s exemption equivalent against my estate, along with my exemption equivalent.

From a practical standpoint, this means when the second-to-die spouse does die, his executor can shelter $10,860,000 from federal estate tax.  If you are a married couple and unless you have more than $10,860,000, then you do not have to worry about federal estate tax.  If you are single person, you only have to worry about federal estate tax if you are worth more than $5,430,000.

Since people who are worth more than those amounts are part of the now-infamous 1%, the other 99% of us do not have to worry about federal estate.  For this reason, I say that from a practical standpoint there is no federal estate tax.

And if all of that weren’t enough for you, in 2016, the applicable exemption equivalent is rising from $5,430,000 to $5,450,000.  A married couple will effectively be able to shelter $10,900,000.