Taxes. No one wants to pay taxes. One type of tax that raises a particular amount of ire in people is “death tax”—estate tax, inheritance tax, and, and their lifetime cousin, gift tax. What are the chances you (or your estate) will have to pay any of these taxes? In this article, I will discuss the likelihood of you or your family paying death tax.
Prior to January 1, 2018, New Jersey had an estate tax. If an estate had a gross value in excess of $675,000, then the executor of the estate had to file an estate tax return and may have owed estate tax. The $675,000 threshold existed in New Jersey since the early 2000’s. It was a very low threshold.
Given the value of New Jersey real estate, having an estate in excess of $675,000 is not uncommon. For this reason, the estate tax was very unpopular. The State effectively eliminated the New Jersey estate tax effective January 1, 2018; accordingly, any estates coming into being on or after January 1, 2018, do not and will not have to pay a New Jersey estate tax no matter what the value of the estate.
New Jersey still has an inheritance tax. An inheritances tax is assessed against estates based, primarily, on the relationship of the beneficiary to the decedent. The decedent’s parents, spouse, children, and grandchildren (as well as all other lineal descendants) do not have to pay inheritance tax no matter what the value of the estate. For this reason, most people are not affected by the inheritance tax. Most people leave their estates to their spouse, children, or grandchildren.
An estate tax also is not owed if you leave your estate to a charity. After a spouse, children, and grandchildren, charities are the next, most-common beneficiary of estates.
If you leave your estate to more distant relatives or friends, then an inheritance tax is owed. The tax has slightly different rates depending on the beneficiary’s relationship to the decedent and the amount of money the beneficiary receives.
As for federal estate tax, that tax has become a non-issue for the vast majority of estates. Currently, an estate only has a federal estate tax issue if the gross value of the estate is in excess of $12,920,000. This figure is indexed for inflation. From 2022 to 2023, for instance, the threshold increased by nearly $1,000,000.
Most people in this country—the richest country in the world—do not have assets worth $12,920,000. When I say to my clients, “Is your estate in excess of $12,920,000?,” I normally get a chuckle from them, followed by “I wish.” That’s because about one-tenth of one percent of the U.S. population has a worth in excess of $12,920,000, so if you have such a net worth, congratulations, you are well within the 1%.
A married couple can easily shelter twice that figure or $25,840,000. When the first spouse dies, the surviving spouse files a federal estate tax return and checks a box requesting to preserve her deceased spouse’s credit against the federal estate tax for when she dies. That’s it, both credits are preserved.
Now, the federal threshold is scheduled to go down in 2026 when the current tax law expires. If it does, a single person will only be able to shelter about $8,000,000 (my estimation of what the credit will be at that time) and a married couple will only be able to shelter $16,000,000. Of course, saying “only” is kind of funny since, once again, most people do not have this much money and never will.
Federal gift tax—there is no state gift tax—is the federal estate tax’s cousin. A person can gift $17,000 a year to an unlimited number of people without reduce her lifetime credit against gift tax, which is currently $12,920,000. If a person gifts in excess of $17,000, then their $12,920,000 lifetime credit is reduced by the amount in excess of $17,000 that she gifted. For instance, if Mrs. Smith gifts $20,000 to her son, then her lifetime credit is reduced to $12,917,000.
Since most people do not have assets worth in excess of $12,920,000, most people could gift all of their assets and pay no gift tax. The recipient of a gift never pays gift tax.