SMALL GIFTS, BIG HEADACHES

“Okay,” I say to my client, “tell me in general terms to whom you wish to leave your money after you pass away.” The woman has come to see me to draft a Will for her. She’s widowed and has three, adult children.

“Well, I want to leave most of my estate to my children. But I also want to leave something to my sister. And I’d like to leave a little something to the church, so masses can be said for the repose of my soul and the soul of my husband.”

As those of you who read my column on a regular basis know, one of the underlining themes of my work is to provide my clients with peace of mind. People come to see me because they want to be assured that after they pass away the people they want to receive their assets will. They want me to draft a Will that accomplishes their objects in the most efficient manner possible, with minimal government interference.

In the circumstance described above, the woman wishes to leave most of her estate to her children. Perhaps, she wants to leave $10,000 to her sister and $2,000 to the church.

Her intentions are very well and good, but her desire to leave her estate in this manner may conflict with the overriding objective that all of my clients have – to minimize government interference with their estate.

For instance, let’s assume that this woman has an estate with a total value of $500,000. That’s a nice estate. Assuredly, the children will benefit from receiving this money, and the money will probably help to enhance their lives and the lives of their children. My client will have accomplished her primary objective – leaving a lasting legacy to her family.

But the bequests to the sister and the church may cause an unintended issue for her estate. If this woman passed away leaving $500,000 to her children, no tax would be due and no estate tax returns would need to be filed.

Now that the woman has left assets to non-lineal descendents – the sister and the church – a New Jersey Inheritance Tax Return will need to be filed. In this instance, no tax will be due, because of the amount of money left to the sister and because the church is exempt from tax, but the tax return will still need to be prepared and filed.

When a New Jersey resident dies and leaves a portion of her estate to “non-lineal descendents” – i.e., persons other than grandparents, parent, children, or grandchildren – an inheritance tax return must be filed. In inheritance tax parlance, lineal descendents are “class A” beneficiaries, and if a decedent left any amount of money to beneficiaries who are other than class A, the tax return must be filed.

In the hypothetical above, the sister is a “class C” beneficiary and the church is a “class E” beneficiary.

In order to prevent the children from avoiding the need to file an inheritance tax return, any banks where the mother had accounts are only permitted to release one-half the account balance until the tax return is filed and documents called “tax waivers” are obtained from the State. In addition, the mother’s real estate could not be properly transferred to another individual without a tax waiver from the State.

The inheritance tax is a lien on the mother’s property and until the tax is paid and a waiver obtained, the lien will remain on the mother’s property.

The sad thing in this situation is, no tax is even due, but nonetheless, the tax return must be prepared and filed because there are beneficiaries other than class A beneficiaries.

The children – or the child who was named as the executor – probably won’t know how to prepare the tax return, so he’ll need to hire a lawyer to help him with that task.

I’m not saying that the woman should refrain from leaving money to the church or to her sister, but she might want to consider making a lifetime gift to the sister and church. If she makes a gift during her life and leaves her entire estate to her children, there is a strong probability that an inheritance tax return will not have to be filed, minimizing the burden on her executor.

Even small gifts can have unexpected consequences, especially when it comes to benefits or estate planning. Taking a moment to check the rules first can save your loved ones stress and headaches later. A little planning goes a long way.