BUSH KILLED THE DEATH TAX, AND STILL THE TAX MAN COMETH
If you have read the newspapers or watched television since the spring, you probably have heard something about the federal tax relief act that Congress recently passed and President Bush cheerfully signed into law (the “Tax Act”). One section of the Tax Act repeals the federal estate tax as of the year 2010. Hooray! Less tax.
Of course, the federal estate tax doesn’t affect most people; it only applies to people having estates greater in value than $675,000. And, even if you do have over $675,000 in assets, there exist so many planning techniques that avoiding the tax is far from impossible.
By the way, the federal estate tax does still exist until the year 2010, though the credit against the tax raises dramatically in the coming years: $1,000,000 next year; $1,500,000 by the year 2004; $2,000,000 by the year 2006; and $3,500,000 by the year 2009. Furthermore, although the Tax Act does eventually repeal the estate tax, the Tax Act itself expires on December 31, 2010, so if Congress fails to pass a new law before then, there will be an estate tax as of January 1, 2011. This fact – which has been discussed extensively by this point in time – could prove to be a significant trap for the unwary, who believe that they do not need to plan for federal estate tax.
But even with the repeal of the death tax, dying may not be a tax free event. Another, less known “death tax” exists in New Jersey: The New Jersey Inheritance Tax.
Unlike the federal estate tax, which levies a tax on estates of a given value, the New Jersey Inheritance Tax is a tax primarily aimed at the individual or entity receiving the inheritance. The Inheritance Tax breaks down beneficiaries into four “Classes.”
Class A beneficiaries are children, grandchildren, parents, and spouses. These individuals are exempt from any tax obligation. Class C beneficiaries are brothers and sisters, and sons- and daughters-in-law. Class C beneficiaries receive a $25,000 exempt against the Inheritance tax. They are then taxed at rates ranging from 11% to 16%, depending upon the value of the inheritance.
Class E beneficiaries are government entities, religious or educational organizations, and other charitable groups. Like Class A beneficiaries, Class E beneficiaries are exempt from the tax. And, finally, Class D beneficiaries are individuals and entities not included in Classes A, C, or E. Class D beneficiaries are taxed at rates ranging from 15% to 16%. If a Class D beneficiary receives an inheritance of $500 or less, no tax is due, but if the inheritance is greater than $500, a tax is levied against the entire inheritance.
The Class B beneficiary designation no longer exists.
The inheritance tax represents a lien on the assets of the estate. If the estate contains beneficiaries other than Class A beneficiaries, an inheritance tax return must be filed. The assets of the estate cannot be fully released to the executor or administrator of the estate until tax waivers have been obtained from the Division of Taxation.
The tax applies to any tangible personal property of a decedent located in New Jersey. For example, if a New Jersey resident or a non-resident of New Jersey dies with a boat located in the state of New Jersey, that boat is subject to the tax. The tax applies to any real property located in this State, whether owned by a New Jersey resident or non-resident. And, the tax applies to intangible personal property (for example, bank accounts, stocks, bonds, etc.), of a New Jersey Resident no matter where the property is located. So, if a New Jersey resident dies with a bank account at an Arizona bank, the account is subject to New Jersey Inheritance tax.
The federal estate tax may be on the way out, but the New Jersey Inheritance Tax is not. The Inheritance Tax has been with us for over 100 years and is probably here to stay. In fact, some have expressed the opinion that with the repeal of the federal estate tax – and the repeal of a credit that the various states received as a result of the federal estate tax – we may see enhancements to taxes such as the Inheritance Tax.
Tax considerations can play a significant role in estate planning, gifting, and asset transfers. Understanding how taxes may affect an estate can help families make informed decisions while protecting more of what they intend to pass on to future generations.