Tag Archives: inheritance tax

Do you want to live or die in New Jersey?

Several years ago after my dad died in New Jersey, my brother and I were shocked when we realized how much money we were going to have to pay to the state in inheritance and estate taxes. The percentage was huge, especially compared to almost any other state in the US. Evidently, we were not alone in being shocked by New Jersey’s tax rules.

According to a study recently commissioned by Charles Steindel, chief economist of the New Jersey Department of the Treasury (and former senior vice president of the New York Federal Reserve Bank), 25,000 people moved away from New Jersey between 2004 and 2009. Why? In 2004, the state’s highest income tax rate was raised from 6.37% to 8.97% for those making $500,000 or more, and in 2009 a one year 10.75% tax rate was assessed on those making $1 million or more.

In addition to such high income tax, New Jersey is one of only two states (Maryland is the other) with both a state estate tax and a state inheritance tax; this is a problem for those who would like to leave at least the majority of their wealth to their loved ones when they die.

Steindel also conducted a survey of subscribers to the state’s online newsletter Tax Notes, which keeps professionals such as financial advisers, accountants and attorneys up to date on changes in law, rules and court decisions governing tax matters. Subscribers include advisers to high-wealth clients.

More than half of the respondents said that clients had recently left or expressed interest in leaving the state. Respondents said the top three reasons that clients gave for leaving were state income taxes (85.4 percent), local property taxes (77 percent) and estate taxes (67 percent). The next two reasons most-often cited were retirement (47.6 percent) and housing costs (43.7 percent).

So if you live in New Jersey and you have any assets, consider moving to a more tax friendly, or non-taxing, state like Florida.

Estate taxes: Who will pay?

If your heirs owe estate taxes to the government, they will have to find the money to pay them, probably before they can actually access their inheritance.

Q. If estate taxes are due, where will your estate get the money to pay them?
A. You should leave instructions in your will or trust authorizing the estate representative to pay the estate taxes for your heirs; you can even specify which assets should be used to pay the tax.  If you do not leave such instructions they will be paid for by the estate representative from assets held in the estate.

If you do not specify which assets to liquidate to pay the estate tax, your estate representative will decide how best to pay the taxes due.  When thinking about who gets what, consider the impact federal estate taxes and state inheritance taxes will have on your estate, and how this will change the value of bequests.

A Family Story: Inequitable inheritance due to estate taxes.
Vinnie had two children, Sophia and Brad.  When Vinnie died, the value of his IRA was $2 million and the value of his personal residence was $2 million, a total estate of $4 million.  Vinnie wanted to share his estate equally with Sophia and Brad.

Vinnie named Brad as the beneficiary of his IRA account, believing he had left Brad $2 million.  Vinnie’s will named Sophia the beneficiary of the house.  Vinnie assumed he had given Sophia a house worth $2 million and had treated each child equally.  Vinnie’s will also included typical default instructions requesting that the estate pay any estate taxes due.

Vinnie died in 2006.  The value of the estate for federal estate tax purposes was $4 million.  In 2006 Vinnie’s personal federal tax exemption allowance was $2 million, leaving a taxable estate of $2 million.  The estate tax due was $780,800.

Because the IRA had a named beneficiary, the IRA was not subject to probate.  Brad automatically inherited the funds in the IRA account, a total of $2 million.  The house Sophia inherited was subject to probate.  Sophia, the executor, had to hire a lawyer and open a probate case.  Sophia could not sell the house until the court was satisfied that estate taxes had been paid.  Sophia had to sell the house in order to pay the estate taxes due.  Sophia then had to pay $780,800 in estate taxes, plus probate court and legal fees of $35,000.  Sophia eventually inherited $1,184,000.  Almost half of what Brad inherited.

When determining who will inherit what, be sure to consider the impact of estate taxes and inheritance taxes on the value of the inheritance.