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Estate Tax Planning Tips for Before You Die

Howard Hook, CFP®, CPA, quoted in NJMoneyHelp on June 24, 2015

The Question:  I’m 75 and healthy, and my Social Security and pension pays for all my expenses. What steps can I do to save on estate taxes when I die and my two kids get my accounts? I have IRAs worth $75,000 , CDs of $314,000 and savings accounts of $29,000.

The Answer: We’re glad to hear your expenses are covered by your pension and Social Security, and we’re also glad you’re preparing for estate taxes rather than just winging it. That could be a costly mistake for your heirs.

You first need to determine the value of your estate and if it exceeds the death tax exemptions provided by both the federal and New Jersey, said Gerard Papetti.

“The current federal exemption is $5.43 million and New Jersey’s $675,000,” Papetti said. “To the extent your estate exceeds the federal exemption, the excess will be taxed at 40 percent. To the extent your estate exceeds $675,000, your estate will be subject New Jersey’s death tax starting at a 4.8 percent rate above $675,000, increasing to 16 percent when the value of your New Jersey taxable estate exceeds $10.040 million.”

The feds and the state do not tax assets that pass to a surviving spouse by means of the Unlimited Marital Deduction, Papetti said. Upon the surviving spouse’s subsequent death, or if single upon the parent’s death, assets that pass to non-spousal beneficiaries (i.e. children) are subject to estate tax if the estate value exceeds the exemptions noted above.

“It should also be noted that New Jersey also has an inheritance tax for assets that pass to non-Class A beneficiaries, which in general are non-lineal descendants,” Papetti said.

To determine the value of your estate, you would need to add the value of all your assets, including any homes you own, to the assets you have listed in your question, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

“The face value of any life insurance owned by you as well as the amounts of any taxable gifts you made during your lifetime would also be added to your assets and included in your estate,” he said. “From that total, you can subtract any debt you have, which can include mortgage debt, automobile loans, student loans and credit card debt.”

If the net amount after subtracting the debt does not exceed $5.43 million, you would not incur a federal estate tax upon your death, Hook said. However, if you live in New Jersey and if the amount exceeded $675,000, then you would incur a New Jersey estate tax upon your death.

Hook said if you have determined that your estate will be subject to estate taxes, there are many steps you can take to reduce the size of your estate. Some are more complicated than others, but all involve either giving away assets or giving up control over assets while you’re alive — something many people do not wish to do.

“I would stress again that before implementing any strategy, it is important to determine if indeed there would be an estate tax at your death,” Hook said. “By implementing some of these strategies, you may wind up paying more income taxes, which while many times is a positive trade-off compared to paying more estate taxes, it may not always be.”

For example, Hook said, imagine someone who transfers the family home to their children with the desire to save estate taxes. If after you die, the children sell the home for more than you paid for it, they would pay income tax on the gain. If there would have been little or no estate tax anyway if you had kept the home, then the children would have needlessly paid income taxes because dying with the asset in your name would have given the children a stepped up basis and likely wiped away any gain on the sale of the home after you die.

Consider meeting with a financial advisor and an estate planning attorney to be sure whatever moves you consider will be best for you in the long run.