What taxes influence how a will is written?
When considering the various components of your will, tax considerations should be an important element to discuss with your professional estate planner. After all, leaving your heirs with substantially less because of an unintended tax bite is likely not your intent.
What taxes should you consider when creating your estate plan?
Inheritance Tax
Inheritance taxes are state-imposed taxes levied on beneficiaries who inherit assets from one who is deceased.
At present, only six states impose inheritance taxes. The states are:
- New Jersey
- Pennsylvania
- Maryland
- Iowa
- Kentucky
- Nebraska
The inheritance tax in New Jersey, for example, focuses on each beneficiary rather than the entire estate. Beneficiaries receiving bequests from your estate could be subject to up to 16% taxation on the value of the gifts.
- Who is Exempt from Inheritance Taxes?
At present, in New Jersey, individuals designated as Class A recipients are exempt from inheritance taxes. These include close family members such as spouses, parents, grandparents, descendants, and stepchildren. Qualified charities listed as Class E beneficiaries are also exempt.
- Who is Not Exempt from Inheritance Taxes in New Jersey?
Siblings and spouses of children are not exempt, although they will pay inheritance taxes only on gifts above $25,000. Above that level, the New Jersey tax rate ranges from 11% to the highest level of 16% at $1.7 million.
Beneficiaries who are not in the above categories (nieces, nephews, aunts, uncles, or unrelated persons) must pay 15% of the first $700,000 and 16% for gifts beyond that level.
A qualified estate planner can help you develop strategies that help to reduce the tax burden that your heirs may need to manage.
Estate Taxes
- Federal Estate Taxes
As of 2018, the Federal Estate Tax exemption is $11.4 million per beneficiary or $22.8 million to a married couple. Above that threshold, federal estate taxes can be up to 40%. If you fall into this category, you should work with a qualified estate planner to develop strategies that minimize these tax impacts.
However, financial advisors suggest that the burden of estate taxes can be avoided by employing certain strategies. For example, while living, you can make an unlimited number of tax-free gifts of $15,000 per person per year. Annual gifts help to reduce the size of your eventual taxable estate.
Also, gifts to spouses or charities are tax-free. Medical or educational expenses paid directly to the institution involved may also be tax-exempt.
- State Estate Taxes
Some states levy taxes on the estate before assets can be distributed to the beneficiaries. Eleven states plus the District of Columbia levy an estate tax. These include Maine, Illinois, Hawaii, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and District of Columbia. The threshold for estate taxation will vary depending upon where you reside.
As of January 1, 2018, New Jersey and Delaware eliminated state-level estate taxes.
Capital Gains Taxes
If you are leaving an investment asset like real estate or stocks and bonds, the value of the assets is determined at the time of your death. If the asset appreciates in value after your death, the beneficiary will be responsible for capital gains taxes whenever the assets are sold.
For example, assume you leave a beneficiary a stock portfolio worth $300,000 at the time of your death. If the shares are later sold at $400,000, the beneficiary will have a capital gains tax burden for the $100,000 gain.
Consult a Professional Estate Planner
Minimize the tax burden on your beneficiaries by consulting with an experienced estate planner in advance.
In New Jersey, Nicholas A. Giuditta of Giuditta Law is an experienced New Jersey Estate Lawyer dedicated to helping clients create their estate plans and wills.
The firm also assists Executors in carrying out the wishes of the deceased in a respectful, confidential, and professional manner.
For proven, professional assistance with estate planning near Westfield, New Jersey, contact the office of Giuditta Law firm at 908.232.0099.
Or, visit the Giuditta Law website for more information.