Beware the Oft Spoken Line to Seniors: “Transfer Ownership of Your House to Your Kids!”
Should parents transfer their home into their adult children’s names, deeding the house to their kids? This is one of the most common questions that comes up when discussing estate planning with families.
In fact, oftentimes families assume that this preferred and correct handling based on the “advice” you or your adult kids have received from well-meaning friends and family—even the internet. The intention of a transfer is always the same. You and your family want to preserve your family home from a required spend down of your assets should you need extensive medical care in a nursing home or acute care facility.
The fact is, no two families are alike. Don’t sign a deed transferring your house to your kids without taking these important first steps: Have conversations about appropriately protecting your assets with your family and then post haste make an appointment with your estate attorney. Recognizing the potential risks of arbitrarily transferring ownership of your home to your kids will give you a clearer picture of why a willy-nilly transfer is a really bad idea.
Timing is Everything
It may be too late to consider a transfer if a diagnosis of an illness or condition has just been made. Medicaid looks back five years for major financial transactions. If the goal is to reduce your assets so you can qualify for Medicaid, remember that Medicaid will review financial transactions over the last five years. The transfer of a home within this 5-year window constitutes a red flag and may disqualify you from Medicaid nursing home coverage unless there are sufficient other assets to cover the costs during the 5-year period.
Emotional Decision-Making Won’t Do
Having your adult children help you with your financial needs late in life can be challenging. Your emotions do not always help you make the best decisions. A desire to keep the long-time family home in the family or, perhaps less charitably a sense of entitlement on the part of some or all of your children who believe that it should be the family legacy, do not typically lead to sound actions. There are many laws and rules to navigate, and time may not be on your side. Plus, the decision cannot be one-sided. If you are capable of sound decision-making, your wishes combined with the guidance of your estate attorney, financial advisor, or CPA must agree on the best course of action for you and your family. Allowing your kids to be privy to these conversations and have a voice is also a good strategy for family harmony.
Uncle Sam Comes Calling
Transferring your principal residence to a family member may disqualify you from part or all of the capital gains tax exclusion on the sale of the residence and cause unnecessary income tax liability when the residence is sold in the future. Consider the hefty tax bill for either a parent or their children from a capital gains tax on any gain (e.g., profit) on the house sale if you lose the exclusion and your family decides to sell the house during your lifetime.
Is a Life Estate Deed the Answer?
Individuals often think they achieve the best of all worlds if they establish a transfer of real property through a life estate deed. A life estate deed permits a property owner to have full use and occupancy of their property until their death, at which time your home will be transferred to your children. Because life happens, there are any number of potential pitfalls:
- Your home becomes exposed to the financial problems, liens, and creditors of all the joint owners; what if, for example, one of your children or their family members claimed bankruptcy
- A child or their family member could have a serious accident and if their insurance does not cover the cost of care, liens could be placed on the house
- Your child could become divorced, putting your home at risk as part of the marital settlement
- You may decide you don’t want to live in the house anymore and would like to sell it, but you are at the mercy of your children’s agreement with this decision
- You may want to make repairs to the house to accommodate your aging in place needs, and your children ignore your request for repairs not wanting the financial responsibility associated with those repairs; your children have the right to do this
- Your child could predecease you and the house becomes part of your deceased child’s estate subject to probate of that estate
Appropriate Transfer of Home. Get Guidance First.
Indeed, there are situations in which a transfer will work. For example, Medicaid sometimes recognizes a caregiver child exception that allows you to transfer ownership of your house, provided the adult child has lived in your home for at least two years and provided a level of care that prevented you from required nursing home care. That said, the transfer of the home through a life estate deed would cancel the caregiver exception.
A Trust is another—if not the best way—to transfer home ownership from you to your children. When the house is transferred to the Trust, you establish directions for the administration of the Trust and appoint a Trustee who is required to protect your interests.
Still in either of these situations, the counsel of your estate attorney in collaboration with your financial advisor, and CPA are the professionals best equipped to assist you with these specific situations.
At Phelan, Frantz, Ohlig, & Wegbreit, LLC, we are available to answer your questions, inform you of your options, and guide you in both your decision-making and the transfer implementation if all parties determine that a transfer is in your best interests.
Call us at 908- 232-2244 and enjoy the peace of mind of knowing that you are backed by support and knowledge in making informed decisions.
Is a Trust for You? It Depends on Your Specific Need.
If you’re looking to avoid probate, limit possible estate taxes, or assume greater control over how your estate is distributed after you pass, a trust may be for you. But making an appointment with your estate attorney and saying you want to establish a trust is like going into a bakery and saying you want to purchase a cake. The baker is likely to ask a number of questions: What’s the occasion? How many people are we feeding? Which flavors would you like?
Similarly, an estate planning attorney should ask a series of questions when clients request a trust because a trust is a uniquely drafted document that’s created to reflect the circumstances of your particular situation. As your legal advisors our first question must be “Why do you think you need one?” This allows us to determine whether a trust is an appropriate planning tool.
One of your biggest challenges is knowing how each type of trust differs and the goals a particular trust can help you accomplish. Even more, do you even need a trust in the first place?
To appropriately determine need, it is helpful to understand the 3 primary classes of trusts: revocable, irrevocable, or testamentary.
A Revocable Trust
A revocable trust, also known as a living trust, is beneficial because provisions of the trust may be changed during the creator’s lifetime. Assets may be placed in trust and removed, the creator (also called the grantor) is entitled to all the benefits and income of the assets that are owned by the trust, and, if they desire, they are empowered to terminate the trust as well.
Only after death do the terms of the trust become unchangeable and the property held in the trust transfers to your beneficiaries. At that time, your heirs benefit because a revocable trust allows them to avoid probate, the lengthy, often expensive, legal process that takes place when it’s time to distribute your estate.
A revocable trust can also be effective if you own property in multiple states and would therefore be subject to probate in several states. However, if those two properties are owned inside of a revocable trust, you’ll likely be able to avoid probate entirely, thus making the process of administering your estate quicker and less costly.
A revocable trust also should designate a successor trustee who is empowered to manage the assets held in the trust should you become incapacitated in any way. This is particularly useful as individuals age and require the assistance of adult children to help manage their finances and pay bills. Because the adult child may be named as the successor trustee of the trust, they are automatically empowered to take over if necessary, without the need for access through a power of attorney or guardian appointment.
Finally, a revocable trust offers families a degree of privacy in their estate planning. Because a Will becomes a publicly available document once probated, many individuals may choose to have the dispositive provisions of their estate plan contained within a trust, which is only available to the named beneficiaries after someone dies.
A revocable trust can be funded or unfunded. Funded means the assets are typically placed into the trust when you establish it. An unfunded trust, by contrast, is actually nothing more than the trust document itself. That said, it is not void but rather inoperative until it is funded.
Sometimes, for whatever reason, the originators of the trust neglect to fund it. This is essentially sub-optimal handling as indefinitely not funding or not having a plan to fund a trust essentially negates what the trust is intended to accomplish. In other circumstances, however, a trust can remain unfunded until you die at which time your Will provides that any assets in the estate be placed into the trust.
An Irrevocable Trust
In contrast to a revocable trust, assets in an irrevocable trust can’t be removed or amended after they’ve been placed in the trust. Essentially this means that you relinquish control of the assets you place in an irrevocable trust, and they are removed from your estate, protecting you from possible estate taxes. Because the IRS and some states tax estates that are above a certain value, you can use the trust to reduce the value of your estate.
By placing assets into the trust and naming your heirs as beneficiaries, you can try to reduce your estate to a level below the tax exemption amount. Keep in mind that this amount fluctuates each year. In 2021, the exemption is $11.7 for an individual or $23.4 for a married couple. For people who pass away in 2022, the exemption amount will be $12.06 million. For a married couple, that comes to a combined exemption of $24.12 million.
Many people also choose to create irrevocable trusts and gift assets into them during their lifetime to preserve those assets from being depleted by long term health care costs that may arise as they age. There are a number of complex issues involved in gifting assets, however, which should be thoroughly evaluated with an experienced estate planning attorney.
A Testamentary Trust
A testamentary trust is established after you pass away and is created through a Will, in which case the terms of the trust are spelled out in the Will. Testamentary trusts are often used as a tool to help you create a trust for minor children. In addition, you can leave assets in trust for your adult children if you want to ensure that their inheritance ultimately passes to your grandchildren as opposed to your son or daughter’s spouse. A testamentary trust may in some cases shield your assets from your beneficiaries’ creditors or a divorce proceeding as well.
From the Grave
Despite the different types of trusts, 2 universal themes are huge motivators for establishing a trust: flexibility and control. You will have the flexibility to avoid probate and minimize estate taxes. Plus, you will have the control to ensure that your assets become a true financial legacy for your family. The terms you set up at the establishment of the trust or that you designate to go into effect upon your death will enable you to control—even from the grave—and dictate that your grandchildren and future generations of your family will benefit from the wealth you have accumulated during your lifetime.
That after all is the peace of mind that you derive from establishing and reassessing your estate plan early and periodically during your lifetime. At Phelan, Frantz, Ohlig & Wegbreit, we become your partners in providing the thoughtful guidance that will help you safeguard your legacy.
Call us at 908.232.2344 to develop a plan and determine the best wealth transfer vehicles personalized to your unique needs so that you can best provide for and protect your loved ones.
If Capital Gains & Proposed Tax Law Change Could Boost Your Tax Bill a Charitable Trust Could Help
While it’s great to see significant growth in your stock portfolio and the appreciation of your investments is gratifying, the capital gains can cause you problems at tax time. Couple that with proposed estate tax changes coming out of the Biden administration and your heirs could be handed a hefty bill when they inherit your estate.
Proposed Tax Law Changes Amounts You Can Pass Tax Free to Heirs
At Phelan, Frantz, Ohlig & Wegbreit, LLC, we can provide you with tools to reduce your estate’s tax burden and gifting strategies that can help minimize your tax bill. The Biden administration, however, has proposed estate tax reform which includes removal of the stepped-up basis. These proposed reforms could potentially increase the tax burden to your estate. That’s why in the current political climate it’s more important than ever to put your head together with your financial advisor, your accountant, and your estate attorney to do some strategic estate planning. Creating an estate plan is your opportunity to provide for your loved ones. The thoughtful time you spend will not only benefit your heirs but also benefit you during your lifetime especially when it comes to estate taxes.
Reduce Your Taxable Estate With an Income Stream to Someone You Love
The good news is that a charitable remainder trust (CRT) may be an option to circumvent changes that may be ahead to significantly reduce the amount of money an individual can gift tax-free during their lifetime and at death. In fact, the primary benefit of a CRT, allows you to reduce your taxable estate while providing an income stream to someone you love.
A CRT is a trust that is funded by an individual during their life. In addition to donating funds to a charitable organization, the CRT makes distribution to a noncharitable beneficiary, which can include the donor or another beneficiary, such as a spouse or child, for a prescribed number of years. A CRT can also offer an opportunity to move assets with a low basis (and corresponding high capital gain).
This is a particularly palatable option if you are charitably inclined and understand that your estate plan serves as a testament to who you are, the values you hold, and the legacy you want. Plus, it addresses the federal estate tax exclusion change currently on the table by limiting or eliminating the amount that will be subject to estate tax upon your death. As attractive, it also can eliminate capital gains on appreciated property, reducing income tax liability during the years of your life when you likely need it most.
Income Stream a Real Plus
Here’s how it works. The CRT makes a distribution to a noncharitable beneficiary for a fixed number of years or for the rest of their life. This means that you can give yourself or another individual an income stream of either a fixed dollar amount per year or a fixed percentage based on the value of the assets transferred to the trust. At the conclusion of the designated term, the assets that remain in the trust will be paid to the charity you have selected. In the year you create the trust and initiate the asset transfer and for the predetermined period thereafter, you will receive a charitable deduction on your income tax return. The deduction will be based on the value of the transfer, the number of years of the trust, the payout rate, and the number of beneficiaries.
Although there has been no proposal put forth to eliminate the tax benefits of utilizing a properly structured CRT, Biden’s proposed plan would impose a 28 percent limit on charitable deductions for taxpayers making over $400,0000 per year in income. This compares to the current environment in which a high-income earner can make a $100,000 charitable gift and write off $37,000 (the highest marginal tax rate). But under Biden’s plan, the same charitable gift would be limited to a $28,000 income tax write-off, with 28 percent being the proposed limit for deductions for charitable giving for those in a higher income tax bracket. Despite this reduction in the write-off limit, however, there is still substantial savings on your income tax. Your accountant and attorney will work together to maximize the amount of charitable deduction you will be able to take on your income tax return.
Heart Centered and Money Wise
At the end of the day, by making this transfer, you have simultaneously maximized the philanthropic benefit of a charitable gift while avoiding the payment of capital gains tax on your highly appreciated assets. You have also subsequently reduced the value of your estate for your heirs which is an important consideration in light of the potential tax changes on the horizon. As importantly, you have not given up the benefit you received from the underlying asset, as you have converted it into an income stream for a period of time.
There is a long road between proposed revisions to the tax law and their enactment. But even in the current environment, capital gains on low basis assets may still be an issue that can cause you significant taxation. At Phelan, Frantz, Ohlig & Wegbreit, LLC, we have always been available to guide you on approaches that can enable you to make investment decisions that will minimize taxation for you during your lifetime as well as for your loved ones when they inherit your estate. In light of the current political environment, there is no better time to work with your accountant, your financial advisor, and your estate attorney to review your estate plan as well as gifting strategies.
Call us at (908) 232-2244 to understand the benefits of charitable giving. Learn how it can be incorporated into a well-designed estate plan that will benefit not only your heirs upon your death but also put your assets to work for you during your lifetime.
AVERAGE AMERICANS TO THE UBER WEALTHY COULD PAY MORE ESTATE TAX TO UNCLE SAM
Proposed Estate Tax Reform Seeks to Cut the Stepped-Up Basis, Raise Tax Rate
A provision in President Joe Biden’s relief plan could cause average Americans along with the uber wealthy to pay more to the federal government when they die, which means your kids or other heirs may get less than they would under the current estate tax laws.
President Biden’s COVID-19 relief package, the American Families Plan, includes a proposal to change the way capital gains are taxed when people pass away. According to economic policy experts, the revision to a tax rule called the stepped-up basis has the potential of being a big revenue raiser for the plan. This, coupled with Biden’s proposed reduction in the federal estate tax exemption to $3.5 million likely will result in tax hikes for not only for the uber wealthy and the well-off but also for everyone who has something of value to pass along to heirs.
The proposed changes are not yet law, and there will surely be lots of Congressional haggling over the measures. But they’re out there and looming. Right now, it’s important for you to keep abreast of what’s going on in Washington and keep in touch with your accountant, financial planner, and estate attorney to make sure you get a handle on how estate tax reform will specifically impact your estate situation.
Inheritance With and Without the Stepped-Up Basis
The stepped-up basis is defined in IRS Tax Code 1014 which says the basis of an inherited asset rises to “the fair market value of the property at the date of the decedent’s death.” Inherited assets like your house or equities in your stock portfolio typically have gained in value since you purchased them. These capital gains are taxable, but the stepped-up basis wipes out the capital gains tax when heirs inherit an asset, which significantly reduces the tax liability when and if the inheritor eventually sells the asset.
For example, if the house you bought for $200,000 years ago has grown to a fair market value of $700,000, the $500,000 in capital gains would not be taxed when your son or daughter inherits it. Plus, if years later, they sell it for $950,000, their personal capital gains would be valued against the $700,000 fair market value of the house at the time they inherited it. The same would be true for stock. There would be no tax when your heirs inherit it and upon sale, the gains would be based on the difference between the market value at the time of your death and the time they sell it.
With the proposed Biden changes, the step-up basis would be eliminated, and your heirs would be taxed on the carryover basis of $200,000 either at the time of your death or at a future date when they sell the asset—and the taxation may be at a new, higher 39.6 percent rate (which is another part of President Biden’s proposal). The use of the carryover basis would be applicable on all assets transferred in the estate.
Then There’s the Gift Tax
Currently, the unified federal estate and gift tax exemption is at an historically high $11.7 million and integrates both the gift and estate taxes into one tax system. You can give as much as $15,000 to as many people as you want during the year without being subject to a gift tax. If any gift exceeds $15,000, you are required to submit a form to the IRS but not required to pay a tax until, if and when, you exceed the $11.7 million exemption. On December 31, 2025, that exemption, which was increased under the 2017 Tax Cuts and Jobs Act (TCJA), will sunset to the pre-TCJA level of $ 5.3 million per person. President Biden, however, has proposed that the estate and gift tax exemptions be decoupled and return to 2009 levels: $3.5 million for the estate tax exemption and $1 million for the gift tax exemption with an increased maximum estate tax rate of 45 percent up from the current flat 40 percent rate.
What You Should and Can Do Now
If you’re planning your estate now, reviewing your current plan, or expect to be the beneficiary of an inheritance, we recommend you consider these strategies to better arm yourself for potential changes Congress may make to the estate tax code.
- Gather Up all Your Records – If you’re not certain where you’ve put all these records, now is the time to find them, store them in a safe place, and send copies to your accountant and your estate attorney. One reason the current stepped up basis rule exists is that it can be difficult to keep track of an asset’s cost basis. In the case of real estate, for example, records of the kitchen renovation or the addition you built several years ago would favorably impact the carryover basis, making it higher. Similarly, if you reinvested dividends and interest in your stock portfolio, that too, would increase the carryover basis.
- Consider Making Charitable Donations or Establish Trusts – You can still donate an appreciated asset to a qualified charitable organization and receive a deduction on the full market value. Trusts will allow you to pass assets to heirs with as little tax as possible.
- Purchase an Insurance Policy – If you’re leaving an asset or assets that you anticipate will cause your heirs to face a big tax bill, consider including a life insurance policy as part of your estate. This will help your heirs pay the tax.
- Gift Prudently – You must seriously think about how you make large lifetime gifts. Even now, we advise clients who want to reduce their estate or get assets out of their names to gift liquid assets. Gifting liquid assets with no capital gains implications makes more sense than an asset like your house or your stock.
- Stay in Touch – Start talking or continue your dialogue with your tax advisors (e.g., your accountant, financial advisor, and your estate attorney). With potential estate tax reform on the horizon, staying connected with these professionals is more important than ever. Change can be daunting but being informed will enable you to be ahead of the curve and, therefore, more flexible and at the ready to make specific adjustments quickly.
At Phelan, Frantz, Ohlig & Wegbreit, LLC, we are knowledgeable of estate tax laws and issues and stay continually abreast of the ongoing changes in estate tax law—and are always available to provide you with the guidance you need for your unique situation.
Call us at (908) 232-2244 to ensure that you’ll be fully prepared for whatever estate tax reform Congress may send your way.
To Transfer or Not: Should You Deed Your House to Your Adult Children?
Thorough Research, Careful Evaluation and Attorney Consult Can Help You Decide
“Should aging parents transfer their home to their adult children?” You’ve probably heard others, perhaps even your friends, ask this question. This is a topic that also frequently makes the news.
The answer: There is no one “right” answer. No easy answer.
The best guidance is to diligently do your homework and consult your estate attorney. Research the pros and cons of a house transfer from a parent to an adult child. Then, determine how the implications of the transfer will apply to your particular family situation. It’s only then that you’ll be positioned to make a decision that works for you and your family.
Preserving assets: a top priority
The most important consideration is to preserve assets. A house is typically your largest asset, especially if your mortgage is fully or significantly paid off. It is, therefore, undesirable to put a drain on any of your assets while you are alive but in need of the long-term care that can bankrupt you financially or force you to sell your house. In these situations, people often wish to seek relief by turning to Medicaid, the joint federal and state program that helps people with limited income and few assets cover health care costs.
Puzzling over Medicaid and some misconceptions
People often think they are ineligible for Medicaid coverage of nursing home costs and doctor’s bills simply because they own property or have some money in the bank. They believe that getting their home out of their own name will enable them to receive the benefit more easily and often use it as a go-to strategy. The reality is, however, that the transfer of assets can have wide-ranging impacts which, in the end, can impact your ability to be considered eligible for Medicaid. What’s required is understanding the rules and making a legal and financial plan, typically with legal and financial professions, to ensure they are met.
Medicaid eligibility requires that an individual’s combined assets be less than $2,000 in order to receive help with payment for care. In certain situations, your home is not considered a countable asset for Medicaid eligibility purposes, especially if you, your spouse, or a dependent relative continues to reside in the property.
Medicaid’s five-year lookback period is perhaps the largest factor that must be considered. Any gifts or uncompensated transfers that have been made in the five years immediately prior to the Medicaid application will result in a penalty period and delay eligibility for months, even permanently. Therefore, an ill-timed transfer could penalize an individual rather than enhance eligibility.
Still, there are circumstances in which it is legal to transfer a house, but these circumstances often come with a double-edged sword. You may freely transfer your home without incurring a transfer penalty to:
- Your spouse
- Your under 21-year-old-child who is blind or disabled
- Your caretaker child who has lived in the house for two years prior to your entering an acute or long-term care facility can also be the legal recipient of a transfer, as long as that child provided care to you during that two-year period.
That being said, Medicaid can put a lien on your house for the amount of money spent on your care. Similarly, if the house is sold while you are still alive, you will likely have to satisfy the lien by paying back the state. There is also an option called estate recovery which under certain conditions allows the government to recover the cost of your care from your estate.The appropriateness of a decision to transfer one’s home for Medicaid purposes is one with which many seniors and families struggle. More often than not, it’s a choice dependent on an individual’s unique circumstances and the real-time monetary values involved in a situation.
For example, a typical scenario which could favor moving the home out of a couples’ name may involve a 70-year-old couple, say, a healthy wife and a husband suffering with Alzheimer’s. The cost of the husband’s long-term care may be exorbitant and the wife will need money to live on herself. And there is always the desire to leave a financial legacy of their hard-earned money for their kids and grandchildren.
Avoiding a hefty tax bill with a Will or Trust
Taxation is another reason you may give thought to transferring your home to your adult children. In lieu of simply handing over the deed to your son or daughter, there are other ways to transfer your home out of your name. The fact is that gifting your home can involve a hefty bill that taxes your son or daughter on the capital gains derived from your home’s increased market value.
Say you bought your home 50 years ago for $25,000, and now it’s worth half a million dollars. That $475,000 increase comes with a huge tax hit for your kids on the capital gains earned between the purchase price and the current market price. That tax could be avoided if they inherit the property after you die. In the latter scenario, your kids will receive what’s called a step-up basis equal to the value of the house at the time they inherited it rather than the value of the house at the time you purchased it.
People are also skittish about probate and sometimes rush to judgement and transfer their home willy-nilly to their kids. In reality, in most states—New Jersey among them—probate is nothing to fear. In fact, most states even have simplified probate procedures for smaller estates. If you are really worried about probate, you can also establish a living or revocable trust to avoid probate—not estate taxation—but this may not really be necessary depending on the cost and complexity of probate in your estate.
Probate is quite expensive and time-consuming in only a few states, such as California and Florida. In those states, as well as in the situation in which you own homes in more than one state, you may want to work with your estate attorney to develop strategies for wealth transfer. In general, however, many individuals perceive probate as something much more daunting than it actually is.
Trusting your kids: a must
One of the most important considerations for you when reflecting on how to treat your home centers on the conversations you have with your children about your intentions regarding your assets. If your objective is to keep the house in the family, it’s essential that you trust that your adult children are aligned with that value especially while you are alive.
This goal is often compromised when adult children live out of state and feel increasingly detached from the home in which they were raised. They could also be facing their own, sometimes extreme, financial difficulties which could subject your home to liens and/or require your adult child to sell your house to satisfy his or her creditors.
Then, too, if your child divorces, your house could be considered an asset to be divided or dealt with as part of the property agreement with his or her former spouse. Finally, there are health situations in which a transfer could work to your adult child’s disadvantage. Your grandchild, for example, could become disabled and require Medicaid or other government benefits. The fact that your adult child owns your house could prevent your grandchild from qualifying for those benefits.
At Phelan, Frantz, Ohlig and Wegbreit, LLC, we are here to help you navigate these challenging conversations and decisions so that you can better evaluate your options and determine the best way to preserve your assets, among them your home. We will help you gain clarity around your unique family situation and will work tirelessly to guide you to effective strategies that will best serve your wishes and the future needs of your family.
Call us at 908.232.2244 to schedule an appointment and ensure that the legacy you leave to your loved ones fulfills your every intention and keeps the best interests of you and your family top of mind.
WHAT’S UP WITH NJ ESTATE TAX?
Recent reports out of Trenton suggest that the evolution of the New Jersey estate tax — thought to be complete in January 2018 with the full repeal of the tax — may face further developments. Revelations that the repeal has resulted in a higher drop in state revenue than anticipated have led to calls for reinstatement of the estate tax in some form. The uncertain future of the New Jersey estate tax adds an additional layer of complexity to the estate planning process.
NJ ESTATE TAX ELIMINATED IN 2018
For many years, the estate tax exemption in New Jersey was relatively low. An estate tax was imposed on individuals with net assets in excess of $675,000 at death. Many residents sought to avoid the hit by establishing domicile in a more tax-friendly state, such as Florida, which had the accompanying result of impacting New Jersey’s income tax collections. In 2016, then-Governor Chris Christie and Republican lawmakers introduced a law to phase-out the estate tax. In 2017, the estate tax exemption was increased to $2 million and in 2018 it was eliminated altogether.
IS IT COMING BACK?
While New Jersey still has an inheritance tax which is imposed when someone other than an immediate family member (parent, spouse, child or grandchild) or charity receives an inheritance, lawmakers knew that the fiscal hit would be significant. News issued recently by the Department of Treasury reveals that the hit has been harder and more precipitous than initially believed, however. Analysts predict that estate and inheritance tax collections for 2018 will decline more than $100 million, in large part because of the 2017 bump in the estate tax exemption and the complete elimination of the tax in 2018.
FLEXIBILITY IN YOUR ESTATE PLAN IS ESSENTIAL
Calls for restoration of the estate tax have been coming fast and furious. Whether it will come back and, if it does, whether it will be restored at the $2 million exemption amount or less, remains to be seen. Regardless, it is critical that individuals and families in the process of updating or creating an estate plan include flexibility in their Will to account for the variety of scenarios that may come to fruition. Consultation with a knowledgeable and thoughtful estate planning attorney with experience in New Jersey’s estate tax is an essential part of this process. The attorneys at Phelan, Frantz & Peek are all mindful of this possibility when we discuss planning with our clients.
Navigating The Shifting Estate Tax Landscape
The attorneys at Phelan, Frantz & Peek want to help you navigate the rolling hills that have become the landscape of inheritance and estate taxes in New Jersey. Until January of 2018, New Jersey was one of two states in the United States (the other is Maryland) that had two death taxes. The first is an inheritance tax that is imposed based on WHO inherits from an estate. The second is an estate tax that is imposed based on the VALUE of the assets passing from one generation to another. As of January 2018, the estate tax is no longer.
NJ Estate Tax Repealed
In October 2016, then-Governor Chris Christie signed into law a bill that repealed the New Jersey estate tax as part of a transportation funding bill that included .23 cent/per gallon tax hike on gasoline. At that time, the state’s estate tax exemption was $675,000 – meaning that an individual could leave up to $675,000 without triggering the estate tax. The exemption amount was increased to $2 million in 2017 and is now eliminated entirely with the ushering in of the New Year.
NJ Inheritance Tax Remains
While the estate tax repeal may have some dancing in the aisles – especially those whose net worth exceeds $2 million, the catch for New Jersey families is that the inheritance tax remains. New Jersey’s inheritance tax is levied on assets passing to anyone other than a descendant’s blood line (children and grandchildren in one direction and parents in the other) or a charity. It is important to note that domestic partners, legally adopted children, stepchildren (but not step-grandchildren), and mutually acknowledged children are included in this class.
Those not exempt from the inheritance tax are siblings, in-laws, civil union partners, nieces, nephews, and friends, to name a few. The tax imposed on gifts left in a Will to individuals in these categories varies depending on their classification and the amount of the gift.
Federal Estate Tax Exemption Increased
And last, but certainly not least, is the federal estate tax. The federal estate tax individual exemption was increased from $5.49 million in 2017 to $11.2 million after President Trump signed the Tax Cut and Jobs Act of 2017. The increase will only last until 2026, when the exemption amount is scheduled to return to 2017 levels. Between now and then, few will have to contemplate this issue.
What does all this mean for you?
As evidenced by the up and down of the past twelve months alone, the landscape of estate taxes is subject to frequent fluctuation. Given recent changes, now is a good time to review your estate plan with a professional to determine if your wishes are still being addressed under the new laws, and insure there is some flexibility built in to deal with possible frequent changes to these laws at both the federal and state levels.