Estate Taxes Today

Published on May 26th, 2014

What are Estate Taxes? How are Estate Taxes calculated? How much Estate Tax will my Estate have to pay? These are very common questions that should be addressed so that plans can be considered that might reduce the taxes.

When a person dies and their assets pass to beneficiaries or heirs a tax must be paid, the Estate Tax. The Estate Tax is based on the “taxable estate”, the value of assets passing at the time of death. It is important to know that there are many assets that are included and taxed as part of the taxable estate even though the assets may not appear to be owned by a deceased, such as certain lifetime gifts.

The assets that are included, the method of valuing included assets, the exemptions and exclusions, vary from State to State and can be different from the federal government inclusions, exemptions, and exclusions. A good example is life insurance proceeds, which treatment can vary widely. To give you an idea of the cost involved, consider the following tax rates, as of the time of posting:

Federal:
The first $5,250,000 per person is exempt.
The tax is 40% of the taxable estate exceeding $5,250,000.

New Jersey Estate Tax:
The first $615,000 is excluded.
Tax rate varies, for example:
Tax on $667,000 is $19,300
Tax on $1,040,000 is $38,800
Tax on $2,040,000 is $106,800
Tax on $5,040,000 is $402,800
Tax on $10,040,000 is $1,082,800
Tax on amounts in excess is at 16%.

New York Estate Tax:
To March 31, 2014 the first $1,000,000 is excluded.
Tax rate varies, for above, for example:
Tax on $1,000,000 is -0-
Tax on $1,100,000 is $32,153
Tax on $2,100,000 is $105,246
Tax on $5,100,000 is $400,383
Tax on $10,040,000 is $1,079,520
Tax on amounts in excess is at 16%.

There is also a New Jersey Inheritance Tax paid by non-exempt heirs and beneficiaries. After the $25,000 exclusion this tax is 11% increasing gradually to 16% for estates in excess of $1,700,000.

In New York the exclusions have just been raised, though the above examples remain instructive as to the tax rates and cost. The exclusions as of now are:
April 1, 2014 – March 31, 2015 $2,062,500
April 1, 2015 – March 31, 2016- $3,125,000
April 1, 2016 – March 31, 2017- $4,187,500
April 1, 2017 – December 31, 2019 – $5,250,000
Thereafter $5,000,000 plus inflation adjustment

It is equally important to know that there are many exemptions and exclusions that can be taken advantage of, though many need to be planned during one’s lifetime, which cost effectively eliminate or reduce estate taxes. There are spousal exclusions that can be tailored to the circumstances using (A-B Trusts, Credit Shelter Trusts). There are programs of gifting that can be tailored to the specific circumstances.

There are many methods of reducing the values of assets passing in an estate and or the inclusion of specific assets in the estate. The transfer of business and real property interests entail special challenges which can be overcome with careful planning and by selecting the appropriate method of tax reduction.

In addition to the above, some of these methods include:

1. Lifetime transfers with asset value discounting
2. Grantor Retained Annuity Trusts
3. Gifts of family limited partnership or closely held corporation interests
4. Private Annuity Sales
5. Self -Liquidating Notes
6. Charitable Remainder Trusts
7. Qualified Residence Trusts
8. Social Services & Supplemental Needs Trusts

Sometimes these exclusions can help, but one must be careful because the improper use of these exclusions can increase the overall tax cost. For example, in planning one must take care that in avoiding the estate tax they do not trigger higher capital gains tax

What assets are transferred, how they are transferred, and when they are transferred are key in planning to reduce taxes. How best to use these options depends on the particular personal and family circumstances, and must consider personal, financial, and family goals in addition to tax savings.

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