What you need to know about New Jersey estate taxes

You may not realize that New Jersey's fourth largest revenue stream - an expected $755 million this fiscal year - comes from the estate and transfer-inheritance taxes. One of the reasons is that New Jersey's estate tax exemption is the lowest in the country.

Does this bring to your mind the 1966 Beatles song "Taxman" or the 1995 Stevie Ray Vaughn cover? The refrain goes: "Now my advice to those who die, Declare the pennies on your eyes." You may also remember the chorus line that goes something along the lines of working for no one but the taxman.

An expensive place to die

New Jersey's estate-tax exemption is currently $675,000, but can be as low as zero if you leave your assets to nieces, nephews, friends. Estate taxes can take a sizeable chunk - ranging from 4.8 percent to 37 percent - of assets above this threshold.

The federal estate exemption receives the headlines, so many people are aware that it has soared to over $5 million per individual in the last decade. Most estates will pay no federal estate tax. Only one in 700 taxpayers pays federal estate taxes according to a review by the Brookings Institute.

New Jersey, however, passed legislation decoupling its state exemption from the federal one and has no inflation indexing. The estate tax has come up this legislative session, but it is unclear whether lawmakers will reach a deal that would increase the exemption. One proposal is to offset lower estate tax revenue with a higher state gas tax.

Even as lawmakers seek to reduce the number of New Jersey estates affected, those who have estates between $675,000 and $1 million are often surprised. If your estate assets (you and your spouse, if married) are in excess of $675,000, it is crucial to work with an experienced attorney to create an estate plan.

What can you do?

Numerous strategies exist to avoid an unnecessary tax burden. Lifetime gifts are one option. The Internal Revenue Service will allow gifting to over $5 million without imposing a gift tax, so a couple could give away almost $11 million over their life times, plus up to $28,000 per person each year without tax consequences. In certain circumstances, New Jersey has a look-back rule, however, so seek sound legal advice before making substantial gifts.

Another estate planning tool is a living trust, which may have an added benefit of avoiding a lengthy and costly probate proceeding, and also eliminates the need to obtain a waiver from New Jersey before you can transfer assets on death.

Tax planning needs to be an important component of your estate plan. The failure to anticipate state tax obligations could leave your loved ones with a surprise tax bill that could take a large bite from your estate. An experienced estate planning attorney who practices in New Jersey can analyze your financial picture and suggest a strategy that will work best for you and your family.