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In New Jersey, tax planning includes inheritance tax, P.2

In our previous post, we began discussing estate taxes in New Jersey, putting a special emphasis on New Jersey's inheritance tax.

Tax planning is a large component of estate planning. In establishing an estate plan, it is important for residents of New Jersey to be aware of the inheritance tax, and to figure it into their planning.

To take the example of a single woman who wishes to leave a portion of her wealth to her nieces and nephews. Under New Jersey's inheritance tax, a niece or nephew receiving over $500 will a have to pay 15 percent on the first $700,000 of the bequest and 16 percent of the excess amount.

One thing such a person can do is take advantage of lifetime gifting, as New Jersey's inheritance tax doesn't apply to gifts made more than three years prior to death. Lifetime gifts will also cut down on the amount of federal estate tax due on the estate.

One way to do this is to give each niece or nephew the full amount of the annual gift tax exclusion amount of $13,000 outright. That amount can be given each year to a separate beneficiary without reducing the lifetime federal gift tax exemption, which currently sits at $5 million. Such gifts could also be made to a separate trust for each beneficiary or a common trust that will be split between the beneficiaries.

One could also use a trust to hold life insurance designated to benefit nieces and nephews. In that case, the insurance premiums are paid with some or all of annual gifts. If properly set up more than three years prior to death, such trusts allow the proceeds of the life insurance policies to pass free of federal or state estate tax and New Jersey inheritance tax.

There are additional tax planning strategies that can be considered, but, as always, it is wise to consult an experienced estate planning attorney.

Source: Star Ledger, "Inheritance tax only hits gifts within three years of death," Karin Price Mueller, August 29, 2011.

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