Sometimes navigating through estate taxation issues can be confusing, even where the estate at issue is relatively straightforward.
A recent article in the Star-Ledger discussed the broad outlines of how estate tax works for a relatively simple estate. In that article, an only child was set to receive all the father’s assets under his will. Those assets included life insurance with the child as the beneficiary, Treasury notes, bonds, bills, as well as savings, checking, and stock brokerage accounts.
The state of New Jersey imposes estate taxes on estates of New Jersey residents which over $675,000 in value. At the federal level, taxable estates in excess of $5 million are subject to estate tax in 2011 and 2012. The question then is which property is included in the taxable estate?
In this case, any assets owned solely by the by the father in his own name would be included in taxable estate. For life insurance, it doesn’t matter whether the policy lists someone else as the beneficiary or not. If they are still owned by the father at the time of his death, they are included in his taxable estate. Treasury notes, bonds and bills would be included in the taxable estate.
Insurance proceeds, Transfer-on-death deeds, and pay-on-death accounts are also included, unless it can be shown that someone else contributed funds to any of the accounts or purchase any of the stock. The father’s taxable estate can then exclude some of the value of the stocks or accounts, based on the amount contributed by another.
One thing to keep in mind about taxable estates is that lifetime gifts are a good way to reduce one’s taxable estate. Annual gifts up to $13,000 can be excluded from taxation. One example would be transferring one’s life insurance policy to trust. This would yield potential tax savings, provided that gift is made 3 years prior to the testator’s death. Estate tax will be due on any taxable estate over $675,000, so it is well worth exploring ways to reduce one’s taxable estate.
Estate planning can be complex at times, and difficult to navigate. Not only are there tax issues to be concerned about, there are also issues of family politics, personal goals, charitable goals, and a variety of other considerations to take into account. If one wishes to engage in accurate and efficient estate planning, it is critical to work with a knowledgeable attorney.
Source: Star Ledger, “Estate taxes leave surviving only child wondering,” Karin Price Mueller, 11 May 2011.