Estate Taxes or Death Tax Planning

The issue of estate taxes or “death taxes,” which occur when a primary estate holder dies and passes wealth and property to the next generation, has become a widely debated and legislated area in recent years. Baratta, Russell and Baratta has been helping clients navigate this changing landscape for years. Our knowledge comes from years of assisting clients make sure that as much of their wealth passes down as possible.

One aspect of estate taxes is that while much attention is focused on the federal level, states also administer estate taxes. Our firm is well-versed in both state and federal estate tax laws.

State Taxes

Both Pennsylvania and New Jersey assess taxes on property passing to a person’s heirs at death. Tax returns are due eight to nine months after the date of death.

Pennsylvania

The Pennsylvania Inheritance Tax is assessed on estate property and joint assets owned by a decedent at the time of death. The tax rate is determined by the relationship of the person receiving the property to the decedent. There is no tax on property passing to a husband or wife. The tax rates are as follows:

  • To spouse 0%
  • To children 4.5%
  • To siblings 12%
  • To anyone else 15%
  • To Charity 0%

New Jersey

New Jersey has both an Inheritance Tax and an Estate Tax. The New Jersey Inheritance Tax is similar to Pennsylvania’s, except that there is no tax assessed on transfers to a person’s spouse and children. The New Jersey Estate Tax is levied on estates where the total value of the assets transferred is greater than $675,000. While the New Jersey Inheritance Tax applies to out-of-state decedents, only in-state residents are subject to the New Jersey Estate Tax.

Federal Estate Tax Planning

For individuals with assets in excess of the lifetime tax exemption, or for people who expect to exceed that threshold through income or appreciation of assets over the course of their life, careful planning can mitigate or eliminate the consequences of the federal estate tax on their estate.

With the top federal estate tax rate at 40 percent, failure to plan can result in the federal government taking a very large bite out of the assets transferred to a person’s family. If the holdings are not liquid, the family may even be forced to sell assets (such as a family business) in order to pay a large tax bill, which is due within 9 months of death.

The federal transfer tax system includes the Estate Tax and Gift Tax. Each person has a lifetime exemption, or “unified credit,” which is an amount that he or she can pass free from federal taxes during life, or at death.

The rules in this area have changed rapidly in recent years. As recently as 2003, the lifetime exemption was just $1 million.  For 2016, the lifetime exemption for Federal Estate Tax  is $5,450,000, indexed for inflation. However there is no guarantee that the exemption will not drastically change.

A few years ago, the most basic form of planning for the federal estate tax was for a married couple is to maximize the use of both spouses’ lifetime exemption by using a credit shelter trust or bypass trust. Now, this planning is becoming outdated because the government allows portability of the applicable exclusion amount between spouses. This means that the first spouse to die can transfer his /her unused estate tax lifetime exclusion to the surviving spouse, who can then use it for his/her gift or estate tax purposes. In today’s difficult-to-predict legal environment, it may make sense to use a more flexible disclaimer trust, which will give the surviving spouse the option to set up a trust if necessary to minimize the tax eventually paid when the assets are transferred to their children.

Persons can also make use of the annual gift exclusion ($14,000 per person) to make lifetime transfers. Any gifts in excess of the annual gift exclusion will be deducted from the person’s lifetime exemption. A carefully planned giving program can transfer significant assets to future generations free from estate or gift tax. Life insurance and life insurance trusts can maximize the benefit transferred.

Lifetime gifts can also be made in ways that minimize the gift tax paid and transfer appreciating assets, such as a Qualified Personal Residence Trust or a Grantor Retained Annuity Trust. It is also important to note that the Generation Skipping Transfer Tax may apply to transfers to grandchildren or persons more than one generation below the person making a gift.

For persons with estate tax concerns, a careful evaluation must be made of their assets and their goals before developing a sophisticated plan to minimize tax while maintaining a comfort level of control of the assets they have worked so hard to accumulate.