There are many considerations in deciding to gift money and assets to your heirs before your death. The biggest consideration is taxes.
Every state is different, so the answer to whether you should make these gifts will vary depending on where you and your heirs live. In New Jersey, where the Timothy Rice Estate and Elder Law Firm is located, there are some unique tax laws that could impact your decision on giving a gift vs. making a bequeath.
Estate Tax
An estate tax applies to all property, from cash to real estate to stock, that is transferred from a deceased person to their heir. The amount of tax is based on the current fair market value of the asset, not on what the decedent paid for it. Recent changes in both the New Jersey and federal estate tax laws mean most people are not subject to estate taxes. It is important to note, though, that political and government budget issues could impact future legislation and change future estate tax laws.
New Jersey Estate Tax
New Jersey first implemented an estate tax in 1934, but it was phased out in two parts. Since Jan. 1, 2018, New Jersey no longer imposes an estate tax.
Federal Estate Tax
The federal estate tax has gradually increased over the years and now stands at $11.7 million under legislation passed by Congress and signed by former President Donald Trump in January 2018.
Inheritance Tax
An inheritance tax is imposed on those who inherit assets from a deceased person. It is different than an estate tax in that it is based on the value of the inheritance. There is no federal inheritance tax and New Jersey is one of only six states that levies an inheritance tax on residents. Whether an inheritance tax is imposed depends on the value of the inheritance, the beneficiary’s relationship to the deceased and if the deceased was a New Jersey resident. “Class A beneficiaries” are exempt from inheritance tax. This category of beneficiaries includes: spouse, domestic/civil union partner, child, grandchild, great-grandchild, parent, grandparent, great-grandparent, step child, adopted child or mutually acknowledged child.
Gift or Bequeath?
Before New Jersey repealed its estate law, many people saw the benefit in gifting to their heirs during their lifetime to avoid paying estate taxes. Since the change in the law, this option may not be recommended as part of an estate plan.
However, based on the value of the estate and the class of beneficiaries, it may be beneficial to make lifetime gifts in certain circumstances. You should be aware that gifts in New Jersey are subject to the inheritance tax if they are made “in contemplation of death.” This means that any gift made within three years of death could be considered a death-bed gift and, thus, subject to the state’s inheritance tax. There are exemptions based on the same criteria of value and relationship. It’s also important to stay within the IRS’ gift limits to avoid tax consequences.
There can be significant financial benefits to gifting property before death, but it is important to understand the potential tax consequences of both gifting and bequeathing. We urge you to speak with an experienced estate planning attorney before making decisions with potential costly outcomes for you or your loved ones. Click here or call us at 856.782.8450 so we can help.
