Sure, the thought of dying doesn’t bring a smile or a happy dance to most. But dying and being taxed, even after you’re dead?
Welcome to New Jersey.
While there have been many changes to estate tax law through the years, often benefitting the so-called rich, New Jersey, as usual, rocks to its own drummer. It’s a politically charged issue, but let’s face it: Dead people can’t vote. And the state isn’t likely to give up easy revenue anytime soon.
So don’t die in New Jersey — or at least don’t die in New Jersey without a comprehensive estate plan.
DIE AND BE TAXED AGAIN
First, let’s review the federal estate tax.
The federal estate-tax exemption increased over the past decade, meaning you were able to leave more money free of federal tax as the exemption went up each year. For 2010, the tax was completely repealed, making this year a great year to die, at least federally speaking. If there’s no action in Washington for 2011, a $1 million exemption will be resurrected.
Congress keeps dallying around the issue, so the future of the federal estate tax remains, for now, in limbo. New Jersey’s estate tax, by comparison, is pretty solid.
A majority of states linked their estate tax exemptions to the federal exemption amounts during the past decade, meaning they mirrored the fed’s example. But New Jersey, along with 15 other states and D.C., “decoupled,” setting their own estate-tax rules, according to the nonpartisan financial educational organization the Tax Foundation. New Jersey kept the estate tax exemption at $675,000, the amount of the federal exemption in 2001.
That may sound like a lot of moola, but it’s not hard to die in New Jersey with that much in assets. Lots of state residents reach the $675,000 threshold in real estate alone. Throw in a 401(k) and a bank account or two, and you’re there. Even if you don’t have enough to owe federal estate tax, you very well may owe the tax to New Jersey.
Here’s an example: Let’s say you die with an estate worth $950,000 in 2010 or 2011. You won’t owe any federal estate tax. But anything over $675,000 — in this case, $275,000 — would face the New Jersey estate tax. That comes to a bill of $31,800. If you instead died in a state with no state estate tax, your estate would owe nothing at all.
Move to Florida. Yes, Florida is estate-tax-free, and moving is one way to avoid the New Jersey tax. Of course, I’m not suggesting you leave the state. I plan to stay here even if I amass a great fortune before I die. If you want to stay close, here are a few other considerations:
• Become a snowbird. Retain your Jersey home and establish permanent residency in one of the states with no estate tax. To satisfy a wary IRS auditor, you’d need to make it official. Live in the new state for 183 days a year, open local bank accounts, register to vote, get a driver’s license and car registration and so on.
• Establish trusts: There are many trusts that can help minimize estate taxes on both the federal and state level.
• Check your beneficiary designations: Certain assets, such as life insurance policies and retirement accounts, don’t pass to heirs via a will, but are distributed based on beneficiary designations. Still, they’re part of your estate for tax purposes. Why does that matter? If you die and your spouse inherits your retirement accounts and receives a life insurance payout, his or her taxable estate could jump significantly and impact estate taxes on both the state and federal level when your spouse eventually dies.
• Consider gifting assets. Give away some of your money during your lifetime to reduce your taxable estate. Individuals can give $13,000 to as many individuals as they want this year; and if they’re a couple, they can give $26,000. Just make sure not to give away money you’ll need to support yourself in your later years.
• Resign yourself to paying the estate tax. Depending on your situation and that of your spouse, there are times when paying the estate tax upon the first death is cheaper than waiting until the death of the second spouse, especially if tax rates rise, as many expect they will.
All of these strategies can be helpful, but they’re not right for everybody. The best advice? Hire a good estate planning attorney who can assess your potential tax liabilities, something that’s especially important with upcoming changes on the federal side. Check for attorneys who are members of the New Jersey state, American and county bar associations, or try the American College of Trusts and Estate Counsel for a qualified attorney.
An estate-planning attorney may not be able to eliminate your estate’s tax burden, or make it pleasant to die in New Jersey, but he or she can make it a little more affordable. If you want to earn extra credit while studying estate taxes, pick up a copy of “On the Road to Florida,” by Michael H. Forman, a guide on how to move to Florida from New Jersey or New York.