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Tax planning tips for your estate plan

| Mar 12, 2021 | Tax Planning |

As a New Jersey resident, you may create a will, bequeathing your assets to family members, friends and charities. However, that may leave them subject to the inheritance tax, which can become costly. However, you can take steps that minimize or avoid the tax altogether

According to the New Jersey Division of Taxation, the amount of inheritance tax imposed on beneficiaries depends on the following:

  • Who they are
  • Their relationship to you
  • Value of the assets
  • Type of assets
  • Whether you live in New Jersey or another state

The tax results from the ownership of assets transferring from your estate to the beneficiaries. Even if you lived in another state, if your beneficiaries live in New Jersey, they must pay the tax unless you take tax planning measures.

Life insurance

This is a popular planning tool because it is exempt from the inheritance tax when the beneficiary is a spouse or domestic partner, child, including legally adopted children, grand and great-grandchildren. Although it includes grandparents, parents and step-children, step-grandchildren are non-exempt.

Trusts

Putting assets into an irrevocable trust while you are alive can protect them against the inheritance tax. You must fund the trust at least three years before you die or be able to show that you did not transfer the contents specifically to avoid the tax.

IRA and 401(k)s

If you name immediate family members as beneficiaries of your IRAs and 401(k)s, they can avoid paying taxes on the funds they receive. However, if you leave the proceeds of the plans to a civil union partner, son or daughter-in-law, niece, nephew or friend, they may have to pay taxes on anything over $25,000.

Your executor must file the inheritance tax return form and ensure it gets paid. If your estate has a balance remaining after the payment of specific bequests all debts, you can specify that it should go towards paying all the taxes as part of your estate plan.