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I Have to Pay an Inheritance Tax?

Death and taxesWhile Virginia has no inheritance tax there are six states that do.  Before you leave the Commonwealth, taxes may be one more factor in your decision of where to retire.

 Although I was born in New Jersey, it is not the best state to die in these days. Let me say to all of you that have moved to the Old Dominion: "Great choice!"  The reason so many seniors are heading south for retirement has a much to do with taxes as it does with the weather or at least it should. You see, New Jersey has both a 'death' tax and an inheritance tax– good grief!

The amount of tax depends on the transfer amount, or "taxable estate," and who is receiving the transferred amount. The transfer amount is in essence the fair market value of the deceased's assets plus any life insurance proceeds. There are both federal and state estate tax laws to look at when evaluating a deceased's estate. The state where Grandma resided at the time of her death is important, rather than where the heirs live. If Grandma was a New Jersey resident at the time of her death, estate taxes could apply when assets are left to anyone other than her spouse.

The federal estate exemption amount is currently $5.45 million per person. You are only taxed if more than the exemption amount is transferred at death. However, if any lifetime taxable gifts were made by the deceased, it's possible the estate could be subject to estate tax even if the estate is less than the exemption amount. That's because a taxable gift is a gift in excess of the annual gift tax exclusion amount of $14,000 per person.

But if Grandma's taxable estate is less than the exemption amount—after adjusting for any lifetime taxable gifts—there would be no federal estate taxes due. New Jersey has a state estate tax exemption of only $675,000. As a result, many state residents will be subject to state estate taxes. But again, if Grandma's taxable estate is less than $675,000, there's no New Jersey estate tax due.

There's also the issue of state inheritance tax. The taxable estate for New Jersey inheritance tax purposes has two important adjustments: gifts made within three years of death are generally added back, and life insurance proceeds are exempt if paid to a named beneficiary (but not if they were paid to the estate of the deceased).

At these they don't take two tax bites; you only have to pay the greater of the New Jersey estate tax or the inheritance tax, but not both. Also, immediate family members—including the spouse, grandparent, child, or grandchild—are exempt from the inheritance tax which is much better than Pennsylvania's inheritance tax that has no such exemption except for surviving spouse.  Recognize that the better tax deal is still here in Virginia with no estate or inheritance taxes.

With some many differences from state to state when it comes to settling an estate and paying the appropriate taxes, it's best to speak with with an experienced estate planning attorney about intestacy and estate/inheritance tax laws in the deceased's home state. We can help you with that, call today for your complimentary consultation at 757.259.0707.

Reference: NJ 101.5 (March 1, 2016) "What taxes apply when someone passes away?"

 

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