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Relatives Don’t Let Relatives Live in New Jersey!

Relatively speakingGranted, this post offers irrelevant advice to Virginians but hopefully, it can reinforce why you left New Jersey! 

New Jersey repealed its estate tax as of January 1, 2018, but it still has an inheritance tax. The inheritance tax is imposed on transfers of assets to certain classes of beneficiaries who are beyond the immediate family. This includes nieces and nephews.

The inheritance tax rate on transfers to nieces and nephews is 15% in New Jersey. There is an exception if the bequest is less than $500. In that case, there’s no tax. Therefore, if an aunt or uncle leaves a niece or nephew $500 or more, there will be a tax on the entire amount.

It's important to know that the tax is imposed on every transfer, regardless whether it’s probate or non-probate. A probate transfer is an asset that passes under a will, like a family home or an auto the decedent owns in his or her name alone. A non-probate transfer is something that passes outside of your will, like a joint checking account or a retirement account.

As a result, if an aunt or uncle wants to designate a niece or nephew as a beneficiary of an IRA or 401(k), there’ll a 15% tax due on the amount they get. This is also true even when they withdraw money from the IRA. In most cases, they’ll also have to pay income tax on the withdrawal.

Like any rule, there are exceptions. There are some transfers that are exempt from the tax. One is life insurance paid to a named beneficiary. In the scenario with the generous aunt or uncle, if they name their nieces as beneficiaries of their life insurance, they won't have to pay any inheritance tax on the proceeds of that insurance policy.

Typically, the person receiving the asset is liable for the tax. This can be a troublesome issue for them when the asset they’re receiving isn’t liquid—like real estate. In that case, the beneficiary might have to sell (or liquidate) the property to raise the money to pay the tax. As an example, if an aunt or uncle leaves a house worth $300,000 to a niece or nephew, they’d be on the hook for inheritance tax of $45,000. That tax is due just eight months after the date of death.

One easy solution to the issue of the inheritance tax is including a provision in the aunt or uncle’s will that all taxes are to be paid from the residue of their estate. This is pretty common.  It means that all of the inheritance tax would be paid before any assets are distributed to the beneficiaries. A daughter might receive less than what she might otherwise inherit, but this would have the effect of treating all three beneficiaries the same. The aunt or uncle will need to be certain they have enough assets flowing through their estate to pay the tax. That may require some planning, so speak with a qualified estate planning attorney.

Reference: nj.com (January 19, 2018) “Dividing and conquering the inheritance tax”

 

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We've been putting together as many resources as possible so that we can continue to help:

  • If you’re a current client with a signing appointment or a prospective client with a consultation and would prefer that meeting take place in your own home, we can accomplish that with a little bit of pre-planning on our part and with the addition of a laptop, smartphone, tablet or other computer in your home to facilitate this virtual meeting. For those of you that need to sign legal documents, that too can be accomplished with the use of a webcam (FaceTime etc.), so that we can witness and electronically notarize all of your important legal documents.
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Thank you, Walt and the Zaremba Team

Coronavirus/Covid-19
Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.