New Jersey residents got relief from state estate taxes earlier this year. After a multi-year step-down process, state estate taxes were wholly eliminated for those who died on or after January 1, 2018. Now, the federal government has raised the estate tax exemption, further reducing the already-small number of families impacted by federal estate taxes.
According to the Center on Budget and Policy Priorities, only 2/10 of 1% (.2%) of Americans owed federal estate taxes. That’s just two out of every 1,000 estates opened in the U.S. each year. Further, the Tax Policy Center at the Urban Institute and Brookings Institute says that only about five in 1,000 estates is even required to file a federal estate tax return.
That was when the exemption was just under $5,500,000.
Increase in the Federal Gift and Estate Tax Exemption
The federal gift tax, GST, and estate tax exemption has increased to $11,200,000 ($22,400,000 for married couples). While this change will impact only a small percentage of families, there is a significant amount of money in play. In 2017, estates valued at $5,000,000 and up paid an average of 17% of their value in estate taxes. The average percentage increased with the aggregate value of the estate.
The few thousand estates subject to federal estate tax each year pay about $20 billion in aggregate estate taxes.
Tax Planning for Estates
With New Jersey estate taxes a thing of the past and so few estates impacted by federal estate taxes, it may seem that you needn’t think about taxes when planning to pass property to heirs and beneficiaries. While it’s true that most families won’t be impacted by federal estate taxes, some higher-value estates may still be subject to taxation. For example, valuable real estate may nudge an estate into the taxable category, even without significant cash assets.
Further, other tax considerations may impact the best way to structure an estate and pass property to your beneficiaries. For example:
- Inheritance tax may be imposed when property is bequeathed to people other than immediate family members. Inheritance tax may create significant complications when assets such as real property are left to friends or more distant family members. In some cases, the obligation to pay inheritance tax may force the recipient to liquidate or take out a loan against the property to cover the tax debt.
- Retirement accounts that are tax-deferred or tax-exempt when the account holder follows certain guidelines may lose that status when passed to a beneficiary. Educating yourself about the best way to pass retirement accounts can make the difference between your beneficiary receiving full benefit of the account or losing a percentage to taxes.
- Life insurance policies may or may not be included in the value of the estate, depending on how they are owned and who is listed as a beneficiary. While the new federal exemption is high enough that this issue won’t impact most estates, those with significant assets must consider the structure and value of any life insurance when planning to avoid estate taxation.
Tax Planning is for Everyone
Regardless of the anticipated value of your estate, tax considerations may impact the value received by your beneficiaries. In some cases, appropriate planning for tax obligations may even make the difference as to whether or not a beneficiary can keep property such as a house, car, boat, or undeveloped real estate.
Even if you are confident that your estate is well below the federal estate tax exemption threshold, take the time to educate yourself about other potential tax consequences, how they may impact your beneficiaries, and what you can do to protect them.
An experienced estate planning attorney can be your best starting point.