Parents may want to leave their children money when they're gone, but they might want to ensure that their children don't have to pay taxes on this wealth transfer. This concern could lead parents to assume that the best course of action is to give their children the bulk of their inheritances while they're still alive. Doing so, however, could be a very big mistake and lead to serious, unintended tax consequences.
Until this year, 2018, residents of the state of New Jersey were subjected to three different taxes upon death: the New Jersey inheritance tax, the New Jersey estate tax and the federal estate tax. However, new laws have changed whether individuals will be struck with these taxes or not.
The federal estate tax exemption increased this year to $11.18 million, allowing parents to transfer their estates to their children without incurring federal estate taxes as long as their estates are under this amount. The New Jersey estate tax exemption has also risen in recent years, increasing the amount up to $2 million. As such, for the vast majority of households, these taxes will have been rendered moot.
Finally, we're left with the New Jersey inheritance tax. However, this tax only gets imposed on people who are not Class A beneficiaries. Children, spouses and grandchildren will be exempt from the New Jersey inheritance tax.
Individuals in New Jersey might not want to gift their assets to children now because the IRS uses a stepped-up basis for inherited assets, meaning that people do not have to pay capital gains assets on the assets they receive from their parents.
The purchase value of the assets will be upgraded to the date that they were inherited. As for gifted assets, on the other hand, recipients of the gifts will also face taxation based on the original purchase value of the gift as the basis for capital gains tax purposes.
If you have a tax question about estate planning strategies, make sure you investigate both federal and state laws as they may apply to your situation.
Source: NJ.com, "This estate planning mistake could mean huge tax bill," Karin Price Mueller, April 10, 2018