With proper planning, it may be possible to avoid state estate taxes. However, it must be done in advance and most families will benefit from the help of an experienced professional.
It’s a common scenario: a surviving spouse inherits all of the couple’s assets, which are more than the state’s threshold for state estate taxes. The surviving spouse is not well, and the children are trying to figure out if they will be able to avoid the state estate tax. Is it too late, or can anything be done?
nj.com’s recent article, “Last minute help to avoid estate tax,” recommends that a person in that situation should seek the advice of an experienced estate planning attorney, who can make recommendations tailored to her specific circumstances.
Here is some information about state estate taxes. For example, in New Jersey, a state estate tax return must be filed in 2017, if the deceased person's gross estate exceeds $2 million. However, deductions are allowed for certain expenses and debts, which can drop the estate below the $2 million exemption threshold.
Even if a tax return must be filed because the gross estate is over $2 million, there still may be no tax owed because gifts prior to death can reduce the New Jersey estate tax. It’s critical that, before gift giving to reduce a state estate tax like New Jersey’s is done, the income tax ramifications need to be considered. Donees of gifts take the donor's basis in the assets transferred. If that basis is substantially lower than market value, the donee must pay income tax on the gain in a later sale. Therefore, beneficiaries receiving property at death obtain the property with a basis at its date of death value are less likely to incur a taxable gain—or may have a significantly reduced gain—when the asset is later sold.
Talk with an experienced estate planning attorney about gift giving techniques to avoid negative income tax ramifications.
When a parent has a traditional IRA, she may consider converting all or a portion of it to a Roth IRA. The conversion means there’s income tax owed as a result of the conversion. This taxation reduces her estate (perhaps under the estate tax exemption amount). This conversion would benefit the beneficiaries because their future withdrawals from the Roth IRA will be income-tax fee. The savings can also be substantial, if the beneficiaries are in a higher income tax bracket.
It’s advisable for the children and, if possible, the parent if he or she is competent, to meet with an estate planning attorney to be sure that the current plan and documents are still in alignment with their overall goals and evaluate the state estate tax situation.
Reference: nj.com (October 20, 2017) “Last minute help to avoid estate tax”