Can I avoid inheritance tax for nieces and nephews?
Q. I am unmarried and have five nieces and nephews and want to leave my estate to them. I have a house, several retirement accounts, a brokerage account and an online savings account. What strategies can I use to circumvent inheritance tax?
A. New Jersey remains one of the few states to impose an estate tax.
Inheritance tax is not based on the size of the estate, but on who receives the estate.
There is no inheritance tax imposed on transfers to a parent, grandparent, spouse, domestic partner, child or son-in-law, who are known as Class “A” beneficiaries. said Richard I. Miller, co-chair of the NJ Elder Law Center. at Mandelbaum Salsburg in Roseland.
As you know, inheritance tax is imposed on transfers to nieces and nephews, who are class “D” beneficiaries, he said.
The tax rate is between 15 and 16% depending on the amount transferred, Miller said.
“Transfers made within three years of death are presumed to be ‘in anticipation of death’ and may also be subject to inheritance tax,” he said. “In addition, transfers intended to take effect on or after death are included in the estate for inheritance tax purposes.”
For all these reasons, Miller said it would be financially beneficial to give funds to your nieces and nephews while you are alive — if you can afford it and the donations don’t compromise your own standard of living.
This could be accomplished through outright donations or payment of medical bills or school fees for your nieces and nephews, he said.
Estate tax can also be avoided through the use of an irrevocable trust in certain circumstances, Miller said, and can be used to pay expenses for the benefit of your nieces and nephews.
“However, this requires relinquishing control and use of the assets held in trust. You may not have the right to revoke, amend, modify or regain a beneficial interest in the trust,” Miller said. “Similarly, the transfer of trust property to your nieces and nephews cannot be specifically triggered by your death. »
Another option could be to purchase life insurance that would be paid directly to your nieces or nephews upon your death. It’s not subject to inheritance tax, he said.
“As a result, if you name your nieces and nephews as beneficiaries of a life insurance policy, no inheritance tax will be imposed,” he said. “If you’re insurable, you can use some of your cash to fund a life insurance policy.”
Another – but more drastic – option would be to change your domicile to a state that has no inheritance tax. That would include everywhere but Iowa, Kentucky, Maryland, Nebraska and Pennsylvania, he said.
The tax is based on where the deceased lived, not where the beneficiary lived, he said.
Send your questions to [email protected].
Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. To find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comit is weekly e-newsletter.