The federal estate tax is based on the value of one’s assets less liabilities at the person’s date of death. There are three important exceptions that are critical to understanding how the federal estate tax works.
First, there is the unlimited marital deduction, which means that all of the assets one leaves to his or her surviving spouse are exempt from federal estate taxes.
The second important exception involves the estate and gift tax applicable exclusion. Under current law, the estate tax applicable exclusion permits you to transfer up to $3,500,000 at your death to anyone without incurring an estate tax. In 2010, the Federal estate tax is scheduled to be repealed, but only for one year. Starting in 2011, estates will once again be subject to estate tax at 2001 rates (top rate of 55%) with only a $1 million exemption available.
The federal gift tax applicable exclusion is fixed at $1 million and permits you to transfer that amount to anyone during your lifetime without incurring a gift tax. If you use any portion of the gift tax exemption during your lifetime, it is essentially subtracted from the $3.5 million exemption allowed at your death.
The tax law also allows you to gift up to $13,000 per year to anyone without using any part of your $1 million exemption. This is called the annual exclusion.
The third exception applies to certain qualified charitable organizations. In general, assets passing to charity are exempt from estate tax.
Currently, the federal estate tax rate is 45%. In 2010, the estate tax will be repealed. In 2011, the estate tax will return with a maximum estate tax rate of 55%. It is anticipated that Congress will consider new estate tax legislation in 2009.
Under New Jersey law, there is a state estate tax imposed on assets in excess of $675,000 passing to someone other than a spouse. The rates are range from 4.8%-16% (with the first $52,174 taxed at 37%).
In addition, there is a New Jersey inheritance tax for assets passing to someone other than a parent, child or grandchild. Any assets left to siblings or spouses of children would be subject to this tax at a rate of 11-16%, and any assets left to anyone else, as well as any amounts left in trust, would be subject to this tax at a rate of 15-16%. Estates subject to inheritance tax will receive a credit for the amount of inheritance tax paid against the New Jersey estate.
New Jersey does not impose a separate gift tax.
Although each spouse is allowed both the federal and New Jersey estate tax exemptions, Wills must be drafted in a particular way in order for each spouse to take advantage of his or her exemptions. If you do not have a Will, or if your Will is not drafted properly, the first spouse could be wasting his or her exemptions, which could result in more tax owed at the second spouse’s death and less assets being available to care for your child with special needs.