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Health & Fitness

All the Attention is on the Federal Estate Tax: Be Weary of New Jersey's Estate Tax

All the recent attention as a result of the 2012 ATRA is on the Federal estate tax but New Jersey has both an estate tax and inheritance tax that is different.

New Jersey has both an estate tax and an inheritiance tax.  New Jersey's estate tax exemption is $675,000.00, which is significantly less than the current $5,250,000.00 available at the Federal level.  Aside from the altruistic benefits of making gifts, property transferred by gift before death is generally excluded from the gross estate which may save New Jersey estate taxes; however, be careful of certain gifts made within three years of death that may be “pulled back” into the gross estate. IRC § 2035(a). As a side note, IRC § 2035(b) also includes within the gross estate, gift taxes paid within three years of death as the estate tax is an “inclusive tax.”  An inclusive tax includes tax owed in the tax base.

From a tax standpoint, gifts have two principal advantages over transfers at death (i.e., out of the estate). First, to the extent there is future appreciation in the property, a gift of that property permits a property transfer at a lower value for gift tax purposes; thereby, allowing future appreciation in property value to pass to others free of additional gift or estate tax. Second, to the extent the gift represents a present interest in property a donor may transfer up to $14,000.00 (currently) exempt from Federal gift tax to each donee every calendar year.  This allows the donor to reduce the size of the estate remaining at death without any transfer tax consequences.

Under New Jersey law, the requirements for a completed gift are:

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There must be (1) an unequivocal donative intent on the part of the donor; (2) an actual or symbolical delivery of the subject matter of the gift; and (3) an absolute and irrevocable relinquishment by the donor of ownership and dominion over the subject matter of the gift, at least to the extent practicable or possible, considering the nature of the articles to be given.  In re Dodge, 234 A.2d 65, 77-78 (N.J. 1967).

For Federal gift tax purposes, a completed gift generally has two requirements: (1) lack of consideration, in whole or in part (that is, the recipient must give up nothing in return); (2) and the donor must relinquish all dominion and control over the property transferred. However, if the gift is incomplete or void for whatever reason it is generally included in the gross estate.  This has a potentially disastrous result from an estate tax planning perspective. First, property included in the gross estate is valued as of the date of death rather than at the date of the gift.  Second, when a charitable gift fails, the gift is included in the gross estate and the income tax charitable deduction is lost.  Incomplete gifts can happen for a number of reasons including, but not limited, incapacity of the donor at the time of the gift and lack of intent on the part of the donor. 

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I welcome you to visit my website to learn more.  www.millsestateplanning.com

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COMMENTARY INCLUDED HEREIN DOES NOT CONSTITUTE AN OPINION AND IS NOT INTENDED OR WRITTEN TO BE USED AND CANNOT BE USED BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER.  MOREOVER, THE COMMENTARY HEREIN IS SOLELY FOR INFORMATIONAL PURPOSES ONLY AND NOT FOR THE PURPOSE OF PROVIDING LEGAL ADVICE.  USE OF THIS MATERIAL DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP.

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