Estate taxes, also known as death taxes, are some of the most loathed of all financial burdens placed on American citizens. These taxes affect the beneficiaries of an estate or the estate itself and typically must get paid as part of the administration of the estate. Many states do not even collect estate taxes, leaving New Jersey in the minority that does.
Failing to pay the taxes in a timely manner could mean that either the executor or the beneficiaries of the estate become vulnerable to legal action to recoup the unpaid estate taxes. Understanding when your estate becomes vulnerable for taxation at the state and federal levels can help you make better estate planning choices.
New Jersey has a lower estate tax threshold than the federal government
In order for you to need to pay federal estate taxes, the total value of your estate must be at least $11.58 million. Otherwise, you will only have to worry about paying New Jersey estate taxes. The total value of your estate only needs to reach $2,000,000 for the state of New Jersey to apply a state tax to it.
That estate tax liability increases with the total value of the estate, meaning the people who leave the most behind for their loved ones will have to worry the most about the potential taxes involved.
How can you avoid estate tax obligations for your heirs and loved ones?
The most straightforward way to reduce your obligations for estate taxes will be to reduce the overall value of your estate before your death. There are typically two strategies people use to reduce the taxable value of their estate, either of which can be useful on its own or in conjunction with the other.
The first way to reduce the value of your estate is to begin strategically gifting assets to your loved ones. This way, you can witness them enjoying some of their inheritance while you are still alive while simultaneously reducing the risk for them paying estate tax after you die.
If that situation doesn’t seem ideal to you, creating a trust or even several trusts could be another solution. Everything from bank accounts to real estate can be used to fund a trust, reducing the value of your estate while simultaneously giving you more control over the use and distribution of those assets.