The purpose of estate planning is to take control over one’s legacy, provide support for dependents and address the possibility of a future emergency. A thorough estate plan includes a variety of different documents drafted based on the circumstances and priorities of the testator.
Many people prioritize preserving as much of their resources for beneficiaries as possible. They want their success and good fortune to benefit their loved ones after they pass. Unfortunately, financial obligations can diminish what beneficiaries inherit.
Debts owed by the decedent often take priority during estate administration. There may also be tax obligations that consume a portion of the estate. It is often possible to minimize tax obligations with proper planning. Do people need to worry about estate taxes when they establish or update New Jersey estate plans specifically?
Several taxes may apply during estate administration
There are both federal and state taxes that can diminish the value of an estate. New Jersey does not collect an estate tax anymore. However, the state does assess an inheritance tax. People with close relationships to the decedent can inherit without paying tax on the value of the assets they receive.
Others may have to report their inheritances and pay taxes to the state. The parties who can avoid estate taxes include children, stepchildren, mutually-acknowledged children, grandchildren, spouses, domestic partners, civil union partners, parents and grandparents. Others may have to pay taxes based on the value of what they inherit.
If the estate is sizable, then federal estate taxes might apply. There is a relatively generous exemption threshold for federal estate taxes. If a person dies in 2025, the value of their estate must exceed $13.99 million for federal estate taxes to apply. However, for those with larger estates, federal estate taxes can become a significant burden.
The personal representative of the estate may need to pay between 18% and 40% of the total value of the estate in taxes. Choosing appropriate beneficiaries, adding co-owners to major assets and moving assets to trusts are among the various strategies that people can use to minimize estate tax and inheritance tax obligations.
Reviewing personal holdings and potential tax exposure with a skilled legal team can help people optimize their legacies. Proper estate planning can help a testator ensure that their intended beneficiaries, not the government, will receive their assets after they die.
