Tax can have a profound impact on the estate planning process. Testators need to consider the taxes that their estate may owe. They may also need to plan in advance for the taxes that their beneficiaries could end up responsible for after their passing.
Frequently, testators consider estate taxes when they have estates large enough to trigger federal estate taxes. What they may not consider is the possibility that certain beneficiaries could end up responsible for inheritance taxes.
Careful planning can limit the amount that beneficiaries end up paying after they receive an inheritance.
Who owes inheritance taxes?
The beneficiaries selected by a testator are the ones who typically pay inheritance taxes. Some people are exempt from New Jersey inheritance taxes. Spouses, children, parents, grandparents and grandchildren are immediate family members deemed exempt from inheritance tax obligations.
More distant family members, including siblings, cousins, nieces, nephews and in-laws, may have to pay inheritance taxes after receiving property from an estate. One of the strategies used to avoid or at least minimize inheritance taxes involves the transfer of valuable property to an irrevocable trust.
While doing so means they must give up their interest in certain property and allow the trustee they name to manage those resources while they are still alive, doing so provides better inheritance tax protection for their selected beneficiaries. There may be other strategies that can work as well, depending on the nature of the assets and the relationship that the testator has to the beneficiary.
Discussing inheritance tax concerns with an estate planning attorney can help people optimize what their loved ones ultimately receive. The beneficiaries of an estate or trust are likely to feel grateful if a testator takes steps to protect them from costly inheritance tax obligations.
