Navigating New Jersey’s Heavy Estate Taxes with Life Insurance

When it comes to estate taxes, New Jersey residents have it pretty rough. Not only are the taxes high, with rates that can go up to 16%, it’s also pretty likely that heirs are going to be taxed twice for anything they receive from you due to dual estate and inheritance taxes. The state has one of the lowest estate tax filing thresholds in the nation and is not that friendly when it comes to exemptions either.

New Jersey’s Tough Tax Laws

If you live in New Jersey, there’s a big chance your heirs are going to have to file a state estate tax return, even if they’re not required to file a federal one. Simply the act of owning a life insurance policy or a home is enough to push you past the state’s estate tax threshold. To add insult to injury, the state also has an inheritance tax to deal with. On the upside, you don’t have to file an estate tax return in New Jersey if you’re not a resident, even if you do own property there. The tax is only for New Jersey residents.

The threshold that determines if you must file an estate tax return in New Jersey is $675,000 per person. While most states are well into the millions when it comes to estate tax, New Jersey’s exemption has been stuck at that tax rate since 2001. There have been discussions about increasing the threshold — or even getting rid of the tax entirely — but no significant movement has been made. That means you’re probably going to need to plan for taxes in New Jersey.

The exemptions you can take are pretty limited, too. You can’t take an offset for your home, even if it’s your primary residence, unless that property is transferred to your spouse upon your death. There’s no exemption for anything gifted to children or for life insurance proceeds either.

Estate taxes are due within nine months of death, and if they’re not paid, an annual interest rate of 10% is charged. There are no payment extensions available and taxes must be paid in cash. The state can also place a lien on the estate assets in the event of nonpayment.

Estate taxes are charged in addition to inheritance taxes, meaning that your heirs will get double taxed on anything you leave to them. The rate of tax your heirs will pay will vary based on both your estate value and the type of property and assets being valued, but these taxes can go as high as 16%.

Planning Your Estate in New Jersey with an ILIT

If you own a home in New Jersey, it’s imperative that you have funds outside of your estate so your family can pay the taxes. Otherwise, it’s pretty likely that your heirs will have to sell the home, and if they can’t do so quickly, they’ll pay additional penalties.

The best way to manage this is to prepare a separate funding pool for heirs with an irrevocable life insurance trust (ILIT). If the life insurance policy isn’t in your name, then it’s not considered part of your estate, and using a trust is the best way to accomplish this. There are several benefits to using a trust funded with life insurance in New Jersey:

  • The trust stays outside of your name, meaning it stays outside of your estate.
  • Heirs receive an immediate lump sum payment without having to wait through probate.
  • Trusts can act as shelters for assets to reduce your estate value below the $675,000 exemption.
  • Life insurance funds are available right away to pay taxes due, which helps your heirs avoid penalties.

Of course, using an ILIT means leveraging gift tax exclusions and adhering to certain requirements to make sure the trust is executed properly. Otherwise, it won’t work the way it should and could be considered part of your estate.

That’s why you should always work with a firm that specializes in these types of arrangements. Howard Kaye has been using life insurance as a means of creating legacies and minimizing taxes since the firm opened its doors in 1962. Our life insurance advisors are specifically experienced in using these types of trusts with life insurance and can ensure you get the policies you need to preserve your wealth for your heirs in the state of New Jersey. Contact us today at 800-DIE-RICH.