Titling of Assets

The way you hold title to your assets is key to any comprehensive estate plan. The greatest Will in the world is going to be ineffective if you have survivorship assets, IRAs or life insurance benefits going to people you don't want them going to. In short, how you own your property determines where it goes when you die. Additionally, how you own your property can affect how it is used if you become disabled.

There are many different ways to own property. You can:

1. own it outright, solely in your own name (these assets pass by your Will);
2. own it outright with another as joint tenants in common (your share of these assets pass by your Will);
3. own it outright with a spouse (this asset passes to your spouse on death regardless of what your Will says);
4. own it outright with another as joint tenants with rights of survivorship (this asset passes to the other person on death regardless of what your Will says);
5. own it outright, but have it be payable on death to another. This includes: Life Insurance, Annuities, Retirement Accounts, 529 Accounts and POD Accounts or TOD Accounts. (These assets pass to the named beneficiary regardless of what your Will says.);
6. own it through a business (Many businesses that are owned with other parties will have an agreement that says where the business will go when you die. Accordingly, this will trump what you have in your Will.);
7. own it through a revocable living trust (Assets in the trust will usually pass according to the terms of the trust);
8. be a beneficiary of a trust (Assets in the trust will usually pass according to the terms of the trust - but this trust was not a trust established by you, so you may not have control over where it goes); and
9. be a third party beneficiary. (This is basically a trust without a written trust document. This scenario often occurs when there is a contract between two people that benefits a third party. For example, a divorce agreement between a husband and wife might require the husband to leave $100,000 to his children. This will trump whatever the husband puts in his Will if rights a Will cutting out his children.)

A good estate planning attorney will make sure to review the title of all of your assets. By doing so, he can help you:

1. ensure that your money goes where you want it to go;
2. advise changes that should be made to the title of assets (particularly for married couples) to maximize estate tax exemptions and minimize taxes;
3. avoid the risk of litigation; and
4. reduce probate costs.

Seminar Announcement - Which Side of the Delaware River Should I Live on?

Let’s Get The Facts Straight!

Which Side of the Delaware River Should We Live On?

New Jersey vs. Pennsylvania

We invite you to be enlightened on the Facts and Myths about Estate Planning and how it may or may not differ depending on where you live. Our free seminar will cover such topics as:

· Inheritance Taxes, Estate Taxes, Laws that affect Non-Traditional Couples & Titling of Assets

· Financial Investment Opportunities, Income Taxation of Retirement Plans & The Importance of Proper Beneficiary Designations

· Property Tax, Property Values, Schools & Real Estate Investment Opportunities

Guest Speakers

Kevin A. Pollock, J.D., LL.M.

Attorney at Law, licensed in NJ, NY, PA & FL
Law Office of Kevin A. Pollock LLC

Kate P. Sweeney, CFP, CIMA

Senior Vice President
Senior Investment Management Consultant
Morgan Stanley Smith Barney -------------------------------------------------------------

Saturday,November 6, 2010

9:00 a.m. to 11:00 a.m.

NEW HOPE MANOR

44n Sugan Rd.

New Hope, PA 18938

PRESENTED BY:

Weidel Realtors

New Hope/Lambertville Regional Office

215-862-9441

Refreshments will be served

Comparison of PA and NJ Inheritance Tax Laws - Chart

As a followup to my October 4 post comparing the PA and NJ Inheritance tax laws, I thought it might be helpful to see all the information in a format that is a little easier to comprehend. Accordingly, I have prepared a chart, which you can view by clicking on this link: Chart Comparing New Jersey and Pennsylvania Inheritance Tax Laws.

Pennsylvania Inheritance Tax Trap

Estate Planning Practitioners and clients should be aware that there is an inheritance tax trap in Pennsylvania. In most states, it is common to set aside a certain amount for the spouse and the children in one trust on the first to die. This is known as a bypass trust and done for a variety of reasons, but usually to take advantage of the federal estate tax exemption on the first to die.

In Pennsylvania, a trust like this will cause an immediate inheritance tax because a portion of the money is going to children who are taxed at a rate of 4.5%. Accordingly, if you are moving to PA from another state, it is highly likely that you should to redo your estate plan.

A Comparison of the Pennsylvania and New Jersey Inheritance Tax Laws

Some states, including New Jersey and Pennsylvania, have an inheritance tax. Other states, like Florida and New York, do not have an inheritance tax. An inheritance tax is a tax on the person who receives money from a decedent.

The inheritance tax rate itself depends upon the relationship between the person receiving the money and decedent. For example:

1. In both New Jersey and Pennsylvania, if the person receiving the money is a spouse (or a charity), there is no tax.
2. If the person receiving money is a sibling, there is a flat 12% tax in PA. In NJ it is a bit more complicated - the first $25,000 is exempt; beyond that there is a tax of 11-16% depending upon on the amount of the bequest.
3. Generally, if the person receiving money is anyone else (besides a child, parent or same sex partner), then there is a 15% flat Pennsylvania inheritance tax and a 15 or 16% New Jersey inheritance tax depending upon the amount of the bequest.
4. The first BIG DIFFERENCE is that Pennsylvania taxes bequests to all lineal descendants and certain lineal ascendants at 4.5%. New Jersey does not charge an inheritance tax to any lineal descendants or ascendants. (Note: Pennsylvania does not charge a tax on the bequest to a parent if the decedent was under 22 years of age.)
5. The second BIG DIFFERENCE is that Pennsylvania has a 15% inheritance tax on bequests to a same sex partner. In New Jersey, as long as the partners are in a civil union or domestic partnership, there is zero inheritance tax. If the partners are not in a civil union or domestic partnership, then there is a 15 or 16% tax, depending upon the amount of the bequest. For more information, see my blog on Estate Planning for Same Sex Couples.
6. In NJ, a bequest to a son-in-law or a daughter-in-law is taxed at the same rate as a bequest to a sibling. N.J.S.A. Section 54:34-2c. In PA, such transfers are taxed at the same rate as a bequest to a child. 72 PS 9116 (Note: If the son-in-law or daughter-in-law later remarries, this does not apply.)
7. In both NJ and PA, step children and adopted children are taxed in the same manner as natural children. New Jersey also allows inheritance tax free transfers to mutually acknowledged children in certain circumstances. N.J.S.A. Section 54:34-2a.
8. The only other significant difference in the rates is that New Jersey exempts transfers that are less than $500. Pennsylvania exempts certain transfers of up to $3,000.

New Jersey and Pennsylvania also have similarities and differences between the types of assets that they will tax. This is not a complete list, but as an example:

1. Neither state taxes life insurance, real property located outside of the state or business interests located outside of the state;
2. Both states will fully tax cash and brokerage assets of individuals who died while domiciled in their state.
3. Both states will fully tax real estate and business interests located inside the state of resident and non-resident domiciliaries.
4. Joint property held with rights of survivorship are fully taxed in New Jersey unless the recipient can prove he or she contributed to the joint property. In Pennsylvania, only the portion of the property owned by the decedent is taxed.
5. IRAs, Annuities, 401(k)s, 403(b)s and other retirement assets are taxed in New Jersey, but not in Pennsylvania, provided the account owner passes away before having the right to withdraw the money free of penalty (generally before retirement age of 59.5) AND provided that a person was named as beneficiary of the retirement plan. In PA, if the owner of the 401(k) has the right to close down the account it will also be subject to a tax, this is generally age 62 or 65.
6. Retirement plans, annuities and other benefits payable by the federal government to a beneficiary are not subject to an inheritance tax in NJ or PA.
7. In Pennsylvania, transfers made within one year of death are taxable, but each such transfer is subject to a credit of up to $3,000 per recipient. In New Jersey, transfers "made in contemplation of death" are taxable for inheritance tax purposes. There is a presumption that transfers made within three years of death are made "in contemplation of death".

Note: An inheritance tax is not to be confused with an estate tax. A state can have either an inheritance or an estate tax, both, or neither. Additionally, many of the assets that are exempt from inheritance tax (such as life insurance) are subject to an estate tax.

The NJ inheritance tax is due within 8 months from the date of death. In PA, the inheritance tax is due within 9 months of the date of death, but there is a 5% discount if the tax is paid within 3 months from the date of death.

The NJ Inheritance tax statute can be found at N.J.S.A Section 54:34-1, et. seq. The PA Inheritance tax statute can be found at 72 PS 9101, et. seq.

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Edited on January 20, 2011 thanks to input from Patricia Picardi.

New Jersey Estate Tax

New Jersey has many different types of taxes, including two different taxes on death: the NJ Estate Tax and the NJ inheritance tax. The New Jersey estate tax is a tax on transfers at death and certain transfers in contemplation of death.

Transfers to charities, a surviving spouse or a surviving Civil Union partner are exempt from the NJ estate tax. Transfers to anyone else are taxable to the extent that the transfer exceeds $675,000. New Jersey never does anything in a simple manner, and it does not technically offer a $675,000 exemption from the estate tax. NJ actually exempts the first $60,000 of transfer and then taxes the next $615,000 at 0%. The effect of this is that the first $675,000 can almost always pass to whomever you want tax free.

Each New Jersey resident is entitled to the NJ estate tax exemption. Accordingly, married couples and Civil Union couples can double the amount that they pass on to their children with proper planning. (This usually involves setting up a bypass trust for the surviving partner or spouse rather than leaving them money outright.)

The New Jersey estate tax is a progressive tax, meaning that the more you pass on, the higher the tax rate. The NJ estate tax rate generally varies from 0% to 16% depending upon the amount of the transfer. The major exception is that for the first $52,175 over $675,000, there is a 37% tax. For a detailed breakdown of the tax rates, see page 10 of the NJ Estate Tax Return.

New Jersey offers two different method of calculating the state estate tax on the NJ Estate Tax Return: the 706 method and the so called "Simplified Method". The Simplified Method allows the executor or administrator of the estate to avoid filing a 2001 version of the federal estate return, but it often results in a higher tax. For this reason, it is often advisable to hire a competent estate planning attorney to minimize this tax liability.

A decedent's estate can be subject to both the NJ estate and inheritance taxes. New Jersey does offer some relief if an estate is subject to both taxes. For example, if a person with $1,000,000 dies and leaves the entire amount to her nephew, this transfer would be subject to both taxes. A transfer of one million dollars in normally subject to a $33,200 New Jersey estate tax. A transfer of this amount though is also subject to a $150,000 New Jersey inheritance tax. In such an instance, New Jersey would only collect only the higher tax, the 15% inheritance tax in this case.

The NJ estate tax is due within 9 months from the date of the decedent's death. This is different than the NJ inheritance tax, which is due within 8 months from the date of the decedent's death.

The NJ estate tax should not be confused with the federal estate tax. Unless Congress acts to extend the repeal of the federal estate tax (which I think to be highly unlikely), the United States will have a separate and additional tax on death.