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.
Showing posts with label Bypass Trust. Show all posts
Showing posts with label Bypass Trust. Show all posts
Tuesday, October 5, 2010
Sunday, October 3, 2010
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.
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.
Monday, February 5, 2007
Irrevocable Trusts
There are many different types of irrevocable trusts. The most popular irrevocable trusts include:
The Irrevocable Trust document itself has provisions which state that the Grantor may not make changes or modifications to the trust. Unlike a Revocable Trust, the Grantor of an Irrevocable Trust gives up all control once the trust is created. There are times when such trusts can be later modified, whether by court or by consent of all the beneficiaries, but never by the grantor alone.
Frequently people also create an Irrevocable Trust because once assets are transferred to such trust they will receive favorable estate and inheritance tax treatment. Assets in Irrevocable Trusts receive favorable tax treatment because they are excluded from the gross estate of the grantor at the time of the grantor’s death.
Another reason people also create irrevocable trusts is to provide as a means of protecting the assets in the trusts. By giving up control of the assets (in a non fraudulent way), a potential creditor may not sue the Grantor and try to claim against the assets in the trust.
In most states, including New Jersey, a Grantor may not be a beneficiary of an asset protection trust. However, a few states do allow self settled spendthrift trusts.
- life insurance trusts;
- asset protection trusts;
- charitable trusts;
- trusts created upon death (such as QTIP trusts and bypass trusts); and
- special needs trusts.
The Irrevocable Trust document itself has provisions which state that the Grantor may not make changes or modifications to the trust. Unlike a Revocable Trust, the Grantor of an Irrevocable Trust gives up all control once the trust is created. There are times when such trusts can be later modified, whether by court or by consent of all the beneficiaries, but never by the grantor alone.
Frequently people also create an Irrevocable Trust because once assets are transferred to such trust they will receive favorable estate and inheritance tax treatment. Assets in Irrevocable Trusts receive favorable tax treatment because they are excluded from the gross estate of the grantor at the time of the grantor’s death.
Another reason people also create irrevocable trusts is to provide as a means of protecting the assets in the trusts. By giving up control of the assets (in a non fraudulent way), a potential creditor may not sue the Grantor and try to claim against the assets in the trust.
In most states, including New Jersey, a Grantor may not be a beneficiary of an asset protection trust. However, a few states do allow self settled spendthrift trusts.
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