IRS Issues Ruling on Tax Filings for Same Sex Couples

Yesterday the Internal Revenue Service issued an important ruling in the wake of the Windsor case in which the Supreme Court ruled that the Defense of Marriage Act was unconstitutional.  Specifically the IRS stated that it will recognize all same sex marriages regardless of where the couple was married. 

The Supreme Court did not specifically address what would happen if a same sex couple got married in one state and then moved to another state that did not recognize the union.  Now it is clear that the IRS will respect the marriage regardless of where the couple moves afterwards.

The IRS also stated that starting with the 2013 tax year, all married couples (same sex or opposite sex) must either file as married or married filing separately.  Additionally, same sex married couples may elect to file an amended income tax return for the 2010, 2011, or 2012 calendar years.  You should seriously consider amending the return if one spouse worked and the other didn't or if there are other significant tax advantages. 

It should be noted that the IRS rules only applies to married couples, not civil unions.  New Jersey and two other states currently allow only civil unions.  The most likely outcome of this is that the civil union laws will eventually fall by the wayside in favor of same sex marriages as separate is once again inherently unequal.

Affect of United States v. Windsor on NJ Same Sex Couples

After scrutinizing the United States v. Windsor decision yesterday a little more thoroughly, it occurs to me that same sex couples in New Jersey are still a state of limbo.  It should be noted that the Supreme Court relied on the fact that the couple in the Windsor case not only were legally married in Canada, but resided in New York, a jurisdiction that recognized the marriage. 

The Supreme Court left open the question as to whether a couple that is in a Civil Union (like in New Jersey) would be entitled to the same benefits as a same sex married couple and it also left open the question as to whether the federal government would have to recognize the marriage of a same sex couple that legally married in one jurisdiction and resides in a jurisdiction that does not recognize the marriage.

While New Jersey recognizes same sex marriages from other jurisdictions in New Jersey, according to the 2007 Opinion of Attorney General Stuart Rabner, it ONLY recognizes them as Civil Unions.  New Jersey does not currently allow same sex marriages.  Therefore, there is a real question as to whether the Windsor case will benefit same sex couples living in New Jersey, regardless of whether they entered into a Civil Union or were married in another jurisdiction.

To take the analysis a little further, the 2007 Opinion of Rabner was not meant to be restrictive, it was actually near the forefront at the time and designed to treat same sex couples as married couples, just using different terminology.  Moreover, New Jersey Statute 26:8A-6(c) specifically states: A domestic partnership, civil union or reciprocal beneficiary relationship entered into outside of this State, which is valid under the laws of the jurisdiction under which the partnership was created, shall be valid in this State.  This statutory language (which was written in 2003, one year before Massachusetts became the first state to allow same sex marriages) would seem to imply that the New Jersey should in fact recognize foreign same sex marriages.

Finally, the New Jersey Supreme Court has already issued an opinion in Lewis v. Harris, 188 N.J. 415 (2006), which held that New Jersey's State Constitution requires that same sex couples be afforded access to a government sanctioned relationship that provides all of the rights and obligations of marriage.  As a result, it is my opinion that if the federal government does not recognize New Jersey Civil Unions or it does not recognize the validity of the legal marriage of same couples living in New Jersey, New Jersey will be required to modify its statutes to allow for same sex marriages.

Perhaps the easiest and best way to test this is for a same sex couple to file a joint federal tax return and see if it is accepted...

Probate In New Jersey - When There Is A Will

One of the questions I frequently get is: What is involved with probate in New Jersey?

In some jurisdictions, I know attorneys go out of their way to help their clients avoid the probate process by creating trusts and titling assets so that they can be transferred automatically on death.  In New Jersey, probate usually is not that costly or difficult - at least compared to places like California, New York, Pennsylvania and Florida.

Part of the reason for this is that New Jersey requires attorneys to charge a reasonable fee, and not a percentage of the estate.  Additionally, the New Jersey does not charge much for filing a Will or for any other administration fees.  Moreover, in almost every county that I've had to deal with, the local Surrogate has been tremendously helpful in trying to assist us through the process.  I know I frequently call the Mercer County Surrogate's Office, which is a wealth of information.

So, going back to what is involved, each estate is highly unique.  However, here are some good steps to take:

1)  Deal with the family and make funeral arrangements.  An executor does not have to pay for the funeral.  Whoever pays can be reimbursed by the Estate later on.

2)  Identify valuable assets and the Will and secure them for safe keeping.  (This may include searching the house and possibly even changing locks if you think that someone may access the property unlawfully.)

3)  Identify the decedent's next of kin and obtain contact information for them.  You will need this when applying to be executor.

4)  After the Original Will has been found, identify who the Executor is. If the Executor is not alive or not willing to serve, steps must be taken so that a backup can be named.  If the Original Will cannot be found, there is a process for a having a copy approved by the Court.

5)  Take the Will to the Surrogate in the County where the Decedent resided.  Be aware that no Will can be probated in New Jersey until ten (10) days have passed since the Testator has died.  An Executor can go down to the Surrogate with all the paperwork within the first ten days, but the Letters Testamentary won't be released until that time frame has expired.

6)  Once the Executor receives Letters Testamentary (also known as Short Certificates), he can transfer assets from the name of the Decedent into estate accounts for the Decedent.  New Jersey automatically puts a lien on a Decedent's bank accounts, brokerage assets and real estate when a person passes away.  Banks will only release 50% of the assets to pay bills of the estate until they receive a tax waiver from the New Jersey Division of Tax.

7)  Shortly after qualifying as Executor, you must mail out a notice of probate to all people named in the Will AND all immediate next of kin, regardless of whether they are named in the Will or not.  This can be problematic if you wish to cut an heir out or cannot locate an heir.  I would also be a good reason to create an estate plan that will avoid probate.  If a charity is named as a beneficiary, then a notice must be sent to the Attorney General's office.

8) If the Executor did not already have access to a safe deposit box, he can do so at this point. 

9)  Within eight (8) month of the Decedent's date of death, the Executor must file a New Jersey Inheritance Tax Return and pay any taxes due.  Typically an inheritance tax return must be filed if assets are transferred to someone other than a spouse, civil union partner, child, grandchild, parent or charity.  There is a 3 year lookback.

10)  Within nine (9) months of the Decedent's date of death, the Executor must file a New Jersey Estate Tax Return and pay any taxes due.  A New Jersey Estate Tax Return must be filed if the TAXABLE estate is in excess of $675,000.  Note, the taxable estate can be different from the probate estate because the taxble estate may also include life insurance, retirement benefits, and joint accounts.  If the taxable estate is above $5,000,000 (indexed for inflation), a federal estate tax return must also be filed.  (It might be advisable to file this return in most situations on the death of the first spouse to pass on the Deceased Spouses unused tax exemption.) 

11)  The Executor must arrange for income tax returns to be filed and pay any taxes due. 

12)  The house must be cleaned and potentially sold or transferred.

13)  If there is real estate located in other jurisdictions, the Executor must do an ancillary probate.

14)  Other duties could include dealing with any business interests or intellectual property rights, assisting beneficiaries with any claims they might have for life insurance or retirement benefits, investigating the validity of claims against the estate and researching the proper title to assets.

15)  The executor should prepare an accounting for the estate.  This includes what the assets of the estate are, income, expenditures and distributions.  Unless the matter is contested, an informal accounting will usually suffice.

16)  Conduct child support searches on all beneficiaries.

17)  After the tax returns are filed and the estate receives tax waivers and all bills are paid, the Executor can transfer the assets of the estate as directed in the Will.

18)  Simultaneous with the transfers from the estate, an Executor should obtain a release and refunding bond.  This acts as a waiver to release the Executor from liability and a means by which the executor can retrieve the inheritance back in the event that new bills arise for the estate.

An executor is not required to hire an attorney to help out with an estate admistration, but it can make the process much smoother. 

Estate Planning for Same Sex Couples

In many jurisdictions, estate planning for same sex couples can be quite complex. In some states, the laws are favorable to non-traditional couples and in others, they are not (like Pennsylvania). There are also states like New Jersey, where the laws themselves can be favorable to same sex couples if you enter into a Civil Union, but there is still Tax Planning that must be done.

In states where the laws are unfavorable to same sex couples, without structuring your affairs properly, one partner may not inherit from the other. Moreover, without a Power of Attorney or Guardianship in place, one partner may even not be allowed to visit the other in a hospital or make financial or health care decisions for the other.

To structure your affairs properly, you should prepare a Will, Financial Power of Attorney, Health Care Power of Attorney and properly title your assets. The proper titling of your assets, including naming beneficiaries of your retirement accounts, life insurance policies, brokerage assets and bank accounts must not be overlooked. Without doing this, your plan will fail.

If you are ready to make a commitment to each other, you should take advantage of whatever laws the state you live in offers, whether it is a marriage, a Civil Union or a Domestic Partnership. To give you an idea of some of the benefits this can offer:

1. In NJ, a civil union partner and a domestic partner are entitled to receive the death certificate of the deceased partner.


2. A surviving civil union partner is automatically allowed to inherit as if he or she was a surviving spouse; and


3. A surviving civil union partner is deemed to be first in line to act as an administrator (if the decedent has failed to prepare a Will) or guardian (if the partner has failed to prepare a Power of Attorney).

You should also be aware that New Jersey has not updated all of its statutes to comply with their own Civil Union Law. For example, 37:1-31 states that NJ Civil Union Couples shall have all the rights of married couples. However, the inheritance tax law does not use the phrase Civil Union Couples - only domestic partners, as it was last updated prior to the enactment of the Civil Union law. Even though the inheritance tax statute has not been updated, NJ Division of Taxation has updated its forms and I have not heard of any instances in which NJ has tried to tax the surviving partners of a civil union.

Among the things that I find get overlooked when same sex couples plan for themselves is that they do not consider what will happen to their assets if both of them should pass simultaneously nor do they consider the most tax efficient way to structure their assets. So while much of the material here you may have read elsewhere, you should realize that a good estate planning attorney can help you customize a comprehensive, tax efficient plan for you.

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.

New Jersey Estate Tax for Non-Residents Coming?

New Jersey State Senator Andrew Ciesla, a Republican from Brick, has introduced legislation to modify the New Jersey estate tax so that non-residents, in addition to residents, are responsible for paying the tax.

Currently, New Jersey has two types of death taxes. There is the New Jersey estate tax, which generally imposes a tax of 6-12% on all estates over $675,000. The New Jersey estate tax is currently only imposed upon the estates of decedents who are residents of New Jersey.

Additionally, New Jersey has an inheritance tax of 0-16%, depending upon whom assets are transferred. The New Jersey inheritance tax is imposed on the estates of all New Jersey residents as well as non-residents who own real or tangible personal property in New Jersey.

If the assets pass to a spouse, civil union partner, lineal ascendant, lineal descendant or charity, then the transfer is exempt from the inheritance tax. If the assets pass to a sibling, a son-in-law, daughter-in-law or civil union partner of one of your children, there is an inheritance tax of 11-16%. New Jersey does exempt the first $25,000 of the transfer though.

If the assets pass to anyone else, there is an inheritance tax of 15-16%, but the first $500 is exempt.

The proposed law is designed to target people who die owning homes in New Jersey but are residents of other states. Most of the estates of these decedents currently do not pay any estate or inheritance tax to New Jersey because the estate tax does not apply to them as a non-resident and the inheritance tax will only affect those who leave money to someone other than immediate family or charity.

If enacted, the modified New Jersey estate tax will require the representatives of people who die as residents outside of New Jersey to file a New Jersey estate tax return and pay a proportional share of taxes. For example, if a person's estate is $1,000,000 and they owned property in New Jersey worth $500,000. Normally, if the person was a New Jersey descendant, the tax would be $33,000. In this situation though, since 1/2 of the assets are outside of New Jersey, the tax would most likely be 1/2 of the $33,000.

The proposed tax would surely raise a significant amount of money in this cash strapped state. However, with a Governor highly opposed to any new taxes, I would be surprised it passes.

Beware the Compromise Tax

One area of estate administration that often gets overlooked on tax returns is the compromise tax. When a decedent transfers assets that are subject to a contingency or are otherwise difficult to value, the taxing jurisdiction and the estate must compromise on the tax due.

There are a variety of reasons an asset may be difficult to value, but the most common reason is because the asset is subject to a lawsuit. For example, if Decedent died owning a 60% interest in a closely held company, it is relatively easy to determine the value (although people may disagree as to the true value). If however, Decedent's surviving business partner claimed that Decedent really only owned 20% and that Decedent "cooked the books", Decedent's estate will be very difficult to determine until the matter of Decedent's true ownership is resolved. The government, however, wants its money now. This is one area in which the estate and the taxing authority can compromise on the tax due. Oftentimes, this type of situation is difficult to avoid even with great planning.

As for transferring assets subject to a contingency, this is something that can be planned for. Let's say there is a man who wants to leave money in trust for his wife, or Civil Union Partner, and then when the wife or Civil Union Partner dies, the money will go to the man's brother. In a states like New Jersey and Pennsylvania, the transfer to the brother would give rise to an inheritance tax of about 15%. So the question then becomes how do we value the likelihood that the brother will receive the money. In essence, we will have to use life expectancy measurements for the surviving wife or Civil Union Partner to determine that person's interest, and then we can determine the remainder interest. This can get very complex depending upon what, if any, rights to principal the survivor has - hence, a compromise tax.

So when does all this knowledge become really important? When filing the tax return, if the proper amount of taxes are not remitted, then large interest and penalties will be due.

Helpful Estate Planning Hints for Divorce Attorneys

A. Have your client do pre-divorce estate planning (especially if the split is partially the result of financial matters)

1. Most clients are not aware that if they die during the pendency of their divorce that their soon to be ex may still inherit everything. This can be particularly important if it is likely that the ex will remarry or has kids from another relationship.

2. Generally, your client cannot write a new Will completely cutting out the soon to be ex out due to NJ's elective share statute.

a. Exceptions:

1) The soon to be ex can be cut out if your client and the soon to be ex are separated and not living together.

2) The soon to be ex can be cut out if your client and the soon to be ex have ceased cohabitating as husband and wife.

b. If one of the exceptions does not apply and your client dies before the divorce is final, the soon to be ex can elect to receive up to 1/3 of the augmented estate.

1) In a simplistic way, the augmented estate can be estimated by looking at the net estate (the value of the estate minus the bills that must be paid).

2) Do not factor in estate taxes at this point.

3) Do add back gifts made by the decedent within two years of death.

4) Do add in retained interests held by decedent at the time of death.

5) See N.J.S.A. 3B:8-3 for a true definition.

3. If your client is wealthy, he may wish to consider putting the soon to be ex's 1/3 share in a fairly restrictive trust for the soon to be ex with the remainder going to your client's children.

B. When drafting agreements between the divorcing parties, don't just say that money should be held "in trust" for the benefit of your client's children in the event one of the two die. This agreement can potentially override the terms of any will or trust agreement, so think a bit about some of the terms:

1. Typical terms include:

a. Having the children receive the money in two tiers (1/2 at age 25 and the balance at age 30 is usually good). If there is a lot of money, you can even do three tiers.

b. You should have your client think for a few minutes about who should be trustee. Better the two parties agree than have to get the court involved to appoint one.

2. Do any of the children have special needs and should special provisions be incorporated?

3. How important is it to guarantee that the ex put a provision in his/her Will stating that a certain percentage of his/her estate must go to their children? This can be contractually agreed to.

C. Don't just require that your client's ex purchase $X amount of life insurance on the ex's life.

1. Demand that your client's ex agree to pay for the policy, but have your client actually buy it. This accomplishes multiple goals:

a. It ensures that the policy is in fact in place;

b. In the event the ex runs into financial trouble, your client can continue the payments;

c. It can save a huge amount in taxes;

1) Typically if the ex owns and maintains the life insurance on his life, then regardless of who the beneficiary is, it will be subject to the Federal and State Estate tax upon his death;

2) If your client or an irrevocable life insurance trust (an "ILIT") owns the policy, then it will not be subject to estate taxes upon the ex's death (provided it was not transferred to your client or the ILIT within 3 years of the ex's death).

3) To give an example of real life savings, let's assume that ex is worth $2 million and is required to buy a $1 Million life insurance policy. That policy will cause ex's estate to be subject to approximately a $500,000 tax. This is particularly problematic if most of that is going to your client's children. By having your client or an ILIT own the policy, this estate would completely escape federal estate taxes and only be subject to minimal NJ estate taxes.

D. Do not forget about retirement assets, pension plans and life insurance

1. Most divorce attorneys remember to put a provision in the divorce and separation agreements which will require that their clients receive a portion of the ex's estate, but some forget to require/request that their client receive a portion of the ex's retirement assets or life insurance upon the ex's death. The general trend is to deal with this through a QDRO and let the chips fall where they may upon the ex's death.

2. Moreover, many divorce attorneys forget to include the client's children in this part of the planning. It is imperative for attorneys with clients who's wealth is tied up in retirement accounts deal with where these retirement accounts go on the death of the ex.

3. A common example of the above may be illustrated as follows. H and W, who have 2children, get a divorce. H has a 401(k) worth $1,000,000. The two do a QDRO and split this evenly. H should insist of W, and W should insist of H, that their children be named as the beneficiaries of this 401(k) (AND any IRA that this gets rolled into). Otherwise, if W gets remarried, the new husband could legitimately be named as the new beneficiary of this retirement account. NOTE: They attorneys should leave this open for the clients to amend in an amicable way in the event one of the children should not be named as a beneficiary due to drugs, alcohol or any other legitimate reason.

E. What about possible inheritances?

1. Except to the extent that the parties agree, you should always get the soon to be ex to disclaim all interests that he/she may have in your client's estate, non-probate assets and joint assets.

2. Many times your client's parents will include the ex as a beneficiary of their estates. You should think about trying to get the soon to be ex to disclaim these interests as state law may not always treat the ex as dying on the date of the divorce.

F. Dividing Joint Assets

1. Transfers of property incident to divorce are not treated as taxable gifts for federal gift tax purposes. To qualify, the property must generally be transferred within one year from the date the marriage ends. (Transfers made within 6 years of the date of divorce can qualify if the transfer is made puruant to a divorce or separation agreement. This time frame may be further extended for cause such as litigation surrounding the transfer of a business interest.)

a. Exceptions:

1) Transfers to a non-citizen former spouse;

2) Transfers to a trust for the benefit of the transferee former spouse of property on which liabilities exceed the transferor's basis for the property; and

3) Transfers to a trust for the benefit of the transferee former spouse of installment obligations.

b. If one of these exceptions apply, the transferor spouse may recognize gain or loss.

c. If the transfer is deemed as a transfer incident to divorce, the transferee spouse takes the property with a basis in the property equal to the basis of the transferor spouse. This is known as a carryover basis.

d. Divorce attorneys should be careful in agreeing to take property that has high built in gains as result of this carryover basis.

e. Your client may be required by the settlement agreement to transfer an insurance policy on his or her life to the ex and continue paying the premiums on the policy. It is important to know that the transferor can only deduct those premium payments as alimony (taxable to the recipient) if the transferor makes the transferee both the owner and irrevocable beneficiary of the policy.

2. In NJ there is no gift tax, but in order to avoid the real estate transfer tax for transfers incident to divorce (or the dissolution of a civil union partnership) the property must be transferred no later than 90 days after the date the divorce or dissolution decree is entered. See: http://www.state.nj.us/treasury/taxation/pdf/other_forms/lpt/rtfexempt.pdf