For 2018, the federal estate tax exemption per individual is $11,200,000. But what if your state has an estate tax and your parent has assets that exceed the threshold? What can be done to avoid the estate tax?
nj.com’s recent article, “Last minute help to avoid estate tax,” recommends that a person in that situation should seek the advice of an experienced estate planning attorney, who can make recommendations tailored to her specific circumstances.
Here is some information about state estate taxes. For example, in New Jersey, a state estate tax return must be filed in 2017, if the deceased person's gross estate exceeds $2 million. However, deductions are allowed for certain expenses and debts, which can drop the estate below the $2 million exemption threshold. In California there is no estate tax for assets held in California. A person could be subject to estate tax if he or she owns assets (like a second home or rental property) in a state where there is state estate tax.
Even if a tax return must be filed in NJ because the gross estate is over $2 million, there still may be no tax owed because gifts prior to death can reduce the New Jersey estate tax. It’s critical that, before gift giving to reduce a state estate tax like New Jersey’s is done, the income tax ramifications need to be considered. Donees of gifts take the donor's basis in the assets transferred. If that basis is substantially lower than market value, the donee must pay income tax on the gain in a later sale. Therefore, beneficiaries receiving property at death obtain the property with a basis at its date of death value are less likely to incur a taxable gain—or may have a significantly reduced gain—when the asset is later sold.
Talk with an experienced estate planning attorney about gift giving techniques to avoid negative income tax ramifications.
When a parent has a traditional IRA, she may consider converting all or a portion of it to a Roth IRA. The conversion means there’s income tax owed as a result of the conversion. This taxation reduces her estate (perhaps under the estate tax exemption amount). This conversion would benefit the beneficiaries because their future withdrawals from the Roth IRA will be income-tax fee. The savings can also be substantial, if the beneficiaries are in a higher income tax bracket.
Based on when the parent executed her estate planning documents and assuming the parent is competent, ask an attorney to review the documents to be certain the specific documents as well as the overall plan still meets her personal objectives and there are no legal issues.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: nj.com (October 20, 2017) “Last minute help to avoid estate tax”