Taxes on inheritances are affected by how the asset is inherited.
You were named as a life insurance beneficiary.
But you are not quite sure what this means.
Do you have to pay tax?
Or is it exempt?
Good question.
A recent NJ.com post, titled “Is inheritance tax owed on life insurance?,” addressed this very question.
Where do you begin?
First, you need to know the tax rules for your state.
For example, those in New Jersey could potentially face the state estate tax, the state inheritance tax, and the federal estate tax.
Federally, the estate tax exemption is $5.49 million.
With "portability" this would be more.
What is portability?
Portability is when the surviving spouse can add the remaining exemption of his or her last deceased spouse to his or her own federal estate tax exemption.
What does this mean?
A married couple who plans properly could exempt up to $10.98 million at the federal level.
Currently, there is still a $2 million cap on what can pass free of estate tax in New Jersey.
Although it is scheduled to no longer exist after this year, it is in effect for 2017.
Another bummer?
New Jersey does not allow for portability.
How are estate taxes calculated?
The tax is calculated from the gross estate, excluding certain deductions.
What are some of these deductions?
- Estate Administration expenses
- Debts
- Funeral expenses
- Charitable donations
- Bequests to a spouse in the form of a qualified trust
- Bequest made outright to the surviving spouse
What assets are generally included?
All assets controlled or owned by the deceased individual.
Does this include a life insurance policy?
If it is paid to the estate or a third-party beneficiary, yes.
The state inheritance tax is also a factor.
What are these rules?
In New Jersey, the rules are different from the estate tax.
They involve a variety of factors.
Like what?
- Whether the transfer or bequest was made within three years of the death of the individual.
- The relationship of the beneficiary to the decedent.
- The type and value of the asset.
How do these factors affect the inheritance tax?
There is no inheritance tax if an individual is of a certain relationship.
What relationships are included in the exemption?
- Spouse
- Grandparent
- Parent
- Domestic partner
- Descendant
- Charity
- Step-child of the decedent
Does the amount matter?
No.
Not for any of the aforementioned relationships.
What about if the relationship is not one mentioned above?
The nature of the relationship as well as the value and type of asset must be considered together.
Are certain assets completely exempt from inheritance tax?
Yes.
Life insurance is always exempt in New Jersey ... if it is paid to the beneficiary or the trust of the beneficiary.
What if it is paid to the estate?
The tax exemption does not apply.
Does this seem like a lot to consider?
It is.
For the most tax-efficient planning, you must work with an experienced estate planning attorney.
He or she will be able to create a plan to align with the unique estate and inheritance tax laws for your state.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
Reference: NJ.com (March 28, 2017) “Is inheritance tax owed on life insurance?”
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