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What… My Taxes are Going Down? What Gives?

Happy-old-coupleThere could be more reductions in the offing, as lawmakers in Minnesota recently raised the state's estate tax exemption to $2.1 million retroactive to January. That exemption will rise to $2.4 million next year. Similarly, Maryland is going to increase its $3 million exemption to $4 million in 2018. New Jersey's exemption of $675,000 per person increased to $2 million per person this past January.

In addition, Fox Business’s article, “Why More States Are Killing Death Taxes” reports that the Garden State will also totally eliminate its estate tax, making New Jersey one of about six others that have ended their estate taxes in the last ten years.

The tax-cutting trend stems from an intense competition between the states for affluent and wealthy taxpayers. Residents owe income taxes every year. However, there are those who are willing to move out-of-state to avoid death taxes. In addition, with the federal estate and gift tax exemption increasing to more than $5 million, states with death taxes really stick out.

There are two holdouts, Massachusetts and Oregon. These two are the only states with estate tax exemptions of $1 million or lower, compared to nine in 2009. The tax in both states will increase annually because neither adjusts for inflation. Some Massachusetts lawmakers are concerned about losing residents to other states because of its estate tax, a $400 million revenue generator last year. Massachusetts is looking at upping the exemption to half the federal level and maybe excluding the value of a residence.

It’s a different story in Oregon where efforts to raise the exemption have met with resistance in the legislature. The estate tax revenue of $200 million for the two-year cycle ending June 30 is 50% higher than forecast, which has been helped by strong housing and financial markets. Nevertheless, few people are expected to leave Oregon to avoid its estate tax.

In another six states, it’s the inheritance tax that is creating pressure on the government. An inheritance tax is payable by the person who inherits assets, not the estate of the person who died. Inheritance tax rates and exemptions often vary, according to the heir's relation to the decedent. For instance, in Nebraska, there’s no tax on assets left to a spouse, a top rate of 1% on assets passed to lineal relatives or siblings and a top rate of 18% on assets left to non-relatives.

There are two states, New Jersey and Maryland that have both an estate and an inheritance tax. They’ve both trimmed their estate tax, but neither state has modified its inheritance tax. On the bright side, Maryland has large exemptions to its inheritance tax.

Reference: Fox Business (June 16, 2017) “Why More States Are Killing Death Taxes”

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How Much Inheritance Tax Did Grandma Leave Me to Pay?

Question markGrandma just died without a will, and her husband, children, and siblings have all died. The remaining relatives need to consider not only the inheritance tax, but possibly the estate tax, says NJ 101.5 in "What taxes apply when someone passes away?"

The amount of tax depends on the transfer amount, or "taxable estate," and who is receiving the transferred amount. The transfer amount is in essence the fair market value of the deceased's assets plus any life insurance proceeds. There are both federal and state estate tax laws to look at when evaluating a deceased's estate. The state where Grandma resided at the time of her death is important, rather than where the heirs live. If Grandma was a New Jersey resident at the time of her death, estate taxes could apply when assets are left to anyone other than her spouse.

The federal estate exemption amount is currently $5.45 million per person. You are only taxed if more than the exemption amount is transferred at death. However, if any lifetime taxable gifts were made by the deceased, it's possible the estate could be subject to estate tax even if the estate is less than the exemption amount. That's because a taxable gift is a gift in excess of the annual gift tax exclusion amount of $14,000 per person.

But if Grandma's taxable estate is less than the exemption amount—after adjusting for any lifetime taxable gifts—there would be no federal estate taxes due. New Jersey has a state estate tax exemption of only $675,000. As a result, many state residents will be subject to state estate taxes. But again, if Grandma's taxable estate is less than $675,000, there's no New Jersey estate tax due.

There's also the issue of state inheritance tax. The taxable estate for New Jersey inheritance tax purposes has two important adjustments: gifts made within three years of death are generally added back, and life insurance proceeds are exempt if paid to a named beneficiary (but not if they were paid to the estate of the deceased).

The good news is that you only have to pay the greater of the New Jersey estate tax or the inheritance tax, but not both. Also, immediate family members—including the spouse, grandparent, child, or grandchild—are exempt from the inheritance tax.

Talk with an experienced estate planning attorney about intestacy and estate/inheritance tax laws in the deceased's home state.

Reference: NJ 101.5 (March 1, 2016) "What taxes apply when someone passes away?"

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Dispute Over WWII Jacket Reaches Conclusion

Bigstock-Lancaster-Raid-1907815A family estate battle over a rare and valuable World War II fighter pilot's jacket has been resolved in court. The case is unusual not only because of the jacket, but also because of one family member's position in the case.

Americans were involved in World War II before the Japanese bombed Pearl Harbor. One such American was Phillip Epley, Sr., a fighter pilot and a member of the American Volunteer Group. This group was known as the "Flying Tigers." They were an elite group of fighter pilots employed by the Chinese government in its fight against Japan. Epley passed away in 2008, and left his entire estate, including his Flying Tiger memorabilia, to his wife.

When she passed away in 2013, a dispute began over ownership of the jacket that Epley wore during the war. It's estimated value? $24,000. Penn Live has more on this story and the history of the Flying Tigers in "Rare WWII 'Flying Tigers' flight jacket focus of Pa. court battle."

Most of the memorabilia went to Epley's son, Robert Epley. However, one of the wife's sons, John Stull, removed the jacket from her home. Her other son, Daryl Stull, was named the executor of his mother's estate and repeatedly asked John to return the jacket. John refused.

Daryl, acting as the executor, then reported to the state's Department of Revenue the value of the jacket and that John had possession of it. The government sent an inheritance tax bill to John based on that information. That's when John decided that he did not want the jacket and claimed that he was only holding it for Phillip Epley's son.

John tried to argue in court that he never owned the jacket and thus he owed no tax on it. The court was not convinced as he kept the jacket for more than a year and only gave it to Robert Epley when the tax bill came.

For more information about estate planning, please visit my estate planning website.

Reference: Penn Live (September 30, 2015) "Rare WWII 'Flying Tigers' flight jacket focus of Pa. court battle."

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Four Important Dates to Consider When Reviewing Your Estate Plan

Important-Dates-1Whenever clients ask if they need to update their will or trust, the first question back to them is: “When was it created?” If they say it was 10 to 15 years ago or longer, the attorney may react like they found expired food in the fridge because it may not be safe to use something that old. Your family and personal situation has probably changed a lot since then (perhaps your will or trust was created when your children were in high school, but now they’re married with kids). The tax laws have changed a lot over the years, too.

The website nextavenue.org recently posted a very informative article, titled “Why Your Will May Be Out of Date,” which states that although your estate planning documents are still valid, they may no longer work the way you originally thought they would.

But how do you know if your estate plan is out-of-date? If your will or trust was created prior to the four key “freshness dates” listed below, it’s time to visit your estate planning attorney for a review.

April 14, 2003: the required HIPAA compliance date. The HIPAA privacy rule imposed strict guidelines on the disclosure of “protected health information” (or PHI) without the patient’s express permission. The privacy protections are designed to help us, but they could be problematic if your executor, trustee or agent (under a durable power of attorney) needs to speak about your personal details with your employer, insurer, or medical providers. The rule says that to act on your behalf, an authorized person must have a written document executed by you, with very specific language required by HIPAA. The article says that if your will, revocable trust, durable power of attorney or health care power of attorney was executed before April 14, 2003, your executor, trustee or agent may have some trouble working with your medical providers and insurers. Talk to an estate planning attorney and have him or her update your documents to include the required HIPAA language.

January 1, 2005: if you live in a state that imposes its own state-level estate or inheritance tax. Prior to 2001, there was a federal credit for state death taxes, varying by the size of the estate. There was little incentive to make plans for avoiding state death taxes because those taxes were totally offset by the federal credit. However, the Economic Growth and Tax Relief Act of 2001 (EGTRA) phased out the credit between 2002 and 2004, and since January 1, 2005, state estate or inheritance taxes apply in addition to any federal estate tax. There are now 15 states that impose their own state estate tax. Seven states have an inheritance tax. Several states have both. If you live in a state that imposes its own estate tax and your will or revocable trust was executed before 2005, you need to talk to your estate planning attorney about these state taxes.

December 17, 2010: the enactment date of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“TRA 2010”). This upped the federal estate tax exclusion to $5 million for 2010 and indexed it to inflation after that. For 2015, the federal estate tax exclusion is $5.43 million. In effect, TRA 2010 eliminated the federal estate tax for thousands of people, so if your estate plan was created before December 17, 2010, your estate planning documents may contain federal tax-planning provisions that are no longer needed. Talk to your estate planning attorney about a better and simpler plan. However, the reverse may be true if you live in one of the 20 states that imposes a state estate tax or inheritance tax. There may be a more sophisticated plan you need to consider with your attorney to deal with state estate taxes, as they usually start at a much lower threshold. The article stresses that tax laws are drastically different today: estate planning documents drafted before December 17, 2010 may produce unexpected or unfavorable results.

January 2, 2013: the American Taxpayer Relief Act of 2012 (ATRA) went into effect. This is important for married couples with a combined taxable estate exceeding $5.43 million – it made the “portability election” a regular feature of federal estate tax planning, which allows an executor to transfer a deceased spouse’s unused federal estate tax exclusion to a surviving spouse, a very important estate-planning tool. So, if you are married and your will or trust was drafted before January 2, 2013, you need to sit down with your attorney—you might be missing out on valuable tax planning opportunities.

For more information about estate planning, please visit my estate planning website.

Reference: nextavenue.org (April 27, 2015) “Why Your Will May Be Out of Date”

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