Federal Estate and Gift Tax

Much has been said and written about “death” taxes, but in my conversations, I find that most people really don’t know what they are or how they will affect them.  This is an overview of the Federal Estate and Gift Tax, and the death taxes and rates applicable in Pennsylvania and New Jersey.

Federal Estate and Gift Tax law permits each taxpayer to transfer a certain amount of assets free from tax during his or her lifetime or at death.  The amount of money that can be shielded from federal estate or gift taxes is determined by the federal unified tax credit. The credit is used during your lifetime when you make certain taxable gifts, and the balance, if any, can be used by your estate after your death. In addition, you can make annual gifts of $15,000 or less to each person that you would like to gift to and these gifts are not counted against the lifetime amount.

All property (and certain powers) that a person has at the time of his or her death is subject to tax.  The tax is payable by your estate – usually before property is distributed to the beneficiaries of the estate.  Barring an extension, the estate tax is due within nine (9) months of your death.  Currently, each person can pass the first $11,180,000 exempt from Federal Estate taxes.

The unlimited marital deduction, qualified charitable organization deduction, and unified transfer tax credit enables most estates to be distributed without incurring any federal estate tax. In addition, there are many ways in which you can structure your estate to take advantage of available exclusions, exemptions, credits and deductions so that the tax bite is reduced.  Of course, to reduce or eliminate potential death taxes, you have to actually take some affirmative steps and plan for it, and as I have written, ad nauseum, most people just don’t do it.

In Pennsylvania, there is no estate tax, but there is an Inheritance Tax.  The main difference between the federal law and the PA one is that the amount of tax paid varies depending upon the relationship between the person who died and the recipient of the inheritance. There is no tax on inheritances between spouses; the rate is 4.5% for children, stepchildren, grandchildren, and parents; 12% among siblings; and 15% for everyone else.

In New Jersey, there is no longer an Estate Tax as of 1/1/2018.  For Inheritance Taxes, spouses and lineal relatives are exempt; siblings and other relatives are taxed from 11 to 16%; and other beneficiaries are taxed at 15 to 16%.

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