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Planning to avoid the potential of estate taxes

| Oct 28, 2020 | Estate Planning |

People engaged in the estate planning process in New Jersey typically have one goal: optimize the opportunities to limit liabilities against their estate. This ensures that they retain as much of their personal wealth as is possible to pass on to their beneficiaries.

Yet most might assume there to be one expense they cannot avoid: estate taxes. Yet according to the New Jersey State Treasurer’s Office, the state has not imposed a local estate tax since 2018. This means that local residents only need to account for the potential of federal estate taxes.

The federal estate tax exemption

That is if their estate will even face federal taxes at all. An estate tax exemption exists that keeps taxes from consuming people’s estates. Per the Internal Revenue Service, the exemption amount for 2020 is $11.58 million. Married couples can extend that amount even further through portability. Portability allows parties to share tax benefits. Estate tax portability offers the potential of a person claiming their deceased spouse’s unused exemption amount and combine it with their own. Proper planning might even preserve one’s entire estate tax exemption to pass on to their spouse. Should they leave their entire estate to their spouse, the unlimited marital deduction lets that transfer occur tax-free while not touching their estate tax exemption. When their spouse subsequently claims their exemption, they effectively double their own exemption amount.

Electing portability

Portability does not happen automatically, however. One must elect it by filing an estate tax return within nine months of their spouse’s death. If they do not, then their spouse leaving their entire estate to them might inadvertently push the total taxable value of their estate above the threshold amount (thus making is subject to tax when it might otherwise would not have been).