There are several possible tax liabilities which can be incurred as the result of making a gift: federal gift tax, capital gains tax, generation skipping transfer tax, federal estate tax, New Jersey estate tax, and New Jersey inheritance tax.
Gifts made in contemplation of death can trigger New Jersey inheritance tax liability if the value of the gift is over $500 and they are made within three years of the date of a person’s death. New Jersey Inheritance tax is a tax imposed upon certain classes of beneficiaries. Thus, you must consider who is receiving the gift before you can determine if this will result in liability. The New Jersey tax code separates beneficiaries into “Classes.” Class A beneficiaries pay no inheritance tax, Class C beneficiaries will pay tax on gifts over $25,000 made within three years of the date of death and Class D beneficiaries will pay tax on gifts over $500 made within three years of the date of death.
The decedent’s spouse, civil union partner, domestic partner, children, grandchildren, great-grandchildren, parents, grandparents, great-grandparents, and step-children are Class A beneficiaries, and no inheritance tax will be attributable to gifts made to these people. The decedent’s brother and sister, and son-in-law, and daughter-in-law (if they are the spouse of decedent’s predeceased child) are Class C beneficiaries. Anyone not included in Class A or Class C are Class D Beneficiaries.
New Jersey inheritance tax on such gifts to Class C beneficiaries which are valued over $25,000 are taxable at a rate between eleven and sixteen percent of the value of the gifts. New Jersey inheritance tax on such gifts to Class D beneficiaries which are valued over $500 are taxable at a rate between fifteen and sixteen percent.
Additionally, gifts to charities are not subject to New Jersey inheritance tax.
A gift can also be subject to New Jersey and/or federal estate tax under the three year “look back” rule or the lifetime “look back” rule. Section 2035 of the Internal Revenue Code provides that there is a limited three year look back for federal estate tax purposes. There is also a lifetime “look back” for gifts in excess of the annual exclusion amount.
Federal tax law requires that life insurance policies which are transferred within three years prior to death are subject to federal estate tax. It is first important to note that if a person dies owning a life insurance policy insuring his own life, the death benefit is subject to both New Jersey and federal estate taxes. It is a common misconception that life insurance proceeds are not subject to tax. However, unless the beneficiary of the policy is a spouse, civil union partner, domestic partner or a charity, the proceeds are subject to estate tax. If a person transfers ownership of the policy prior to death, Internal Revenue Code Section 2035 requires that if the transfer was made within three years of the date of death, the death benefit value is subject to New Jersey and federal estate taxes.
As of 2013, you can gift up to $14,000 per year to anyone without incurring gift tax. However, it should be noted that, as discussed, gifts to certain classes of beneficiaries may be subject inheritance tax if the gift is made within three years of the date of death. Gifting $14,000 to your intended beneficiaries remains an effective and easy way to remove assets from your estate and avoid estate and inheritance tax liability for the gifted amounts. This is possible because the federal annual exclusion amount is currently $14,000 (the “2503(b) exclusion”). Any gifts in a single year to one individual which cumulatively total more that $14,000 result in a “taxable gift.” While there will be no tax due at the time of the gift, a gift tax return must be filed. When a person has made gifts exceeding the annual exclusion which when added together over your lifetime exceed the lifetime exclusion amount of $5,250,000.00, then any gifts exceeding that amount will be subject to gift tax.
The cost basis of a gifted (non-cash) item is an important consideration in deciding whether it is beneficial to make the gift because the gift will not get a stepped up basis. However, if the asset is transferred as part of an estate, the cost basis for the recipient will be adjusted to the date of death value. If the asset is gifted before death, the recipient may be responsible to pay significant capital gains tax upon the sale of the asset. An analysis should be done to determine if the estate and/or inheritance tax will be greater or less than the capital gains tax. As a general rule of thumb, you should not gift appreciated property during your life.
Asset analysis and careful planning are necessary to ensure that your lifetime gifts are done in a way to maximize your tax savings. Contact our attorneys by e-mail or telephone at 973-890-0004, or visit our website for estate planning help.