Estate Tax Exemptions Question
This is a question related to a very old post I did about estate exemptions and joint accounts. So, I will give a stab at it, but in future, we’ll probably keep the Q&As within the confines of the credit world. I also do not think myself or anyone here is qualified to answer this, but hopefully this will open our readers’ eyes into more complicated financial matters that does not get mainstream press coverage. So here goes :
Question from Donna Freeman – Here is my question… my dad’s planning and Will had specifically allowed two rental properties to be the “remainder” (not specifically given to his wife)of his estate. The remainder is to go into the Trust that was set up prior to his death. The trust allows that the income is to be used by his wife (principal if needed). The catch for me is that the appraisals of the two properties came in at about $800k. He lives in NJ which has a $675k exemption cap.
How do we report (form 706)and title the two properties so that $675k worth of the value is in the trust and the other $175k counts toward the marital unlimited exemption?
Answers – First a disclaimer – we are not attorneys, so please do not take this as legal advice! Consult with your estate attorney. Having got that out of the way, here goes.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), signed by President Bush on June 7, 2001. It provides for increases in the federal estate tax exemption. The present “federal” estate tax exemptions are
$3.5mm for 2009
No Estate Tax for 2010
$1mm for 2011
From 2012 onwards, the uncertainty persists and it is still to be ratified by Congress. Note that for anyone fortunate enough (pun intended) to die in 2010, there will be no estate taxes, but the cost basis of properties inherited will be at cost and not the value on date of death.
However, many states like New Jersey have imposed their own estate taxes separately because EGTRRA has phased out the state death tax credit (which means states can no longer rely on a steady stream of income of estate taxes). So even if Donna’s dad’s estate if not subject to federal taxes, it “may” to subject to NJ’s taxes depending on how the estate is distributed.
Our thoughts are that there are a couple of ways to look at it. Firstly, one property could be put into a trust and the other just given to his wife. Because of unlimited marital deduction, there should be no state taxes in this case.
But presumably, there is a reason for him to put it in a trust, perhaps to ensure kids from first marriage will inherit it after his wife’s death (is this a second marriage?) or to sure that the money is managed properly. That being the case, we do not have answer for how to actually file the 706 form for New Jersey. I do not think it is even possible.
Perhaps another consideration would be to sell one property. That should solve the problem. But that decision will be a function of (among many things) the cost basis of the property. If the cost basis is very low, it probably does not make sense.
You also did not mention his other assets (stocks, cash in bank etc), which would materially affect his estate planning.
Lastly, properties should be titled properly to be put into a trust – no joint accounts.
As mentioned earlier, it is best to consult a competent estate attorney in NJ. Better pay a few hundred bucks to potential save on tens of thousands in estate taxes.
Disclaimer again! – We not not attorneys so please do not take this as legal advice.
