Tax Planning

Often, the main considerations in determining which method is appropriate for disposition of property after death are tax considerations. Both Federal and New Jersey tax rules apply. In short, the Federal government imposes tax on the taxable income of estates or other property held in trust, including that held for future distribution in a will or trust. For the purposes of determining Federal estate tax, expenses of administration are deductible from the gross estate, including compensation to the executor. But money or other property that an executor receives in performing executor’s services is taxable to him or her as compensation. A “bequest” to an executor instead of compensation, if not conditioned on actual service as an executor, is not taxable income.

New Jersey also imposes tax on the transfer of real or personal property valued at least $500.00 or any income or interest from it, even if in a trust, transferred by will or by state laws without a will. In New Jersey, property transferred to an executor or trustee instead of commission is taxable in the amount that exceeds the amount considered reasonable compensation for the services. The Superior Court that has jurisdiction determines the reasonableness of the compensation. Recipients are liable to pay state inheritance tax, unless the will directs another source of payment of the tax. Joint ownership of property is also subject to taxation on the death of one of the joint tenants, except for rights of spouses or domestic partners and except when the survivor can prove that the property originally belonged to just the survivor and never belonged to the one that died. New Jersey has several exemptions to the rules of taxation, such as property transferred for public purposes, the part of the estate transferred to educational institutions or churches or hospitals, insurance proceeds payable to beneficiaries, and pensions or retirement allowances from qualified plans.

The law is crafted and decided to prevent evasion of paying legitimate taxes, such as attempts to call something an inter vivos gift (transferred to another while the transferor is alive) but depriving the transferee of enjoyment of the gift until after the transferor dies or the transferor retaining ownership of the property during his or her lifetime. However, courts recognize transfers occurring during one’s lifetime when the grantor’s retention of benefits is not determined in relation to the duration of his or her life, the grantor has completely divested himself or herself of entire interest in the transferred property, or the grantor received full and adequate consideration for the transferred property. The courts do not subject those kinds of transfers to inheritance tax.

Governing tax laws, both state and federal, can be thorny and unwieldy, and should not be navigated without qualified professional assistance. The tax and legal experts at McLaughlin & Nardi, LLC, bring years of experience and expertise to any unresolved issues or concerns. We have experience in tax law, wills, trusts, estates, accounting, and banking. E-mail us or call our office at 973-890-0004 to see how we can help you.