Mary‘s dad lived a long life, passing away at 80. He left a 1.5 million dollar estate. In an effort to minimize estate taxes he had started a gifting program amongst his 3 children and 9 grandchildren, which had reduced his estate by almost $500,000 in the last 3 years of his life. Because he died in 2010 there was no federal estate tax. Mary understood, however, that there was New Jersey estate tax to pay. When I told her we might have to add back Dad’s lifetime gifts, however, she was perplexed.
That’s because New Jersey, like many states, doesn’t have a gift tax. Now you might think that’s a good thing, but we need to be careful. To recognize why, it helps to understand how federal gift tax works. Most people know that they can make gifts of $13,000 per person per year (the amount was $10,000 but is now indexed for inflation) without paying gift tax. They can additionally make $5,000,000 in gifts during their lifetime. (The new federal estate tax law passed by Congress for 2011 and 2012 upped both the estate and gift tax exclusions.)
New Jersey provides two methods to calculate its estate tax. One way requires gifts to be added back to the estate for purposes of determining the estate subject to tax. The other way does not. So, depending on which method is used her dad’s estate could have to pay more or less in taxes.
Mary had a hard time understanding that at first. “But Dad gave no more than $13,000 to each of his children and grandchildren,” she exclaimed. “He didn’t owe any tax”. “All true,” I replied, “depending on what way you figure out the tax”. It’s a good thing Mary sought our guidance. The potential additional tax that she was unaware of amounted to over $50,000. Although Mary was confused as to why two different tax amounts for the same estate could exist she was appreciative that we were able to steer her away from a costly mistake.