Estate Planning – Changing as We Age (Part 3)

            Last week I was talking about what we call senior estate planning and something called a tax waiver.  New Jersey probate – the process of administering an estate after someone dies – is easy in some respects but not so easy in others.

            Let’s go back to Jack and Diane.  Upon Jack or Diane’s death, their will must be presented to the surrogate, that elected official charged with overseeing the probate process administratively.  Unless there is a dispute over the will’s validity, there is no need to appear before a judge.  The will is accepted and the executor named in it is appointed as the official representative of the estate, charged with gathering the assets together, paying the debts and taxes if any and distributing the assets according to the instructions in the will.  It’s a very easy process.

            However, the estates of New Jersey residents are potentially faced with 2 types of taxes after death – New Jersey inheritance tax and estate tax.  To insure that the tax is paid, the State has put in place something called a tax waiver system.  Here’s how it works.

            By law, New Jersey requires financial institutions to freeze ½ of the deceased individual’s accounts until the State determines that it has received all the estate and/or inheritance taxes it is owed.  The tax waiver is a piece of paper issued by the State that says it is OK to unfreeze and release those accounts.

            How does someone get this tax waiver?  In some cases, for very small estates an affidavit signed by the executor which is then sent to the State is sufficient.  But in many cases an estate and/or inheritance tax return must be filed – even if no estate or inheritance tax is due.  New Jersey’s tax division must review the tax return and confirm that there is no tax due before it will issue the tax waiver.

            The inheritance tax return is due 8 months after death and the estate tax return is due 9 months after death.  The State will often send the return to an auditor which can take months.  Once the State issues a final notice of assessment – confirming that all taxes owing have been paid – it will issue the waivers.

            This process can take 1 to 2 years from the date of death and in some cases even longer.  During that time the accounts remain frozen.  Financial institutions will not allow withdrawals.  They also won’t allow buying and selling of investments within those accounts.  If the stock market is dropping you can’t sell off anything that has been frozen to protect against losses.

            So while New Jersey probate is easy, the big negatives are a low threshold before New Jersey estate taxes kick in, an inheritance tax that some estates with less than $675,000 must pay because the heirs are not Class A beneficiaries and the tax waiver system that can cause assets to be frozen for a 1 to 2 years or more.

            I’ve written much about tax planning that can sometimes avoid or minimize the estate tax.  Next week I’ll tell you how you can completely avoid the tax waiver system and prevent your assets from being tied up for years.