CSG Law Alert: Back to Basic Series: Don't be Caught Dead in High Tax States
Unfortunately, many seniors must choose where they call home based upon affordability and not simply on where they prefer to reside. Thus, many retirees choose the state with the friendliest tax environment. In this article, we will cover the basics about death taxes imposed in New Jersey, New York, and Pennsylvania.
New Jersey and Pennsylvania do not impose an estate tax; however, both New Jersey and Pennsylvania have an inheritance tax. Conversely, New York has an estate tax but no inheritance tax. These costly death taxes often cause retirees to move to a tax friendly state such as Florida, which does not have an estate tax, inheritance tax, or individual income tax.
The burden of the Pennsylvania Inheritance Tax is based on the relationship of the recipient to the decedent. Transfers to a surviving spouse and children 21 or younger are taxed at a rate of 0%, which effectively means no tax. The decedent’s other descendants and lineal ancestors are taxed at a rate of 4.5%, and the decedent’s siblings are taxed at a rate of 12%. All others are taxed at a rate of 15% (except charitable organizations, exempt institutions, and government entities, all of which are exempt from tax). Pennsylvania does not impose its inheritance tax upon a non-resident decedent’s intangible property, but the commonwealth does so on real estate and tangible property located there.
New Jersey’s estate tax was eliminated as of January 1, 2018, as part of 2016 legislation that increased the state’s gasoline tax significantly. Although New Jersey did not repeal its inheritance tax, property received by “Class A” beneficiaries (i.e., spouses, civil union partners, domestic partners, descendants, parents, and grandparents) and “Class E” beneficiaries (i.e., religious, educational, medical, non-profit benevolent, or scientific institutions, qualified charities, or the State of New Jersey or any of its political subdivisions) is exempt from the tax, which means that most estates will not owe any inheritance tax.
A “Class C” beneficiary (brother, sister, spouse of a child, etc.) has a $25,000 exemption from the tax, but amounts over $25,000 are subject to tax at rates from 11% to 16% depending on the value of the transfer. A “Class D” beneficiary (i.e., anyone else) is subject to tax at a rate of either 15% (for the first $700,000) or 16% (for amounts over $700,000). Nonresidents of New Jersey only pay an inheritance tax on real estate or tangible property in the state passing to a Class C or D beneficiary.
The New York estate tax applies to New York residents and to real estate and tangible property located in New York owned by a non-resident. New York has a “cliff” estate tax: once the value of the taxable estate exceeds the New York exemption (currently $6.11 million) by 5% or more, the estate tax is imposed on the entire estate. The tax owed for the New York estate tax for the estates of decedents dying on or after January 1, 2014 increases based on the size of the estate, and estate tax rates range from 3.06% to 16%.
New York, New Jersey, and Pennsylvania do not have a gift tax (but there is a 3-year look back period), so you should consider making gifts during your lifetime to avoid death taxes. This is particularly true for small bequests made by New Jersey residents. For example, if you leave $1,000 to your niece and the rest of your assets to your children, inheritance tax will be owed on the amount given to your niece, and the estate would need to file an inheritance tax return. This return can be costly to prepare and can delay the administration of an estate if tax waivers (the form issued by New Jersey required to transfer a decedent’s assets) must be requested on the return. If instead you gift $1,000 to your niece now (and you survive the lookback period), no inheritance tax would be owed, and an inheritance tax return would not need to be prepared and filed.
For New York residents whose estate is close to the “cliff” amount, lifetime gifting (subject to a 3-year claw back) and/or charitable bequests can help avoid the loss of the estate tax exemption.
If you have questions about these various tax issues or would like to discuss your personal situation, please contact your CSG Law attorney or Michelle Bergeron Spell, Trusts & Estates Practice Group Leader.