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Preparing for potential estate taxes

| May 25, 2021 | Estate Planning |

Those in New Jersey working through the estate planning process quickly discover that there are a number of opportunities to preserve assets for their beneficiaries (whether those be by structuring one’s estate to avoid probate or making a plan to settle debts prior to one’s death). One one expense that may seem unavoidable is estate taxes.

Yet is that truly the case? According to the New Jersey Division of Taxation, the state has not imposed estate taxes on local residents since 2018. This means that the only potential tax liability facing one’s estate comes from the federal level.

Optimizing one’s estate tax strategy

With the right plan in place, one might even be able to reduce that liability (or avoid it altogether). This is due to the fact that the federal government allows for an estate tax exemption that permits a good number of estates to avoid taxes. Per the Internal Revenue Service, the estate tax exemption threshold for 2021 is $11.7 million. As long as the total taxable value of one’s estate comes in under that amount, it will not be subject to taxes.

Understanding estate tax portability

Married couples may be able to enjoy the benefit of estate tax portability to increase their exemption amounts even further. Portability refers to the sharing of tax benefits between eligible parties. In the case of estate taxes, one can claim their ex-spouse’s unused exemption amount.

One can plan to perserve their entire exemption for their spouse’s use. To do that, they simply need to plan to leave all of their assets to their spouse. The unlimited marital deduction allows this transfer to occur tax-free. The surviving spouse can then claim the unused exemption through an estate tax return and combine it with their own (effectively protecting as much as $23.4 million from taxes).