The law firm of Einhorn, Harris, Ascher, Barbarito & Frost, P.C.

At Einhorn, Harris, we offer services related to wills, trusts, estate administration, estate planning, tax planning, business planning, shareholder agreements and mergers, elder law, long-term care, guardianships, prenuptial agreements, Medicaid, asset protection planning, and probate issues. We serve all of North Jersey and the New York Metro area including Denville, Mountain Lakes, Short Hills, Morristown, Montville , and the surrounding Morris, Essex, Sussex, Bergen, Passaic, Union, and Somerset Counties.

Saturday, February 20, 2010

The New Jersey Inheritance Tax - the lesser known New Jersey death tax

I find that clients often use the terms "estate tax" and "inheritance tax" interchangeably. Usually, that isn't a problem, and I know exactly what they are talking about. However, in New Jersey there really is a distinction between the "estate tax" and the "inheritance tax." This is New Jersey, after all -- so we have two taxes. Go figure!

The New Jersey Estate Tax is the better known of the two taxes. The tax is imposed on estates of over $675,000. However, amounts passing to a surviving spouse are exempt from the tax. While the tax rates imposed in New Jersey are lower than the Federal estate tax rates which most of use are familiar with, they can still be quite significant. In fact, through a strange quirk in the law, the rates start at a rate as high as 37% on the first $52,174 over the exemption, and, thereafter, the rates range from 4.8% to 16%. So, for example, the following taxes will be imposed on New Jersey estates:

  • $1,000,000 $ 33,200
  • $1,500,000 $ 64,400
  • $2,000,000 $ 99,600
  • $3,500,000 $ 229,200
  • $10,000,000 $1,067,600
The New Jersey Inheritance Tax is less a tax based upon value as it is a tax based upon the relationship between the deceased and the beneficiary. All beneficiaries are assigned to a certain "class." There are four classes of beneficiaries: Class A, Class C, Class D and Class E. I didn't forget Class B -- this Class was eliminated in 1963. Depending upon the Class that a beneficiary falls into, there may or may not be a New Jersey Inheritance Tax.

Class A beneficiaries include the decedent's spouse, civil union partner, children, grandchildren, great-grandchildren, step-child, mother, father or grandparents. Bequests to Class A beneficiaries are wholly exempt from New Jersey Inheritance Taxes.

Class C beneficiaries include the decedent's siblings, half-siblings, son-in-law, daughter-in-law, widow of a deceased son, and widower of a deceased daughter. Bequests to Class C beneficiaries are taxed on amounts in excess of a $25,000 exemption to each. The first $1,075,000 over the exemption, received by a Class C beneficiary, is taxed at 11% and the amount in excess of that figure is taxed at rates from 13% to a maximum of 16%.

Class E beneficiaries include tax exempt entities such as charities and not-for-profit organizations. Bequests to Class E beneficiaries are wholly exempt from the New Jersey Inheritance Tax.

Class D beneficiaries include anyone who is not a Class A, C or E beneficiary. So, for example, a nephew, niece, cousin, fiance, best friend, or non-civil union partner are all Class D beneficiaries. Bequests to Class D beneficiaries are taxed on the first dollar (unless the bequest is less than $500) at rates of 15% up to $700,000 and 16% in excess of that amount.

While an estate will receive a dollar-for-dollar credit against New Jersey Estate Taxes for amounts paid as Inheritance Taxes, the tax can be extremely onerous. While this tax is generally not a concern for most "nuclear families", for individuals without children, it can be the most unkind tax of all.

The Inheritance Tax also proves far more difficult to plan around than estate taxes because, in most cases, clients are more reluctant to embark on a lifetime gifting strategy when the intended beneficiaries are not their spouse or children. However, with some careful planning the effect of the tax can be reduced.

Monday, February 8, 2010

Kay v. Kay - Estate of Divorcing Spouse Has Equitable Claim

In a unanimous decision, the New Jersey Supreme Court recently ruled that the estate of a deceased spouse who died while her divorce matter was pending, was entitled to assert equitable claims against the surviving spouse. The case of Kay v. Kay, 405 N.J. Super 278 (App. Div. 2009), aff’d, ____ N.J. ___ (2010), was a logical extension of the Supreme Court's decision in Carr v. Carr, 120 N.J. 336 (1990) and a rejection of the case of Kruzdlo v. Kruzdlo, 251 N.J. Super. 70 (Ch. Div. 1990).

Mrs. and Mrs. Kay were married in 1973. It was a second marriage for both of them and each had children from their first marriages. There were no children born of this marriage. Mrs. Kay filed a complaint for divorce in July 2006, when she was 70 years old. Mr. Kay was 83 years old. In August 2007, Mr. Kay died leaving a will with specific bequests to his grandchildren and a nephew, with the remainder of his estate devised to his brother. After Mr. Kay's death, Mrs. Kay withdrew assets from joint accounts which she owned with Mr. Kay, leaving Mr. Kay's estate with insufficient assets to pay for his burial or attorney's fees.

The executor of Mr. Kay's estate sought a constructive trust to prevent the unjust enrichment that would allegedly occur if Mrs. Kay retained marital property beneficially belonging to Mr. Kay. The trial court denied the estate leave to substitute for Mr. Kay and file amended pleadings, and it dismissed the divorce action. The trial court determined that the result of Mr. Kay's death required the divorce action to terminate and left his estate with no recourse, under a strict reading of the law. On appeal, Mr. Kay's estate successfully argued that the trial court should have accepted the pleadings and considered whether the equities arising from the facts alleged warranted relief. The Appellate Division relied upon the reasoning in Carr, infra, where the Supreme Court held that a surviving spouse could continue divorce litigation for the limited purpose of proving that the deceased spouse had diverted marital assets, because equity demanded that the innocent spouse have a forum through which to recover those assets for equitable distribution. The Supreme Court, in Kay, also rejected the holding of Kruzdlo, where it was held that the estate of a deceased spouse was not entitled to assert equitable claims against the marital estate sounding in constructive trust or unjust enrichment

The Kay case was, basically, a reverse-Carr case. In Carr, the surviving spouse sought equitable relief. In Kay, the estate of the deceased spouse sought similar relief. Just as in Carr, the Court commented on the anomalous results that might occur when the statutes governing equitable distribution and divorce collide with the probate statutes. The two separate statutory schemes sometimes leave one party with no statutory remedy through no fault of his or her own. In those cases, the Courts may fashion an equitable remedy.

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