When Must New Jersey Death and Inheritance Taxes Be Paid When Administering a New Jersey Trust?
The Income Tax Implications of Trusts in New Jersey
As with all things financial, taxes are an issue. There can be significant tax implications for trusts. The implications for these trusts vary, depending upon the type of trust. Trusts that are required to distribute all their income annually (simple trusts) are taxed differently from trusts that are not required to distribute all of their income in one year but are allowed to accumulate trust income from year to year (complex trusts).
For tax purposes, both the trust and the trust beneficiary are separate entities. Thus, it is possible that the trust may have to file an income tax return and pay income tax in the same year that the trust beneficiary does. Both the trust and the trust beneficiary pay income tax on the amount of taxable income retained or distributed to each.
The trust beneficiary is taxed personally on income that is required to be distributed to the beneficiary, regardless of whether the income is actually received. If the income accumulates in the trust and is retained by the trust, the trust pays the income tax on it. When the trust passes the income to the beneficiaries, the trust received a distribution deduction and the beneficiaries must pay the tax on the distribution.
Tax Implications of a Trust
New Jersey Trusts and Estate Tax Liability
Generally, when a person establishes a revocable living trust in New Jersey, he or she should understand that the assets in such a trust are still included in his or her estate. Because the creator of a Revocable Trust can terminate the trust at will or revoke it at any time the grantor is dissatisfied with the operation of this trust, the grantor possesses “incidents of ownership” over the trust and its assets. Thus, this trust is taxed to the individual.
A New Jersey Estate Tax Return must be filed if the decedent’s gross estate exceeds the death tax exemption amount. It must be filed within nine months of the decedent’s death. But NJ Death Tax is being phased out starting January 1, 2017. Then only a person who has an Estate worth more than $2,000,000 will have a taxable Estate and on January 1, 2018 the entire death tax is abolished! Yes, it’s gone. Then the only death tax on the books will be the Federal Death Tax but even so it will not be applicable to those individuals who are worth more than $5,5000,000 dollars. That’s very few people.
If death tax is applicable, a copy of any Federal estate tax return filed or required to be filed with the Federal government must be submitted to New Jersey within 30 days of its receipt by the Internal Revenue Service.
With certain exceptions, the creation of an irrevocable trust will successfully remove the property placed in the trust from the gross estate of the grantor. An irrevocable trust qualifies as a completed gift of all property placed in the trust, if the grantor has made a complete severance of all rights and interests in the property. When this has occurred, the property placed in the trust and all future appreciation of value is removed from the gross estate of the grantor.
New Jersey Inheritance Tax
New Jersey imposes a transfer inheritance tax, at graduated rates, on property having a total value of $500.00 or more which passes from a decedent to certain classes of beneficiaries under the trust. Property passing to a surviving spouse, civil union or domestic partner, parents, grandparents, children, stepchildren or grandchildren is exempt from the tax. All other beneficiaries (except qualified charitable organizations) are subject to NJ inheritance tax. Don’t confuse the Inheritance tax with the Death Tax. While the Death Tax is being phased out starting January 1, 2017 the Inheritance Tax remains in place.
Gift Tax Implications of Trusts
In general, a revocable trust is not considered a taxable gift because the grantor has not parted with legal ownership control over the property. Thus, a revocable trust will not be subject to gift tax liability. However, because the grantor has not parted with ownership of the property it will be included in the grantor’s gross estate, even if the trust is a life insurance trust.
An irrevocable living trust, however, will normally result in some form of a gift tax liability. The gift is the fair market value of the property at the time it is transferred into the irrevocable trust, not its value at the date of the grantor’s death. Thus, if the grantor has property that is highly appreciable in nature, it might be a good idea to transfer the property into the irrevocable living trust in order to avoid having the future appreciation included in the gross estate of the grantor.
TESTIMONIAL
My son is an attorney in New Jersey. I am retired and live in Ocean County, New Jersey about 45 minutes away from my son. I needed a lawyer to look at my estate planning documents including Will, Power of Attorney and Health Care Directive. My son recommended Hanlon Niemann in Freehold, New Jersey, specifically Fredrick P. Niemann. I took his advice and met with Mr. Niemann. I am glad that I did. He is a warm and engaging person.
—Frank Mollo, Manchester, NJ
Because the rules that govern New Jersey Inheritance and Death Taxes and United State Estate Taxes are complex and subject to change, you should
Contact Fredrick P. Niemann, Esq. by email at
or call him at
(855) 376-5291
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Trust Attorney
NJ Trust lawyers serving these New Jersey Counties:
Monmouth County, Ocean County, Essex County, Cape May County, Mercer County, Middlesex County,
Bergen County, Morris County, Burlington County, Union County, Somerset County, Hudson County, Passaic County