Death and Taxes – that’s what they say are life’s only certainty. But..what if they are one in the same. In NJ and PA, you have to worry and plan for both death and taxes, and in this show, I’ll help you understand the distinction between them.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Private Client Capital Group.
Click below to read the full transcript…
Bert: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host Victor Medina, an estate planning and elder law attorney and certified financial planner.
Victor J. Medina: Everyone, welcome back to Make It Last. I’m your host Victor Medina. Thank you for joining me. This is episode 19. This was broadcast originally on August 19th, 2017.
I have to let you know something, it is my wedding anniversary this date. My wife and I have been married 16 years, which means one important thing, which is, [laughs] I’m not live in studio today. This is all prerecorded.
I’m actually on vocation with my family. I’ve decided to spend the wedding anniversary with my wife, with my wife and our three kids. We’re on a little road trip. We recorded this episode ahead of time but it’s still a good one.
I’m going to talk to you a little bit about the inheritance and estate taxes that are in New Jersey. If you get lucky, I’ll even talk to you a little bit about the taxes in other states such as Pennsylvania, Florida and places like that, where you are going to be when you die, what the trade‑offs are, what the taxes are.
It’s going to be a delightful show. Can’t wait for you to join us.
Before we get started on that though, I got to tell you, I’m worked up. I’m worked up for two reasons. The first reason is that there’s a new report that came out that was conducted by some university professors, really trying to understand what the sophistication of investors are and what their belief system is.
For how advisers are acting and whether or not their acting their best interests? At the same time, there’s another report that was done, that was talking about the fights that are going on with Department of Labor Fiduciary rule.
If you’ve been listening every week, this is old hat. I’ve been hitting on this as often as the news appears for me to be doing that because it’s such an important topic, but now there’s even more. There’s even more. Let me tell you how these two things work together.
The report in “The Wall Street Journal,” I don’t think it’s The Wall Street Journal. Let me just check real quick, yeah. No. It was “The Intercept.”
It came out in July 16th, about a month ago. Anyway, it came out and they basically talked about how the Trump administration and some other senators are fighting against this Department of Labor rule.
In fact, there are new laws being proposed to roll back this fiduciary rule and more importantly, as I’ve told you before, the fiduciary rule doesn’t really even cover all of the situations that we want.
Now, if this is your first time listening, look, I can’t stress the importance of being a fiduciary enough. You need somebody that’s in your corner that is ethically and legally obligated to be putting your best interests first.
The Department of Labor put out this new rule that basically says that if somebody helps give advice on your retirement account, they have to be acting in your best interests.
The article actually went through a couple of situations where advisers are working with people, taking them out to rubber‑chicken dinners and they’re right into [laughs] chicken piccata, something like that. Rubber‑chicken dinners, saying that, “We can help you protect your investment for retirement.”
They put them in these really, really volatile, illiquid real estate investments. The reason why they did that was because the adviser could make seven percent commission on what they put in there, and just glossed over all of the risks that were associated with that.
When you read that with this new study that came out about transparency in the investment industry, the public perception of brokers and investment advisers, that was done by The Wall Street Journal, it’s not a pretty picture at the end.
Part of the reason why I’m on this show talking to you about this is I can’t work with everybody but I need everyone to know that this is an important thing, that you have to be working with somebody who is a fiduciary.
When they did their survey and they did the study, it was a real quoted study by these college professors. They learned a couple of things. The first thing is that individuals tend to be confused by titles used in the investment professional industry.
The reason for that is because there is no regulation around it. The people surveyed could understand the difference between a broker and a financial adviser. The broker, they know is a salesperson and the financial adviser, they think is somebody else.
What they don’t know is that the financial adviser or financial planner isn’t a regulated term. The broker can call themselves a financial adviser and still act like a broker in looking out for their interests instead of yours.
When we look at the way that people can take impressions about who investment advisers are and what investment professionals, what qualifications they have, they’re really mismatched for what the truth is.
For instance, I’ll give you another one, more than half of the people surveyed, more than 50 percent, believe that brokers have to have a college or a graduate degree. The truth is they don’t have to have either.
They have to pass one test. They don’t need to have any college education. They don’t even need to have any experience to become a broker. All they need to do is pass the test.
Over 70 percent believed that investment advisers ‑‑ which are distinct from brokers, those are the people that run the IRAs ‑‑ need to have a college or a graduate degree. That’s not true either. You need to pass a test, you are a fiduciary but there’s no rules about how much education you need to have.
I’ll give you a contrast. I’m a certified financial planner, what they call a CFP. When you’re a CFP, you have to pass a test. This test is in six areas of discipline for financial planning. You need to agree to some ethical standards about being a fiduciary.
You need to demonstrate experience, as a planner, and you need to demonstrate a college degree. That’s one designation that’s set up, that’s self‑regulated. That CFP designation is really important because it basically requires somebody to be at the base level of education and experience.
They kept going on through different surveys. People are really still confused between the difference between a financial advisor, a wealth manager, a financial planner. None of those words have any bearing on any regulation, and you shouldn’t be fooled by them.
Look at the qualifications of somebody and look at what their experience is. Take a look at what their ethical obligations are, whether or not they’re held to a fiduciary standard the way I am. A registered investment adviser, I am held to a fiduciary standard as an investment adviser, and that’s different than a broker.
It’s different than an agent who works for one of the large wirehouses, brokerage houses, the ones with the bulls on the front. Those are different. They’re held to different standards.
Even a CFP requires a college education, and then me, I got a legal education. I’m a lawyer on top of being all of these other things. You want to look at the qualifications of somebody, and don’t look at the title.
People use the titles to seem impressive. “Oh, I’m a wealth manager.” Who cares? Just tell me what you actually do. What experience do you really have? How much money you manage, and how long you’ve been doing it. How many clients do you have? What’s your philosophy in what you do? All of these things are more important than the title that’s in there.
Going back full circle to the whole fiduciary thing, over half of the folks that were surveyed still believe that the broker is working in their best interest when it’s not true. It’s not true. It’s just simply not true. They don’t have to, they don’t, they sell to you things that pay them more. That’s what a broker does, that’s basically what they’re doing.
60 percent of the investors had no idea how their financial professional charges for advice or they think, here’s the best one, [laughs] they think that the advice is free. That’s just not true either. Buildings need to be built, they’ve got to pay for the paper and the pens and all that stuff, there’re money being made.
The advice is not free, you’re paying for it somehow. It’s really important to know how that is. The way we work, we make sure that were really transparent. Our fees are paid by the client. They pay us, asset under management fee when we do asset management. We talk about the expenses of the investments. They see that in clear black and white on every statement.
Here, this is my, whatever…I’m tilting the windmills. [laughs] This is what I’m charging after. I think it’s really, really important to make sure that you are looking out for your best interests by making sure that you work with somebody that’s also looking out for your best interest. Work with a fiduciary.
Victor: All right, when we come back from break, I’m going to talk to you a little bit about estate inheritance taxes for New Jersey. I’ll sprinkle in some Pennsylvania since we’re so close to the border and people think about retiring there. Maybe a little bit about Florida.
Stick with us when we come back from the break, all about taxes. I promise I will keep you awake when you come back to Make It Last.
Victor: All right, everybody. Welcome back to Make It Last. I spent that first segment talking more about needing to work with a fiduciary, why that’s important, super, super, super important in your financial life.
We want to make sure that you stay on track with that. I also want to answer a question that could come up about inheritance and the state taxes. There’s a lot of confusion about that.
Back in November of 2016, Governor Christie and the New Jersey Congress legislature came to an agreement where they were going to trade off some taxes in order to meet some political needs that they needed to have in place.
One of them was that they were going to increase the gas tax by 23 cents per gallon. A lot of you are really super aware of that. It came all of a sudden. New Jersey wasn’t the place to go and buy gas.
It used to be super cheap. [laughs] People would come over the border for that, but don’t do that any longer because our gas tax increased by 23 cents.
A lot of people don’t know the other half of that deal. As part of the other half of the deal, New Jersey changed two taxes that are related to retirement and death. The first thing that they did was they increased the taxes exemption for people who are retired and drawing retirement income.
It used to be before that there was only about $20,000 that was exempted from your retirement income. If you made under $20,000, you didn’t pay any New Jersey income.
The new rule is different because they’ve increased that limitation to about $75,000 if you are a single individual, and $100,000 if you’re a married couple. If you have below that number in taxable retirement income, you don’t pay any New Jersey retirement income tax at all. That’s pretty good.
There’s one little trick, though, which is that, if you make more than that by just $1, you’re then taxed on the entire amount. That’s very different than the Federal Income Tax system, because you know that if you make $1 more than the top of a tax bracket, 10, 15 percent, you only pay 15 percent on that $1. They don’t charge 15 percent against the whole thing.
New Jersey, in its infinite wisdom, has decided that it’s going to charge you for the entire amount. You make $100,001, you, all of a sudden, pay New Jersey income tax as a married couple. If you only made $100,000 or less, you would pay zero. That’s pretty significant.
That’s one part of the deal. They’re trying to make it more attractive for people to stay in New Jersey. There’s a mass exodus when people retire because of the way that their income taxes are treated. They figure, once they’re done raising their kids, it’s time to get out.
[laughs] There was even a story. I don’t know if you guys caught it. There’s even another story about an individual who lived in New Jersey, a hedge fund manager who paid a huge amount in income tax.
He finally decided to move to Florida to save himself on the income tax because Florida doesn’t have any income tax on wages like that. Anyway, fast forward, it impacted the budget. [laughs]
This person moving out impacted how much New Jersey had to spend, one person. That’s the income tax situation. Let me contrast that with Pennsylvania, because in Pennsylvania, they have a different tax structure altogether.
Where my practice is, I sit on the border. I’m in Hopewell Valley. I’m in Pennington, Hopewell Valley. I’m right along the Delaware. I have a lot of my clients that are Pennsylvania residents because we’re licensed in there. We do a lot of work there.
I have a lot of people who were former New Jersey employees, a lot of state workers that retired. They moved to Pennsylvania. One of the reasons for that is, first, Pennsylvania has a flat income tax.
New Jersey has a graduated tax, a progressive tax. The more you make, the more tax you pay on it, for up to, I think, like six‑and‑a‑half percent. There’s an even an eight percent number when you’re at the top end.
In Pennsylvania, it’s flat. It’s just around three percent or so. It’s 3.1, 3.5. It’s just a flat tax. No matter what you make, that’s what you should pay on it. That’s on wage income.
They have this other wrinkle, which is that Pennsylvania doesn’t tax any retirement income. Your Social Security, no matter how much other income you have, not taxed. Your pension, not taxed. You take distributions from your IRA, not taxed.
People looking in retirement look to move to Pennsylvania as a way to save on their income taxes. That happens very regularly. In fact, my parents, when they were retiring, they both…my mom and my stepdad, really. They were both school teachers.
They worked towards a pretty healthy pension. They didn’t have a lot of savings in retirement, a little bit but not a ton. Their pension is what they were going to be living off of.
When they first retired, they retired to Florida, because they don’t tax any of the income down there. They get to save that. They only pay Federal income tax.
When they were tired of Florida and wanted to move to somewhere else, we had to make some investigation about where to become residents, because they have an apartment…You don’t know, but I said you know.
Anyway, they have an apartment in New York. New York, not great for income tax. We had to look at other places. One of the places we were looking at was Pennsylvania, because it was so generous by not taxing the income taxes.
Like everything else, there is a trade‑off. The trade‑off is that Pennsylvania does, in fact, have an inheritance tax. In order to set this up, I got to walk you through what inheritance and estate taxes are.
Every year, Forbes puts out “The Worst Places to Die.” Until recently, they would paint states that charge estate taxes in orange, and states that charge inheritance taxes in red. New Jersey was always striped and plaid, because we have both of them.
An estate tax is essentially a tax against the total value of what you own. It’s independent of who you give it to. Estate tax doesn’t care…well, with one exception. If you give it to a spouse, there’s no estate tax.
For the most part, if you give it to whether it’s a kid or the neighbor down the street, the estate taxes, it says that the total value really doesn’t matter who you give it to. That’s an estate tax. That’s based on the total amount that’s in there.
Your Federal government has got an estate tax. The federal government has an estate tax that comes into effect when you have more than $5.5 million, or if you’re a married couple, more than $11 million.
In order to get the $11 million exemption, you got to do a little extra planning. That’s usually where folks like me come in. That’s the level.
For the most part, not going to impact our day‑to‑day friends, $5.5 million. We do have clients that have that much. We’ve done the estate tax planning for them. It’s a pretty regular part of what we do. It’s not really a high percentage of the population.
That’s at the Federal level. The states can set their own level. Until very recently, Ohio had an estate tax that came in when you left more $330,000 to somebody. As you know, it’s pretty low.
New Jersey had an estate tax that is in the process of repealing. When we come back from the break, I’ll talk a little bit about what the numbers for that are. That’s different and distinct from an inheritance tax.
An inheritance tax is really a tax on who you give money to. Just about every state…In fact, I won’t say everyone, because I’m not really certain about all 50.
My belief is that every state exempts transfers to spouses from any kind of tax. If you’re going to leave everything to your spouse, there’s going to be no tax that’s due, inheritance tax.
When we look at leaving it to kids, siblings, nieces, nephews, friends, charities, all of a sudden, if the state has an inheritance tax, it comes into play.
Victor: If we want to keep these two things separate, remember, we’re looking at an inheritance tax as being based on who we give it to, an estate tax being based on how much we have.
Now, when we come back from break, I’m going to explain to you what those limitations are, what the numbers and exemptions are for each of New Jersey, Pennsylvania, Florida, and a few others so that you can understand how to incorporate that into your planning.
It’s a good one. Stay tuned. We’ll be back from the break with Make It Last.
Victor: All right. Welcome back to Make It Last. We’re talking about taxes today, specifically estate and inheritance taxes. These are important ones because there’s some stuff that you can control based on where you live and where you’re residenced. I talked to you in the last segment about the difference between estate taxes and inheritance taxes.
Remember, estate taxes are based on how much you own and inheritance taxes are based on who you leave it to. You can control both of those things based on where you live and some other stuff. Where are those numbers? I talked a little bit about Pennsylvania. Pennsylvania has an inheritance tax but it has no estate tax.
They’re not really concerned about how much you have. They’re concerned about who you leave it to. Pennsylvania is pretty straightforward. If you leave it to a spouse, you pay just about zero. Zero. That’s it. That’s not bad. That’s not bad at all.
If you leave it to a child, if you leave it to one of your children, your grandchildren ‑‑ basically direct lineal descendants ‑‑ you’ll pay four‑and‑a‑half percent from the first dollar. It’s four‑and‑a‑half percent. If you leave it to a sibling, you’ll pay 12 percent. Essentially, everybody else but a charity is 15 percent.
That’s the way the inheritance tax works in Pennsylvania. Pretty straightforward, and, again, there’s no exemptions on how much you start on. They’re basically from every dollar.
New Jersey, for the longest time, had two death taxes. They had an estate tax and they had an inheritance tax. They still have the estate tax, but they’re in the process of repealing it.
The way that that works is, back in the year 2001, New Jersey decoupled from the Federal estate tax, they basically unhooked. They used to be locked step with that as the Federal estate tax started to increase and was on a process of getting repealed. New Jersey said, “No. No, nope, nope. We’re gonna keep charging an estate tax.”
They kept their estate tax number at $675,000. If you left more than $675,000 to somebody, you were going to owe some estate taxes on it. It was part of that gas tax compromise back in November. What they did was began the repeal of the estate tax. In the year 2016, for the rest of that year, if you died and you had more than $675,000, you owed estate tax.
Beginning in the year 2017, that number increased to $2 million. Basically, you’re allowed to give up to $2 million, and you can still die this year and give $2 million because we’re in 2017. However, if you wait to die next year, in 2018, that’s just one more year, there is no estate tax. You can leave an unlimited amount and there’d be no estate tax.
Now, something interesting is going to happen politically, which is that we’re going to change over governors, and Chris Christie is not allowed to run again. It’s maximum terms, so we’re definitely going to have a new governor.
A lot of pundits are predicting that rather than let the estate tax go altogether after there’s a new governor in place and depending on the political leanings of that governor, there’ll be a new estate tax put in. Either it will stay at $2 million or some other number, but I agreed with that. I signed up for it. I think that we’ll have an estate tax back.
That’s largely because about the amount of money that the estate tax generates. If you look at the budget, the estate tax generates about $360 million, or did in 2015. It generated about $360 million, and the inheritance tax generates $370 million. They’re about equal. Now, the gas tax did not eliminate the inheritance tax.
New Jersey still has an inheritance tax, based on who you leave it to. Different rules in Pennsylvania. Remember Pennsylvania, zero to spouses, four‑and‑a‑half to kids on the first dollar, and then 12 percent to siblings, and 15 percent to everyone else, minus charities.
The way that New Jersey does it, there is no inheritance tax if you leave it to a spouse or kids, no matter how much you leave.
In fact, the inheritance tax doesn’t affect most people who are leaving it to spouses and kids. That’s not bad. There’s another tax that starts at 11 percent if you’re going to leave it to brothers or sisters, or surviving spouses of a deceased child. If you leave it to them, it’s 11 percent and goes up to 16 percent, depending on how much you leave, with the first $25,000 excluded.
Let’s try that again, that’s a lot of numbers. Stick with me. If you’re going to leave it to your brother and sister, and it’s under $25,000, there’s no tax. If you leave more than $25,000, it’s 11 percent and goes up from there. Now, everyone else 15 percent. Nieces and nephews, 15 percent.
You’re going to leave $10,000 to your favorite friend that plays bingo with you, 15 percent. That’s on the first $700,000 and, after that, it’s 16 percent. Basically, charities are exempt. New Jersey still has an inheritance tax, and there’s nothing in the current law that gets rid of that. More importantly, this inheritance tax comes with it a lien on your assets.
Now, I’m going to get you to some practical planning. Remember, in this third segment I always try to give you something that you can use in your planning.
New Jersey’s inheritance tax basically requires financial institutions to lock down your money when you die so that New Jersey is, essentially, guaranteed to get paid, so it locks down a percentage of your money.
There’s one way to avoid that, which is to create a revocable living trust. New Jersey doesn’t know who you’re going to be leaving money to. They put the lien on everybody’s assets. They don’t know what your will says or what your trust says. They have no idea.
Because they have no idea, they’re going to automatically lock everybody’s account so that you make sure that you get paid, if you’re the State of New Jersey. If you want to avoid that automatic lien on your assets, the best thing you can do is create a revocable living trust. A revocable living trust avoids the lien. Says so right in the Department of Treasury.
You want to go to the division of taxation, inheritance tax. It says, “The lien may not be applied to assets held in a bonafide trust.” It’s pretty good. Pretty good. We create revocable living trusts as like a default planning in New Jersey because our clients want to avoid the inheritance tax. Now, there’re some special rules in there.
For instance, Pennsylvania and New Jersey both exempt inheritance tax on life insurance. One nice way of planning, if you want to leave a specific amount to your niece or nephew and you don’t want that to be taxed, you can take out a small insurance policy and just name that person as a beneficiary, that niece or nephew. That would escape inheritance tax for both New Jersey and Pennsylvania.
Some people want to think about gifting assets, transferring assets and getting it out of their name so that they don’t have to have it in their estate and, therefore, it’s not going to be taxed. There’s a couple rules on that. Nobody allows deathbed gifts. You can’t just do it and then die right afterwards. They’re going to roll that back into the estate.
In Pennsylvania, you have to live one year before those monies are exempt from inheritance tax. You make the gift and live one year, and if you have no control over it, then it won’t be taxed. In New Jersey, it’s three years. If you make a transfer within three years of death to somebody that would have ordinarily have to have paid some inheritance tax, it’s going to come rolled back in.
They ask her, “Have you made any transfers in the last three years?” They’re ready to go, they’re ready to take that money. Gifting is sometimes an option, but, remember, when you gift an asset, you don’t get a basis adjustment. There isn’t much time to go through that, but a basis adjustment is really just the ability to hit the reset button on all the capital gains.
You pay capital gains at like 15 percent. You don’t want to be doing that to save four‑and‑a‑half percent of an inheritance tax, like in Pennsylvania. You want to watch these things and, of course, here we go, you want to work with a competent professional. Seek the guidance of somebody that knows about this stuff, is an expert.
“Hey, why don’t you talk to an estate planning?” and, I hope, to an attorney who is also a certified financial planner, because that will help you make sure that your affairs are in order. Yes, gifting is an option in the right circumstance.
In fact, I’m just wrapping up a plan today for a client where we’re going to be making some gifts to help escape the four‑and‑a‑half percent because they’re Pennsylvania residents. Something to think about, definitely, for your planning.
Keep an eye on this stuff, and I’ll be helping you keep an eye, in the show, along the way of…Look, I’m going to go back to my wedding anniversary. [laughs]
I’m on the road somewhere. I’m going to be in Montreal, Boston, someplace like that and going to spend it with my delightful wife, who has done me the grace of being married to me, saying yes, and then staying married with me and giving me three great, great, great sons, great children.
Anyway. Stick with us, Make It Last. We’re going to be back next week. We’re going to talk about another great topic.
If you like this show, please rate it on iTunes. If you like this show and you want to help a friend, share it with them. Either send them to the iTunes link or send them to the radio show link, which you can find at makeitlasradio.com.
If you have any suggestions for any shows, please go ahead and send it to email@example.com or drop me a line. We’re happy to talk about what we can include on the show, make this interesting for you as well. Always looking for new topics.
Victor: Until then, this has been Make It Last helping you keep your legal ducks in a row and your financial nest egg secure. We will catch you next Saturday. See you later.
Bert: The foregoing content reflects the opinions of Medina Law Group, LLC and Private Client Capital Group, LLC and is subject to change at any time without notice.
Content provided herein is for informational purposes only and should not be used or construed as investment or legal advice, or a recommendation regarding the purchase or sale of any security, or to follow any legal strategy.
There is no guarantee that the strategies, statements, opinions, or forecasts provided herein will prove to be correct as performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
All investing involves risk, including the potential for loss of principle. There’s no guarantee that any investment plan or strategy will be successful. We recommend that you consult with a professional dedicated to your needs.
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