Estate planning is a critical part of the financial planning process for farm families. No matter how large or small your farm operation and other estate assets, you want to be assured that your assets go where you want them to go when you pass on. You also want to minimize estate taxes and provide for minor children, survivors (e.g., a spouse), and dependents.
Many people procrastinate in planning their estate. One reason is that it is viewed as a "chore" to do when one gets older. The process can also seem overwhelming if decisions that need to be made and appropriate tools are not well understood. It is also uncomfortable to think about death and talk to our families about "sensitive" topics like money and our own mortality.
A critical part of estate planning is federal and state taxes. Estate tax is a tax on a person's total assets, minus specified deductions, at the time of death. Inheritance taxes are based on the relationship between the donor and the recipient of estate assets.
In New Jersey, an inheritance tax is in effect. However, there is no inheritance tax on amounts received by "Class A Beneficiaries" (e.g., surviving spouse, parents, children, grandchildren, and other lineal descendents), regardless of the size of the inheritance .Other people who inherit assets (e.g., siblings, nieces and nephews, friends, and spouses of deceased children) are taxed on inheritances over $25,000.
Under current state law, New Jersey no longer has an estate tax. It was eliminated as of January 1, 2018. In 2024, the federal estate and gift tax exclusion was raised to $13.61 million per person and $27.22 million for married couples. These high limits effectively eliminate estate taxes for all but very affluent households while the Tax Cuts and Jobs Act tax law is in effect. To keep up to date with how estate tax laws will affect you, consider obtaining professional advice periodically from a financial planner or an attorney with expertise in estate tax planning. Update your personal estate plans as needed.
An important term, with respect to the calculation of estate taxes, is "basis." This is the value assigned to an asset from which a taxable gain or loss is determined. Often, an investment's basis is its original cost. When someone inherits assets that have risen in value over the years, the tax basis is generally its value on the date of the owner's death, rather than what the owner paid for the asset. This is referred to as a "stepped–up basis."
In summary, farm families typically hold large amounts of illiquid assets such as farmland. For this reason, professional assistance is recommended. You can lower the cost of a financial or legal consultation by preparing net worth and income and expense statements in advance and making a written list of your questions and concerns.