Although the New Jersey estate tax has been eliminated, the state continues to impose an inheritance tax, one of only six states that do so. Because the tax does not apply to all inheritances, determining a beneficiary’s potential liability can be complicated. The best way to protect an inheritance from taxation is to consult an experienced estate tax planning attorney.
At E.A. Goodman Law, conveniently located in Morristown, we advise estate planners and beneficiaries throughout New Jersey on the tax implications of inheritances under applicable state law. Our trust and estate attorneys are highly experienced in designing strategies to help clients avoid inheritance taxes, such as creating trusts and planned gifting programs.
Founding attorney Elga Goodman focuses her practice on elder law, estate planning, and personal tax issues. Elga is highly regarded for her legal and business acumen, as well as her unique ability to explain complex tax and estate planning matters in understandable terms. When you become our client, you can rest easy knowing that your interests will be protected.
What is the inheritance tax in New Jersey?
The tax is imposed on some, but not all inheritances. Amounts under $500 are not taxed, and certain beneficiaries are exempt from the tax. In addition, the tax rate can range from 11 to 16 percent, depending on the amount of the inheritance and the beneficiary classification. New Jersey beneficiaries are divided into four classes, based on the relationship between the beneficiary and the decedent (the person who died).
The Classes of beneficiaries are as follows:*
- Class A — This class includes spouses and children of the decedent, as well as legally adopted children, mutually acknowledged children, stepchildren, grandparents, grandchildren and great-grandchildren. Class A beneficiaries are exempt from the New Jersey inheritance tax.
- Class C — These beneficiaries include siblings of the decedent (including half brothers and half sisters), and the spouse or widow of a child of the decedent. There is no tax on inheritances of $25,000 or less. Class C beneficiaries are subject to an 11 percent inheritance tax for assets valued between $25,000 and $1,100,000. The tax increases to 13 percent for the next $300,000 and 14 percent for the $300,000 over that. The inheritance tax for any amounts greater than $1,700,000 is 16 percent.
- Class D — This class includes every other beneficiary, such as nieces, nephews and friends. Class D beneficiaries are subject to a 15 percent inheritance tax for assets valued up to $700,000 and 16 percent on any assets over that amount.
- Class E — This class includes qualified charitable organizations, religious, educational and scientific institutions, and other non-profit organizations, all of which are exempt from the New Jersey inheritance tax.
*Class B was eliminated in 1963
As you can see, the inheritance tax is not based on the value of the estate, but rather on who receives the inheritance. As an example, if someone dies with 1 million and leaves $900,000 to a surviving spouse and the remaining $100,000 to a nephew, the spouse pays no tax while the nephew (a Class D beneficiary) will pay 15 percent on $100,000 or $15,000.
Who Pays the Tax?
The executor or estate administrator is responsible for filing an inheritance tax return and ensuring that the tax is paid. In some cases, the will may instruct that the taxes be paid from the decedent’s residuary estate or by the recipient. If the will is silent on how the tax will be paid or there is no will, the inheritance tax will be paid from the recipient’s shares. Given that many beneficiaries may not have sufficient funds to pay the inheritance tax, a significant portion of their inheritance could end up in the state’s coffers. This is why it is crucial to have informed representation when planning your estate.
How to Avoid the New Jersey Inheritance Tax
Whether the New Jersey inheritance tax will be repealed in the future remains to be seen. In the meantime, estate planners can leave certain assets to non-Class A beneficiaries that will not be subject to the inheritance tax, such as:
- Life insurance — Life insurance proceeds paid to Class C or Class D beneficiaries are exempt from the inheritance tax. Since life insurance proceeds are included in the taxable estate, however, another option is to establish an irrevocable life insurance trust.
- Irrevocable Trusts — Assets that are transferred into an irrevocable trust (e.g. special needs trusts, spendthrift trusts) may avoid the inheritance tax, provided that the transfer occurs 3 or more years before the decedent’s passing.
- Gifting — Although gifts made within 3 years of the decedent’s passing may be subject to the inheritance tax, establishing a regular gifting program for beneficiaries not included in a will may help to minimize or avoid the tax.
Contact Our Experienced New Jersey Estate Tax Planning Attorneys
At E.A. Goodman Law, LLC, we understand that no two families are alike and that the very definition of family is changing. We provide clients from all walks of like with estate tax planning strategies that are tailored to their individual needs. If you wish to preserve your legacy and protect your beneficiaries from inheritance taxes, you need the informed representation we provide. Please contact our office today for a free consultation.