The New Jersey inheritance tax is rarely highlighted by the mainstream media yet quite important to all Garden State residents, regardless of their level of income, savings and investment portfolio value. Inheritance tax is somewhat of an uncomfortable subject for obvious reasons. Though you might view the prospect of the state taking a portion of your hard-earned money upon death, depriving your loved ones and charities of the fruits of your labor, it is important that you understand the details of the inheritance tax in NJ.
Here’s the inside scoop on taxes on inheritance in NJ.
The State of the New Jersey Inheritance Tax
Rewind back to the start of 2018 and the NJ inheritance tax was repealed. The repeal of taxes on inheritance NJ occurred in unison with the hike in the exemption applicable to the gift tax and federal estate tax. The repeal of the NJ inheritance tax minimized the necessity of planning for the transfer tax. Though the inheritance tax New Jersey is still in effect, it is important that NJ residents take note of how the tax on hard-earned money alters estate plans.
Half a dozen states have an inheritance tax yet the vast majority of states have a payroll tax. The New Jersey inheritance tax is applicable to financial distributions provided to others after death or in the period of three years following death. The NJ inheritance tax is applicable to beneficiaries in distinct classes determined by the nuanced relationship of the recipient of the inheritance to the decedent.
New Jersey previously had three classes of beneficiaries, one of which was removed in the early 1960s. Today, the state’s Class A beneficiaries, consisting of husbands/wives, direct decedents and ancestors, stepchildren and even partners in civil unions are not subjected to the inheritance tax. Beneficiaries in the Class C segment are as follows: sisters, brothers, offspring-in-law and children’s civil union partners.
In the context of New Jersey inheritance tax, Class C beneficiaries are provided with an exemption of $25,000. The final class of beneficiaries, Class D, encompasses the remainder of individuals provided with an inheritance in New jersey. Beneficiaries in Class D are taxed at a rate of 15% on inheritances upwards of $700,000. The tax rate for Class D beneficiaries increases one more percentage point for financial gifts provided upon death that exceed $700,000.
Though few are aware of it, there is even a special beneficiary class for qualified charities, referred to as Class E. Bequests and other gifts provided to charities are not subjected to the New Jersey inheritance tax.
The Magnitude of the Estate
Let’s shift our attention to estate size. Contrary to popular belief, the magnitude of one’s estate does not spur an exemption from the New Jersey inheritance tax. If the estate in question is small or medium in value, the tax is still applicable as long as the beneficiaries are in one of the categories noted above with the exception of non-taxable charities.
The NJ inheritance tax is applicable to beneficiaries unless the language of the will dictates otherwise. It is the executor of the will who is tasked with reducing the tax from financial gifts after the decedent’s death prior to transmitting those funds to the designated parties.
Tax Information Every New Jersey Resident Should Know
NJ inheritance tax returns are necessary in specific situations. As an example, consider a situation in which a resident of the Garden State passes away with an estate with an aggregate value of $1.5 million. The value of the estate is bequeathed directly to her offspring yet amounts of $10,000 are also included for nephews, triggering an inheritance tax for those recipients. In such a situation, the NJ inheritance tax return can be sidestepped if the gifts upon death were provided to those in Class A as described above.
Furthermore, if step- grandchildren are incorporated in the estate plan, they are grouped in the Class D beneficiary class, meaning an NJ inheritance tax is in effect. However, the New Jersey inheritance tax isn’t applicable if the beneficiaries are in Class A.
Estate Planning in the Context of New Jersey Inheritance Tax
The New Jersey inheritance tax can be partially mitigated with appropriate planning. Tap into the expertise of a New Jersey estate planning specialist and you’ll rest easy knowing you’ve done your part to maximize the amount of money distributed to your loved ones, charities and other deserving parties as opposed to the state.
The idiosyncrasies of NJ inheritance tax laws reveal taxes are not applicable to certain asset types. As an example, if you have a life insurance policy that provides a direct payout to a specific individual or even retirement benefits stemming from federal civil service, there is an opportunity to sidestep the New Jersey inheritance tax altogether.
The NJ inheritance tax does not apply to the payout from an insurance policy transmitted to a specific individual, meaning life insurance has the potential to be used as a money-saving vehicle to shift assets to beneficiaries that are not in Class A. As an example, the inheritance tax is not triggered when life insurance policies are used to redirect funds to friends, nephews, nieces, cousins and others that fall beneath the Class A umbrella.
New Jersey estate planning specialists can also help create an irrevocable trust for tax mitigation. Create an irrevocable trust under the guidance of a NJ estate planning attorney to bequeath your hard-earned money to designated beneficiaries directly from a trust as opposed to shifting the money into those parties’ hands through a traditional estate.
The key takeaway from this content is that death and taxes should be addressed despite the fact that they are uncomfortable subjects. It is in the interest of every New Jersey resident, regardless of socioeconomic class, to proactively engage in New Jersey inheritance tax planning including overarching estate planning to mitigate an arguably unfair tax burden.
If you do not have a will, trust or estate plan, now is the time to take action. There are serious legal and tax implications that must be weighed. Even if you have an estate plan in place, your life has likely changed in recent months and years. A New Jersey estate planning attorney can help you enjoy invaluable peace of mind knowing you’ve done everything in your power to plan for your family’s financial future.
Are you faced with a challenging estate & inheritance matter with family members or loved ones? It pays to have an experienced trust-and-estate litigation attorney on your side. Our firm has the experience you need to advocate or litigate on your behalf. My firm specializes in New Jersey estate litigation, including trust and will contests. Contact my office today to schedule a free consultation.
