Blog last updated on June 30, 2021
The state of New Jersey is unusual in that it is just one of six states that have an inheritance tax. An inheritance tax differs from an estate tax in that it is paid by the beneficiary, not the estate itself. New Jersey actually repealed its estate tax, meaning that estates created after the death of a decedent post-January 1, 2018, no longer have an applicable estate tax. The remaining inheritance tax is something you still have to be aware of, especially since it only affects certain categories of beneficiaries.
- Class A beneficiaries are exempt from the inheritance tax entirely. They include parents, grandparents, spouse/civil union partners/domestic partners, children (biological or adopted), "issue" of children, and step-children.
- Class C beneficiaries are exempt from paying the inheritance tax on amounts up to $25,000. Amounts from above $25,000 and up to $1,075,000 will be taxed at a rate of 11%. Beneficiaries in this category include siblings and spouses/civil union partners of siblings as well spouses/civil union partners of immediate children.
- Class D beneficiaries are only exempt from paying inheritance tax on amounts up to $500. They must pay a 15% tax on any amount up to $700,000. Any additional amount over $700,000 will be taxed at 16%. This category encompasses everyone, not in Class A or Class C, including nieces, nephews, cousins, second cousins, children or step-children, and all other relatives and non-relatives.
Failing to anticipate the inheritance tax can easily turn a gift into an unexpected burden for your beneficiaries. This is especially true if the gift is not made in cash, such as when the property being transferred is a home, valuables, or a motor vehicle. Without proper planning, the beneficiary may be forced to sell the asset in order to pay off the resulting tax burden.
Van Dyck Law can help you prepare your estate for challenges like the inheritance tax. Proper estate planning can account for these impacts and prepare for them in advance. Call us at 609.580.1044 or contact us online to discuss the details of your estate or the estate of someone who is now deceased.
Almost No Exceptions to the Inheritance Tax, Outside Exempted Amounts
The inheritance tax applies to all gifted payments and assets given to a beneficiary from a decedent, including transactions made from outside the probate system. For example, proceeds from a joint account, a retirement account, or a transfer-upon-death property deed can all result in an inheritance tax bill. This situation can cause unexpected problems for families and beneficiaries since they can occur even with the creation of a living revocable trust or other strategy used to avoid probate.
The tax is due within eight months of the decedent's death, so beneficiaries may have an unexpected bill unless they are warned in advance!
One of the few exceptions to the inheritance tax is by creating an irrevocable trust. Once an asset is placed in an irrevocable trust, it technically becomes the domain of the trustee, not the grantor's estate. However, assets transferred through an irrevocable trust may still be subject to the federal gift tax. In any event, individuals concerned about their ability to gift non-immediate family members without causing an unintended tax burden will want to speak to a New Jersey estate planning attorney as soon as they can.
Prepare for the Inheritance Tax With Estate Planning
The rules for the inheritance tax in New Jersey can be complicated. The amounts can differ for individuals living outside the state. Worse, the inheritance tax can even apply to decedents who did not live in New Jersey prior to their death but who are transferring property located within the state.
Knowing this, one of the best ways to approach gifting an inheritance to someone in Class C or Class D is to set aside funds within the estate for the purposes of paying taxes. Many individuals will assign a liquid portion of the estate known as the "residue" to pay off things like taxes, court fees, and estate administration expenses. Having enough residue is often key to avoiding a situation where someone may not receive the intended inheritance, or a beneficiary may be pressured to liquidate a beloved inherited asset to pay for the corresponding taxes. Setting aside this residue amount may slightly decrease the amount available to bequeath to others, but it does shift the burden of tax-paying predominantly back to the estate itself.
Another option is to include cash or liquid asset gift alongside physical assets in order to provide ready funds to pay off the inheritance tax. Note that the tax will be charged on any non-exempt amount as a whole, so be sure to account for enough liquidity to pay for taxes on the asset and the cash itself.
If you are interested in anticipating issues like the inheritance tax and planning for them, we at Van Dyck Law can help you. Our New Jersey estate planning attorneys can review your assets and help you form a solid estate plan optimized towards your intentions and the well-being of your beneficiaries.
Start the process of improving your estate plan today when you call 609.580.1044 or contact us online to schedule a risk-free, no-obligation consultation.