NJ Inheritance and Estate Taxes: Watch Out!

One of our clients recently (and unfortunately) paid $30,000 New Jersey inheritance tax on a $200,000 inheritance received from her aunt. This could have been avoided with some planning.

If you live in New Jersey, then you’re lucky enough to live in one of the two states that collect both a separate state inheritance tax and an estate tax (the other is Maryland). Only eleven states still collect an inheritance tax.

Currently the following rules apply with regard to the New Jersey inheritance tax:

•Charitable organizations are exempt from the tax.
•All other beneficiaries are broken down into three classes with regards to the tax:
•Class A beneficiaries. No tax is imposed on the following beneficiaries – spouses, civil union partners, domestic partners, parents, grandparents, and descendants (including those legally adopted).
•Class C beneficiaries. For the following beneficiaries: siblings, spouse or widow(er) of a child of the decedent, and civil union partner – the first $25,000 is exempt and transfers above this amount are taxed at 11%–16%.
•Class D beneficiaries. For all other beneficiaries (i.e., niece, nephew, cousin, etc.), the first $500 is exempt and transfers above this amount are taxed at 15%–16%.

Life insurance paid to a named beneficiary is exempt from the tax. An NJ inheritance tax return, Form IT-R, must be filed and the tax paid within eight months after the decedent’s death. While no inheritance tax return is required to be filed for Class A beneficiaries, a tax waiver may be required to access bank accounts, stocks, bonds and brokerage accounts.

The bottom line: if you’re a New Jersey resident and your estate is passing to someone other than your immediate family, then your beneficiaries may owe New Jersey inheritance tax. Our office can plan your estate to avoid or minimize the New Jersey inheritance tax.
If you manage to avoid the inheritance tax, you must still watch out for New Jersey estate tax.

A New Jersey Estate Tax Return is required when the gross estate plus prior taxable gifts are in excess of $675,000. Even though a spouse can pass an unlimited amount to his or her spouse during life or at death, the assets left to a spouse at death do count as part of the gross estate and can thereby necessitate the filing of a New Jersey estate tax return even when all assets are left to a surviving spouse. The New Jersey estate tax rate is a progressive rate that maxes out at 16%. The New Jersey Estate Tax Return and any tax due must be paid within 9 months of the date of death.

The bottom line – if you’re a New Jersey resident and your estate is passing to someone other than your spouse and the value is more than $675,000, or if you’re a nonresident who owns real estate and/or tangible personal property located in New Jersey and your estate is valued at more than $675,000, then your estate may owe a New Jersey estate tax.

Our firm has helped hundreds of clients minimize and sometimes entirely avoid the New Jersey estate tax.