As an estate planner, I often feel as though I’m the bearer of bad news. Especially since every time you turn around it seems like the government is taxing you for something, especially in New Jersey.
This is how some of my client sessions go:
“You want to give everything to your kids—got it. And you have life insurance—fantastic. Just know that life insurance is includable in your estate for estate tax purposes, and New Jersey has the worst estate tax in the country.”
Or how about this one:
“You need a will, great. But you want to give $100,000 to your nephew. No problem. Just know that New Jersey also has an inheritance tax. Yes, New Jersey has inheritance taxes also. While many of my clients may be familiar with and troubled by the state’s property taxes and estate taxes, you may be unaware of New Jersey’s inheritance tax. Please don’t hurt me.”
So what, exactly, is an inheritance tax? It’s a tax you must pay after you receive assets or property from a decedent (i.e., the one who died) unless the decedent makes other arrangements to pay the tax under her will. The NJ inheritance tax should not be confused with the NJ (or federal) estate tax, which is usually satisfied from the estate of the decedent.
Currently, there are only six states in the Union that still have an inheritance tax—Nebraska, Iowa, Pennsylvania, Kentucky, Maryland and New Jersey. Additionally, New Jersey and Maryland have both an estate tax and an inheritance tax—a double whammy.
How does the NJ inheritance tax affect you?
How you are affected by the inheritance tax in New Jersey depends on your relationship to the decedent. If you are a Class A beneficiary (father, mother, grandparent, descendant, spouse, civil union partner or domestic partner), no tax is imposed. Therefore, if you want to leave everything to your spouse and then your kids (or grandkids)—I can give you some good news—there is no N.J. inheritance tax!
For Class C beneficiaries, the first $25,000 received is exempt and a tax of 11 percent is imposed on the rest of the inheritance. If you are a brother or sister of the decedent, or the husband, wife or widow(er) of a child of the decedent, civil union partner or surviving civil union partner of a child of the decedent, then you are a Class C beneficiary.
Class D beneficiaries (i.e., everyone else who is not Class A or C) are taxed 15-16 percent.
(In case you noticed, there are no Class B beneficiaries. Just A, C and D.)
Are there exemptions to the N.J. transfer inheritance tax?
As a result of the combined inheritance tax and estate tax, many New Jersey residents are looking to states in the South and West as retirement age approaches. However, depending on your situation, a New Jersey resident may be able to claim certain exemptions from the state’s inheritance tax. According to the New Jersey Department of Treasury Division of Taxation, the following exemptions are available from the transfer inheritance tax:
All transfers with a total value under $500
Transfers for public purposes made to New Jersey or any political subdivision thereof
Federal civil service retirement benefits payable to a beneficiary other than the estate, executor or administrator
Any life insurance that has been paid to a named beneficiary (but not the decedent’s estate)
Charitable donations for the use of any educational institution, church, hospital, orphan asylum, public library, etc.
Annuities payable to survivors of military retirees
Qualified employment annuities paid to a surviving spouse, civil union partner or domestic partner
I know—a very exciting list! But important to note, there are no inheritance taxes for: gifts that are less than $500 and life insurance proceeds payable to designated beneficiaries. Therefore, if you wanted to leave your $100,000 life insurance proceeds to your nephew, there would be no inheritance tax (but there could potentially be estate tax).
Yes, lots of bad news. But I would like to end on a positive note. Any inheritance taxes that are paid to New Jersey are counted as a credit toward the overall estate taxes given to New Jersey. Thus, if there is $45,000 due in inheritance taxes, and the estate tax bill is $50,000, your estate would only owe $5,000 in estate taxes because $45,000 was paid in inheritance taxes. New Jersey will not tax your estate twice.
As you consider your gifts this Chanukah—perhaps give your nephew a little more. It will save on inheritance taxes down the road! Happy Chanukah!
Alec Borenstein, Esq., an estate-planning attorney, is a Teaneck resident with offices in Springfield and Brooklyn. His firm’s website is bmcestateplanning.com. If you’d like a free estate-planning consultation in the comfort of your own home or office, please email [email protected].
By Alec Borenstein