In 2016, the New Jersey legislature repealed the state’s estate tax, but phased in the change. For those who passed away during calendar year 2017, there was a significant bump in the exemption. Prior to 2017, New Jersey estate tax kicked in at $675,000. In 2017, only estates valued at $2 million or more were taxed. For those who pass away on or after January 1, 2018, the state won’t levy taxes against the estate.
With the federal estate tax exemption at $5.45 million and no state estate tax, most New Jersey estates won’t owe estate taxes. However, depending on the relationship of the deceased to the beneficiaries, passing assets through an estate may still be costly. That’s because New Jersey is one of a handful of states that imposes an inheritance tax on many beneficiaries.
The Difference Between Estate Tax and Inheritance Tax
While many people confuse estate tax and inheritance tax, each is exactly what the terminology suggests. Estate tax is paid out of the estate, based on the value of the estate. Inheritance tax is paid by the person or entity inheriting, based on the portion bequeathed to that party.
Prior to the repeal of the New Jersey estate tax, the Garden State was one of just two U.S. states levying both estate taxes and inheritance taxes.
Who Pays Inheritance Taxes?
Some beneficiaries pay no inheritance taxes at all, while others are taxed based on their classification and on the amount of the inheritance.
Beneficiaries Exempt from Inheritance Taxes
The following beneficiaries are exempt from New Jersey inheritance tax, regardless of the amount of the inheritance:
- Surviving spouses
- Surviving domestic or civil partners
- Children and subsequent direct descendants (grandchildren, great-grandchildren, and so on)
- Parents and other direct ancestors (grandparents, great-grandparents, etc.)
- Step-children (but not subsequent step-descendants)
- Qualified charities
- Religious, educational, and medical institutions
- Non-profit benevolent and scientific institutions
- The state of New Jersey
Inheritance Tax Rates for Non-Exempt Beneficiaries
Not all non-exempt beneficiaries are treated equally for inheritance tax purposes. Certain other close relatives are afforded more favorable treatment than other non-exempt beneficiaries. These include:
- Sons-in-law and daughters-in-law (including those who are domestic or civil partners of the child)
The exemption applies to the spouse or civil or domestic partner of the decedent’s child regardless of whether the beneficiary is the current spouse/partner of the child or the surviving spouse/partner of a deceased child.
Beneficiaries in this category may inherit up to $25,000 without paying inheritance tax. For amounts over $25,000, the tax rate is graduated, ranging from 11% to 16%.
All other beneficiaries, including friends, former spouses, nieces and nephews, organizations that do not fall under one of the exempt categories, and others are taxed on the full amount of the inheritance, if that inheritance exceeds $500. The tax rate for these non-exempt beneficiaries is 15% up to $700,000 and 16% for any amount exceeding $700,000.
Ramifications of Inheritance Taxes
When bequeathing property to non-exempt beneficiaries, it is important to take inheritance taxes into account. While inheritance taxes will merely reduce the amount of the inheritance in the case of cash and other liquid assets, bequeathing other types of property may be more complicated. For example, the beloved niece of the deceased may be delighted to learn that she has inherited a home that has been in the family for generations, only to learn that accepting the relatively modest $300,000 house will mean she owes $45,000 in estate taxes. Depending on her circumstances, this may mean that she is unable to accept the bequest.
Complications like the one described above can typically be avoided, but only if the deceased has engaged in careful planning, taking into account issues such as inheritance taxes and other expenses associated with a beneficiary accepting and maintaining his or her inheritance.
An experienced estate planning attorney can help ensure that you are aware of this type of potential complication and the options for ensuring that your property can be distributed as you intended after death.