UNDERSTANDING THE NEW JERSEY INHERITANCE TAX

While many people are familiar with the concept of estate taxes, inheritance taxes can be a bit of a mystery. An estate tax can be imposed at the federal or state level and is generally determined by the value of a person’s taxable estate at the time of their death. Whether an inheritance tax is imposed is usually determined by the relationship of the person receiving the assets from the decedent. The tax rate is generally determined by the value of a decedent’s assets passing to a beneficiary.

In New Jersey, the estate tax was repealed in 2018 after being phased out for several years. However, the inheritance tax remains. Indeed, New Jersey is one of only six states that still imposes an inheritance tax on the disposition of assets to certain beneficiaries. For estates valued $500 or greater, the inheritance tax is imposed on all “non-class A beneficiaries.” New Jersey defines the classes as they relate to the decedent as follows:

• Class A – Spouse, civil union or domestic partner, children (including adopted children), grandchildren and more remote descendants, father, mother, grandparent, mutually acknowledged child and stepchild (but not step grandchildren or their descendants).
• Class B - Eliminated by amendment July 1, 1963. 
• Class C - Brother or sister of decedent, surviving spouse of a predeceased child (i.e., son-in-law or daughter-in-law).
• Class D - Every other transferee, distributee or beneficiary not named in the other classes.
• Class E - Transfers to qualified charitable entities, religious institutions, educational and medical institutions, etc. (nonetheless, if there is a Class E beneficiary for an estate, an inheritance tax return must still be filed).

It should be noted that a trust, by definition, is not a Class A beneficiary, even if the trust is for the benefit of a Class A beneficiary. Even though filing of an inheritance tax return may be required when the beneficiary is a trust, it may be possible, depending on the circumstances, to take the position that no tax should be due.

The tax rate a beneficiary is subject to is further determined by which class the beneficiary fits into:

• Class A beneficiaries are not subject to inheritance tax liability.
• Class C beneficiaries are not taxed on the first $25,000 of assets; assets valued between $25,000 and $1,075,000 are subject to an 11% tax, the next $300,000 is subject to a 13% tax, the next $300,000 is subject to 14% tax, and all assets over $1,700,000 are subject to 16% tax.
• Class D beneficiaries are subject to a 15% tax rate for the first $700,000, and 16% for any assets above that.
• Class E beneficiaries are not subject to inheritance tax liability.

The inheritance tax does not have an exemption amount that passes tax free, as is typical with estate taxes. Accordingly, even small estates can be subject to the inheritance tax if the beneficiary is in one of the taxable categories. This can cause additional expenses to a small estate when an inheritance tax return (ITR) must be prepared and filed.

An ITR must be filed within 8 months after the death of the decedent if any of the decedent’s property is passing to anyone other than a Class A beneficiary. If the ITR is not filed and paid in a timely manner, the tax is a lien on all New Jersey property for fifteen (15) years, with interest accruing at a rate of ten (10%) percent per annum. Although there are extension requests available, the tax must be paid on this date.

For a decedent who was a New Jersey resident, a return must be filed for the transfer of all real and personal property located in New Jersey and all intangible property, wherever located. For a decedent who was not a New Jersey resident, a return must be filed for the transfer of all real and personal property located in New Jersey. There is no tax on intangible property for non-resident decedents, however, it must still be reported on the ITR.

Thoughtful planning may circumvent the inheritance tax in some instances. During a person’s lifetime, assets can be placed in an irrevocable trust for the benefit of non-Class A beneficiaries potentially avoiding an inheritance tax (assuming the transfer was made more than three years before the date of death). Additionally, life insurance proceeds with designated beneficiaries are exempt from inheritance tax and can be directed to any non-Class A beneficiaries.

If you are concerned about the tax liability the beneficiaries of your estate may face, please contact one of the knowledgeable Trust and Estate attorneys at Pashman Stein Walder Hayden to discuss your estate plan.