Growing up my father used to joke that there were only two guarantees in life: death and taxes. All joking aside, he was onto something, especially in the State of New Jersey. Prior to 2018, New Jersey ranked as one of the worst when it came to estate and inheritance taxes. As you may or may not be aware, New Jersey used to have two death tax schemes: 1) the inheritance tax, and 2) the estate tax. While New Jersey has recently revoked the estate tax, the Federal estate tax and the New Jersey inheritance tax live on. Below is brief outline of each tax scheme and how it can affect your estate.
New Jersey & Federal Estate Tax
Prior to 2018, if you died a resident of New Jersey and your assets were over $675,000, your estate would have been subject to the estate tax. This amount was extremely low and, as a result, many estates were subject to the New Jersey estate tax.
Currently, in 2020, there is no estate tax in New Jersey and the Federal estate tax exemption is $11,580,000 per person. While the estate tax is no longer a threat to most New Jersey estates, State and Federal tax laws are always subject to change. As such, there are certain estate planning tools which can be utilized to potentially reduce the value of your estate for tax purposes, should the estate tax return in New Jersey.
New Jersey Inheritance Tax
While the legislature in New Jersey eradicated the estate tax, it did not get rid of the inheritance tax. The inheritance tax in New Jersey taxes payments to beneficiaries based upon their relationship to the decedent. If you are a spouse, child, grandchild or parent of the decedent, you are considered a Class “A” beneficiary and are fully exempt from the New Jersey inheritance tax on anything you receive from the estate. Additionally, charities are considered Class “E” beneficiaries and are also fully exempt from the inheritance tax.
All other relatives (i.e. siblings, cousins, aunts, uncles, nieces, nephews, etc.), and persons with no familial relationship, are subject to the inheritance tax in New Jersey. The tax is a flat tax ranging from 11% to 16% depending upon the class in which the relative or individual falls. The tax is placed on the entire inheritance paid to the beneficiary in a particular class. All assets of the decedent are subject to the inheritance tax, regardless of whether the asset passes to the individual by beneficiary designation, operation of law, the decedent’s Last Will & Testament or intestacy. That being said, the only asset which is exempt from inheritance tax in New Jersey is life insurance policies payable directly to a beneficiary. If a life insurance policy is paid to the decedent’s estate, and the estate is left to non-Class “A” beneficiaries, the policy payments to non-Class “A” beneficiaries will be subject to the inheritance tax.
As you can see, there are many factors in New Jersey which can subject your estate to the federal estate tax or the inheritance tax. If you are interested in discussing your estate in greater detail, and the benefits of estate planning, please contact me for a consultation.
~ Michelle E. Smith, Esq.