The old adage that the two certainties in life are death and taxes still holds true today.
Historically, New Jersey imposed two death taxes – estate tax and inheritance tax. However, as of January 1, 2018, the estate tax was completely repealed, leaving New Jerseyans to contend with the lesser-known inheritance tax. Inheritance taxes are imposed at a person’s death and are calculated based upon the decedent’s relationship to each of his/her beneficiaries.
Additionally, the type of asset being distributed may impact the tax due.
New Jersey categorizes beneficiaries into “classes.”
The specific class that a beneficiary falls into dictates how much, if any, inheritance tax will be attributable to an asset passing to such beneficiary. The classes of beneficiaries are as follows:
Class A: This class includes a surviving spouse, civil union or domestic partner of a decedent; a father or a mother of the decedent, a grandparent of the decedent, child or children of the decedent; stepchildren of the decedent; and any child or children adopted by the decedent. Lucky for Class A beneficiaries, any assets distributable to them do not trigger inheritance tax.
Class C: This class includes a brother or sister of the decedent; and son- or daughter-in-law of the decedent. The first $25,000 of assets from a decedent’s estate distributable to any Class C beneficiary is exempt from tax. To the extent a distribution to a Class C beneficiary exceeds $25,000, inheritance tax is computed as follows:
- 11% on any amount exceeding $25,000 up to $1,100,000;
- 13% on any amount exceeding $1,100,000 up to $1,400,000;
- 14% on any amount exceeding 1,400,000 up to $1,700,000; and
- 16% on any amount exceeding $1,700,000.
Class D: Any other beneficiary not specifically otherwise classified falls into Class D. This includes beneficiaries such as step-grandchildren, nieces, nephews, cousins, significant others, and friends. For any amount distributable to a Class D beneficiary, the tax is as follows:
- 15% on any amount up to $700,000; and
- 16% on any amount exceeding $700,000.
Class E: Tax-exempt charities and governmental bodies can receive any amount from an estate without incurring inheritance tax.
(In case you were wondering, there are no Class B beneficiaries.)
As mentioned previously, certain assets may be exempt from inheritance tax, regardless of who or what the beneficiary is. For example, life insurance is usually exempt from inheritance tax, so long as an entity or living individual is named as the beneficiary. If there is no beneficiary named, if the beneficiary is not then living, or if the beneficiary is listed as the estate, then the life insurance would become part of the decedent’s taxable estate and may, therefore, be subject to inheritance tax.
If there is inheritance tax owed, the decedent’s estate is legally required to file a New Jersey Inheritance Tax Return, as well as pay the tax due to the State, within 8 months of the decedent’s death. Preparing an inheritance tax return can be a daunting task for any Executor, and even CPAs, given that you must obtain the values for all of the assets the decedent owned as of the date of his or her death, even if some of the assets are going to tax-exempt beneficiaries. Once all of the assets are properly valued, the tax must be calculated based on the various classes of the taxable beneficiaries.
It is important to note that a person can specify in his or her estate planning documents how any inheritance taxes attributable to his or her estate are to be paid. Specifically, a person can provide that the taxes are to be apportioned among the beneficiaries or paid from the decedent’s residuary estate. To apportion the tax means that each beneficiary is responsible for his or her respective tax based on the amount that he or she is inheriting. The tax is then generally deducted from his or her respective share of the estate prior to distribution. Alternatively, if a person states that the taxes are to be paid from the estate, the total amount of the tax will be paid off the top of the residue. However, if your estate has different classes of beneficiaries, providing that the estate is to pay the inheritance taxes can create unintended results.
For example, a decedent has a Will that leaves $100,000 to his niece (Class D) and the remainder of his estate to his children (Class A). His Will also provides that the estate pays the tax. The bequest to the niece incurs a $15,000 inheritance tax. In this situation, if the estate was directed to pay the tax, then the $15,000 would be deducted from what the children would have inherited and the niece would essentially receive $100,000 from the estate, tax-free. Conversely, if the Will provided that the taxes were to be apportioned, then the tax would be paid from the niece’s $100,000 bequest. Therefore, she would receive $85,000 ($100,000 – $15,000), and the decedent’s children would share the remainder of the estate, tax-free.
If you have any questions about New Jersey inheritance tax, or any other estate planning or estate administration matter, please call our office to schedule a consult with one of our attorneys.