Demystifying Inheritances Taxes in New Jersey to Plan for the Road Ahead
The New Jersey Inheritance Tax system is complex, and proper estate planning is crucial to ensure that your wishes are carried out and your beneficiaries receive their inheritance in the most tax-efficient manner. At Chamlin, Uliano & Walsh, our experienced estate planning attorneys can help craft a legally sound will or trust, minimizing tax burdens and avoiding probate that may minimize the full value of your assets when bequeathing them to those you love after your death. Here, we provide a deeper view into the inheritance tax system’s inner-workings in New Jersey.
Need to Know: Estate Tax and Inheritance Tax are NOT Interchangeable in NJ
The New Jersey Estate Tax was enacted in 1934. The tax was levied on the entire estate’s value rather than the assets once they were distributed. The estate tax was not paid if the decedent was not a New Jersey resident. The estate had to pay an inheritance tax or an estate tax, whichever amount was greater. On December 31, 2016, estates worth $675,000 or less were exempt from paying an estate tax, while after January 1, 2017, until December 31, 2017, the exemption was $2 million. On January 1, 2018, the estate tax was eliminated.
On the other hand, the inheritance tax is a duty on property from a deceased person. In New Jersey, any property or assets transferred to a beneficiary by the deceased are subject to inheritance tax (subject to certain exceptions); it is based on the value of the asset. New Jersey residents are subject to an inheritance tax, and decedents who are non-residents and own real and tangible property in the state are also included. Real property is usually real estate, while tangible personal property can be any property that can be moved, such as cars, antiquities, or other valuables. The transfer inheritance tax is the tax placed on the value of the assets a beneficiary receives. The taxes must be paid within 8 months of the decedent’s passing. Sometimes, an heir may have to sell a part of what they are bequeathed to pay the tax if they receive items such as cars, jewelry, securities, or real estate.
Inheritance Tax Beneficiary Classes in New Jersey
For inheritance taxes, the beneficiaries are divided into classes A, C, D, and E. (Class B was eliminated with the 1963 tax reforms.) Beneficiaries are assessed taxes depending on which class they are in.
Class A Beneficiaries
Class A beneficiaries are the decedent’s husband, wife, or civil union partner, progeny, children of their progeny, children of the children of their progeny, step-progeny, and adopted progeny.
Class C Beneficiaries
Class C includes the decedent’s brothers, sisters, half-brothers, half-sisters, the spouses of their progeny, and the widow or widower of a deceased child.
Class D Beneficiaries
Class D includes all other beneficiaries not in the different categories, such as the daughter or son of their sister or brother, cousin, fiancé, or friend.
Class E Beneficiaries
Class E is reserved for charities and organizations that do not make a profit, which do not pay any taxes.
Inheritance Tax Exemptions for Different Beneficiary Classes in New Jersey
Classes A and E are entirely exempt, while Class C has an exemption of up to $25,000 and Class D of up to $500.
| Beneficiary Class | Exemption Amount |
| Class A & E | Fully exempt |
| Class C | Exempt up to $25,000 |
| Class D | Exempt up to $500 |
A Breakdown of Current New Jersey Inheritance Tax Rates
Classes A and E are not obligated to pay inheritance taxes. Beneficiaries in Classes B, C, and D must pay taxes based on the amount they receive. Beneficiaries in Class C who receive less than $25,000 are tax-exempt. Beneficiaries who receive $25,000 to $1,100,000 are taxed 11%, while those who receive $1,100,001 to $1,400,000 are taxed 13%. A tax of 14% is levied on amounts between $1,400,001 and $1,700,000; any amount over $1,700,000 must pay a duty of 16%. Class D beneficiaries who receive between $500 and $700,000 must pay a tax of 15%, and amounts over $700,000 pay a tax of 16%.
| Beneficiary Class | Inheritance Amount | Tax Rate |
| Class A & E | Any amount | No taxes |
|
Class C
|
$25,000 to $1,100,000 | 11% |
| $1,100,001 to $1,400,000 | 13% | |
| $1,400,001 to $1,700,000 | 14% | |
| Over $1,700,000 | 16% | |
| Class D | $500 to $700,000 | 15% |
| Over $700,000 | 16% |
Two Main Ways to Settle the Inheritance Tax Bill in NJ
There are two ways to settle the tax bill: the estate pays for it, or the beneficiaries are responsible for filing and paying their individual taxes. The decedent’s will should make this specification to avoid conflicts when the estate is settled. If the taxes are paid directly from estate funds, the executor will calculate the appropriate amounts and pay them just as they would any debts the estate has. Suppose it is not stipulated in the will. In that case, the residuary beneficiaries may balk at using estate funds to pay the taxes for those in Class C and D.
Residuary beneficiaries receive the balance of the estate once all bills and expenses are taken care of. They essentially would receive less of the estate if the taxes from other beneficiaries were paid beforehand. For example, suppose Cousin Crystal (Class D) is bequeathed $50,000, and Uncle Elmer gets $95,000. In that case, the estate will pay more than $20,000, subtracted from the assets, meaning the residuary beneficiaries receive less. To avoid this, it is best to stipulate how you would like the taxes to be paid in the will. If the estate does not pay the inheritance transfer tax, the beneficiaries are each responsible for paying based on the amount they receive.
Consult our South Jersey Law Firm to Ensure that Your Estate Plan is Optimized for Inheritance Tax Efficiency
No one enjoys talking about their passing, but if you want your loved ones to receive the assets of your estate, your wishes must be formalized. An attorney on our team at Chamlin, Uliano & Walsh can guide you through the process, creating a legal, sound last will and testament that outlines how you want your assets to be distributed. If you prefer, a trust can be designed to reduce the tax burden and avoid probate, ensuring that more of your estate passes to your beneficiaries. We are experienced estate planning attorneys serving clients in Wall, Manasquan, Red Bank, Long Branch, Holmdel, Middletown, Colts Neck, and elsewhere in Monmouth County and Ocean County. Our firm offers many options that can be tailored to meet your unique needs and bring critical tax benefits to your estate and beneficiaries.
With over 50 years of experience, our lawyers will work meticulously, providing you with all of the necessary information to help you make informed decisions and then help you formalize your decisions through the legal process. Call us today at 732-440-3950 to schedule a consultation, or complete our online form to get started on preparing your estate.