While the estates of all Americans are subject to federal taxation if the value transferred to heirs exceeds the statutory exemption amount, not many states have separate inheritance taxes. However, New Jersey is one of those jurisdictions, so it is important for Garden State residents to understand when an inheritance tax is applied as you develop or refine your estate plan.
There are a few key differences between an estate tax and an inheritance tax. First, estate tax is collected by the federal government before the proceeds of a decedent’s estate are distributed to beneficiaries. Conversely, the inheritance tax is applied after heirs have received their bequests.
Moreover, different beneficiaries can be subject to varying treatment under the inheritance tax, depending on their relationship to the deceased. New Jersey categorizes heirs into the following four classes, each with its own tax rate and exemption thresholds:
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Class A beneficiaries — Spouses, domestic partners, parents, children and grandparents of the decedent are exempt from New Jersey’s inheritance tax.
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Class C beneficiaries —This group includes a decedent’s siblings, sons-in-law, and daughters-in-law. For Class C beneficiaries, the first $25,000 is exempt from taxation. After that, the tax rate is 11 percent up to $1.1 million. As the inheritance increases, the tax rate does as well, up to a maximum level of 16 percent for the amount that exceeds $1.7 million.
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Class D beneficiaries — Any individuals not covered under Class A or Class C, such as friends, distant relatives or other unrelated heirs, are grouped within Class D. For these heirs, the first $700,000 of a bequest is taxed at 15 percent, with the rest taxed at 16 percent.
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Class E beneficiaries — Charitable organizations, religious institutions and certain government entities are fully exempt from New Jersey’s inheritance tax.
For New Jersey residents with sizable estates or unique beneficiary relationships, understanding the inheritance tax is essential for estate planning. Strategies such as gifting assets during one’s lifetime or setting up trusts can help reduce the tax burden on beneficiaries. If you seek to understand how inheritance tax will affect your heirs or you are a beneficiary unsure about what you might owe, consulting an attorney familiar with state inheritance tax laws is a smart step.
Frieri Law Group in Cranford advises residents of Union, Morris and Somerset counties, as well as other New Jersey locations, regarding inheritance tax issues as well as other estate concerns. To make an appointment, please call 908-883-3390 or contact us online.