Basic NJ Estate & Inheritance Tax Planning
Feb 25, 2021 | Written by: Share|
New Jersey has two death tax systems that are mutually exclusive: the estate tax and the inheritance tax. Prior to January 1, 2018, NJ levied an estate tax on the value of the gross assets of an estate, less an exemption amount that was allowed to pass to the beneficiaries estate-tax free. Until December 31, 2017, that estate tax exemption was $2 million. If the value of the gross estate exceeded $2 million, an estate tax of approximately 10% would be imposed on all except spousal beneficiaries. However, New Jersey paused its estate tax effective January 1, 2018.
The New Jersey inheritance tax remains effective, but it only applies to what are called “non-Class A” beneficiaries. Class A beneficiaries include a spouse, children, grandchildren, parents, and grandparents. Stepchildren are considered to be Class A beneficiaries, however, step-grandchildren are not. All non-Class A beneficiaries are subject to a flat 15% inheritance tax. One exception is in the case of siblings, who enjoy a $25,000 exemption and an 11% inheritance tax rate.
Spouses are exempt from NJ inheritance and estate tax. Marital tax planning techniques can be used to leverage this exemption to benefit the family.
Life insurance proceeds are exempt from NJ inheritance tax if the proceeds are payable to a named beneficiary. Life insurance that is paid to the decedent’s estate and then distributed as an estate asset to non-Class A beneficiaries is subject to the NJ inheritance tax.
A legal consultation is recommended to discuss how the above rules apply to your family. This is particularly important because it is quite possible that the New Jersey estate tax will soon be reinstated to the level it was prior to January 1, 2018. All New Jersey residents should have a basic understanding of marital tax planning and how the New Jersey inheritance tax and New Jersey estate tax systems work. Call us for a consultation. We have several experienced estate planning attorneys in our Trusts and Estates Group who can assist you.