While New Jersey no longer has an Estate Tax (eliminated in 2018), it still has what is known as an Inheritance Tax. Of course, there is still a Federal Estate Tax, but that only applies to estates in excess of $12.06 million so for most of us, that is a non-issue. Unlike the Federal Estate Tax that is imposed based on the amount of money in the estate, the New Jersey Inheritance Tax has to do with who is inheriting the estate and the relationship between the beneficiary and the decedent. Essentially, there are four classes of beneficiaries (here is a helpful link):
Class “A” beneficiaries include the decedent's spouse, parents, children and grandchildren and are exempt from any Inheritance Tax.
Class “B” (was eliminated)
Class “C” beneficiaries include the decedent's siblings and are taxed as follows:
- No tax on the first $25,000
- The next $1,075,000 is taxed at 11%
- The next $300,000 is taxed at 13%
- The next $300,000 is taxed at 14%
- Anything over $1,700,000 is taxed at $16%
Class “D” beneficiaries include all others such as nieces, nephews and other distant relatives as well as friends (essentially anyone not included in Classes A, C, or E) and is taxed as follows:
- First $700,000 is taxed at 15%
- Anything over $700,000 is taxed at 16%
Class “E” beneficiaries are essentially non-profits, though you have to be careful since not all non-profits per the IRS are exempt from the New Jersey Inheritance Tax.
In light of this taxing scheme, you have to be mindful of who you are designating as beneficiaries in your will and who will be responsible for paying the Inheritance Tax. For instance, if you leave $10,000 to your nephew, does the $1,500 tax come out of the nephew's gift (netting him only $8,500) or should the tax be paid from the gross estate leaving the nephew with the full $10,000 gift? Most people would want the nephew to receive the full $10,000, but if that is the case, the will needs to make this clear. Otherwise, the tax will be assessed against the inheritance itself, leaving your nephew feeling gipped (and no one wants a "gipped" feeling nephew!).
Here is a helpful link to the tax table. And here is a link to the actual Inheritance Tax return.
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