Inheritance tax will be the last remaining “death tax” in New Jersey, as of January 1, 2018. On that date, the state’s estate tax will disappear.
New Jersey Inheritance Tax
The “Transfer Inheritance Tax” is assessed against inheritances received by certain classes of beneficiaries. There are four classes:
- Class A beneficiaries: father, mother, grandparents, children, grandchildren, spouses, civil union partners, or domestic partners…. pay no inheritance tax;
- Class C beneficiaries: brother or sister of the deceased; husband, wife, widow or widower of a child of the deceased; civil union partner or surviving civil union partner of a child of the deceased….pay 11 to 16 percent, with the first $25,000.00 exempt;
- Class D beneficiaries: anyone else not otherwise listed above…pay 15 to 16 percent with no tax on transfers that have an aggregate value of less than $500.00;
- Charitable institutions are exempt from tax.
Inheritance Tax is due within eight months of the date of death to avoid interest. Any unpaid inheritance taxes can become a lien on real and personal property.
Inheritance Tax is Determined By the Deceased’s Relationship to the Beneficiary
Inheritance Tax assessment depends upon who is getting the inheritance. If an inheritance is left to a spouse or child, there is no tax. However, if something is left to a brother or sister, there is a fifteen percent tax, but only on the amount they are to receive. It is conceivable that an estate can experience all three classes of tax.
Inheritance Tax: Where Does the Money Come From?
The tax can be paid by the estate, or by the beneficiary. I will guess and say that most people have the estate paying the tax, and it states so in their Last Wills. In these cases, the Executor will write a check from the estate account and pay the tax. But this could cause some friction, because by the estate paying the tax, instead of the Class C or D beneficiary paying the tax on their particular inheritance, the residuary beneficiaries are paying it out of their share of the estate. Residuary beneficiaries are those that take the balance of the estate, as in “I leave all of the rest and remainder of my estate to my children equally”. Residuary beneficiaries get whatever is left in the estate after all bills and expenses are paid. If the inheritance tax is paid by the estate, this lessens what the residuary beneficiaries will receive. It may be that the residuary beneficiaries are Class A, but pay for the tax on Uncle Joe’s inheritance, anyway.
Another way for the tax to be paid, is for the Class C or D beneficiary to pay the tax out of what they have received. Sometimes a Last Will states that taxes will be paid by the beneficiary. If Uncle Joe is left $10,000.00, then the Executor will take the tax out of the $10,000.00, pay the State, and give Uncle Joe the balance. This is seen as “fair”, but your Last Will has to specifically state how the tax is to be paid.
Tax Planning is Part of Estate Planning
Taxes of all types should be considered when you are considering the details of your estate. Writing a will is not just a document. You should know the consequences of your gift giving. The attorneys at Shanahan & Voigt can help. Give us a call.