Understanding New Jersey Death Taxes: Part I

When an individual dies there are a variety of taxes to which his estate and heirs are subject.  These include federal and state estate taxes, federal and state estate income taxes, the generation skipping transfer tax, the gift tax and state inheritance taxes.  For residents of the State of New Jersey, death triggers two taxes known as the New Jersey Transfer Inheritance Tax and the New Jersey Estate Tax.  The New Jersey Transfer Inheritance Tax is a tax on the heirs of an estate.  The New Jersey Estate Tax is a tax upon the estate itself and is based on the size of the estate.  This article shall focus on the New Jersey Transfer Inheritance Tax.

The inheritance tax is a transfer tax imposed on the transferee’s right to receive a gift, devise, or bequest from a decedent. Unlike the estate tax, it is imposed directly upon the beneficiary, not the estate. However, for planning purposes, it should be noted that the personal representative of an estate, through a will, can be directed to allocate the payment of this tax from the residuary estate, among other alternatives.  If the Will is silent, the tax is to be allocated among each beneficiary by said beneficiary’s tax class.

The tax is calculated after determining the value of property that may be received by a particular beneficiary against the relationship of the beneficiary to the decedent. As to this latter factor, the state establishes a different tax rate and amount of exemption from this tax, depending on the relationship of each beneficiary to the decedent.

Classifications of Transferees

The State of New Jersey created the following five categories of beneficiaries subject to the inheritance tax:

  1. Class A: Includes surviving spouses, parents, grandparents, children, grandchildren. and any other lineal ancestor or descendant;
  2. Class B: Repealed;
  3. Class C: Siblings, as well as daughters-in-law and sons-in-law:
  4. Class D:More distant relatives and other individuals: and
  5. Class E: Tax exempt charities and governmental bodies. Specifically, these transferees include the State of New Jersey and any political subdivision thereof; any educational institution, church, hospital, orphan asylum, public library or Bible and tract society or to, for the use of or in trust for any institution or organization organized and operated exclusively for religious, charitable, benevolent, scientific, literary or educational purposes, including any institution instructing the blind in the use of dogs as guides, no part of which inures to the benefit of any private stockholder or other individual or corporation; provided, that the exemption does not extend to transfers of property to such educational institutions and organizations of other states, the District of Columbia, territories and foreign countries which do not grant an equal, and like exemption of transfers of property for the benefit of such institutions and organizations of New Jersey. N.J.A.C. 18:26-1.1.

Inheritance Tax Rates

Pursuant to statutory law, the aforementioned beneficiaries are taxed at the following rates:

  1.  Class A: beneficiaries are completely exempt from the inheritance tax N . J . S. A. 54:34-2, et.seq.;
  2. Class C: beneficiaries are each entitled to an exemption for the first $25,000.00. Thereafter, they are taxed at the following rates, pursuant to N.J.A.C. l8:26-2.7:
    • Taxable Inheritance Net Tax % on Excess
      $25,000.00 $0 11%
      $1,100,000 $118,250.0 13%
      $1,400,000.0 $157,250.0 14%
      $1,700,000.00 $199,250.0 17%
  3. Class D beneficiaries are entitled to an exemption of $499.00 each. Thereafter, they are taxed at the following rates, pursuant to N.J.S.A. 54:34-2(d):15% on any amount up to $700,000.00, and16% on any amount in excess of $700,000.00.Interestingly, the tax on Class D transferees has a cruel twist in that a bequest in the amount of $500.00 or greater is taxed retroactive to the first dollar. Thus, an individual who receives $499.00 from an estate pays no tax, yet an individual who is to receive $500 must first pay a tax of $75.00 before receiving his or her net inheritance of $425.00.
  4. Class E beneficiaries are totally exempt from the inheritance tax. N.J.S.A.54:34-4.ValuationProperty must be appraised on its clear market value as of the date of death. N.J.A.C. 18:26-8.10. This rule applies not only to post-mortem transfers, but certain inter vivos transfers which are deemed taxable as well (as noted in following section).Transfers Subject to Inheritance TaxThe following transfers are subject to the inheritance tax:
    • transfers by will;
    • transfers by intestacy;
    • transfers of jointly held property in which a beneficiary inherited by right of survivorship;
    • transfers, such as revocable trusts and annuities, which are intended to take effect upon or after death; and
    • transfers made within three years of death. This last category presumes that gifts made three years prior to death were in contemplation of death and were only made to avoid the inheritance tax. However, this presumption is can be rebutted.

Exempt Transfers

Certain transfers are exempt from the inheritance tax. Such exempt transfers include:

  1. exemptions for each class of transferee, as detailed in Subsection 2, entitled “Inheritance Tax Rates”, above;
  2. most public employee pensions and annuities; and
  3. most notably, life insurance proceeds which are payable to a named beneficiary other than decedent’s estate, executor, trustee, or administrator.

Deductions

Permissible deductions include, but are not limited to:

  1. reasonable funeral and burial expenses;
  2. reasonable administrative expenses, including attorneys’ fees and accountants’ fees;
  3. commissions for the executor or administrator, as set for in the state’s regulations:
  4. expenses for last illness; and
  5. debts due and owing on the date of death so long as such debts actually diminish the estate.
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  1. Donald Curtis says:

    If the decedent is from another state and you live in New Jersey
    ( Class D Under 50k)
    1. Is there inheritance tax due OR
    2. Is the money you receive taxable as ordinary income OR
    3. Is it tax free
    Tx

    • Donald, inheritance is based on the State in which the decedent resided not where the beneficiary lives. So, for example, if the decedent lives in a state like Florida where there is no inheritance tax, no inheritance tax is due from anyone. An inheritance is not income. It is tax free except if there is deferred income in the asset itself such as as IRA, bonds or annuity. For example, if you inherited an annuity worth $200,000, of which $50,000 was deferred income, you don’t pay tax on the $200,000 but you pay tax on the $50,000 when you withdraw from it or cash it out.

  2. Mike Reynolds says:

    My wife is executor of her unmarried and childless uncle’s estate. The will states that the share of the house he lived in with my wife’s 90 year old father Is to be be divided between my wife and her sister. The only other specific asset mentioned in the will are shares of stock her uncle owned and they are to be divided between my wife and another cousin (a niece via a sister to the decedent and my wife’s father). Other assets covered under the probated will are a small checking account and a modest savings account. All other assets were CDs that were set up with specific people listed on them as POD (my wife and her father). There is wording in the will that states “I direct tat all successions, legacy, inheritance, death, transfer or estate taxes, duties, charges or assessments payable by reason of my death, regardless of whether such property upon which said taxes may be assessed passes under this Will or otherwise, be paid by my Executor out of the residue of my estate. I further direct that no part of said tax shall be paid by the recipient of such property.” When my wife takes into account the inheritance tax due on the house (share going to my wife and her sister), the stock (coming to my wife and her cousin), the checking account, the savings account, and the multiple CDs (that were listed as POD to my wife and her father), there is not enough money in the checking and savings account to cover funeral expenses and all of the due inheritance taxes. In light of the language in the will, where should funds be drawn from to cover inheritance taxes and funeral expenses that are above and beyond what were in the checking and savings accounts that were part of my wife’s uncles estate?

    • Mike, there is no language that one can put into a will that will negate the obligation to pay death taxes. Assuming this is a NJ estate, we are dealing with the inheritance tax. The tax is imposed upon the estate beneficiaries based on their relationship with the decedent. However, a clause in the Will can allocate how it is to be paid. In this case, the tax is initially to be paid from the residuary estate. To the extent to the residuary estate is insufficient, the specific bequests will need to be liquidated. The manner in which that should be done far exceeds the scope of this type of forum as there are considerations to undertake to insure the executor is not liable for any potential claim about how or what should be sold to pay the tax. I would urge you to consult a competent estate attorney to assist your wife in this regard.

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