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 Class B: Repealed;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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Thomas D. Begley, III

About the Author

Thomas D. Begley, III is the co-chair of the Trusts & Estates Group at Capehart Scatchard. He is a Certified Elder Law Attorney (CELA) who earned both his undergraduate and law degrees from Georgetown University, located in Washington, D.C. He concentrates his practice in the areas of estate and tax planning, estate administration, small business representation, elder law, and probate litigation. He is an accomplished author and lecturer who has frequently spoken on behalf of the National Academy of Elder Law Attorneys and the New Jersey Institute for Continuing Legal Education as well as other professional organizations. He has been named a “Super Lawyer” as voted by his peers and facilitated by New Jersey Monthly in the area of Trusts and Estate Litigation on numerous occasions. He has attained the prestigious AV rating by Martindale-Hubbell.

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