Estate & Inheritance Taxes in New Jersey

Estate

This month’s column deals with Estate & Inheritance Taxes especially for residents of New Jersey. Let me give you a quick explanation of how an estate tax differs from an inheritance tax. Quite simply, the estate tax is based upon what you own (for example, cash, real estate, stock and other assets) when you die. Whereas the inheritance tax is based upon what you own AND who receives your estate when you die.

The estate tax you most read about is the Federal estate tax. Only the wealthiest in the country pay this tax. The current amount of assets exempt from this tax is $5.25 million per individual ($10.5 million per married couple). This means that a husband and wife with an estate of $10.5 million or less can pass their estates on to their heirs without having to pay a federal estate tax estate tax with proper planning. It is estimated that only 1.4 out of every 1000 estates (0.14%) would have owed any estate tax in 2013 according to the Tax Policy Center.

Unfortunately for New Jersey residents, the exemption is not $5.25 million per individual – it is $675,000. In my experience, most New Jersey residents are not aware of the NJ estate tax. With proper planning a New Jersey couple can pass to their heirs $1.35 million free of the NJ estate tax. NOT $10.5 million! Utilizing trusts in your estate plan can go a very long way in reducing NJ estate taxes.

Now let me turn your attention to the NJ Inheritance tax. This is the death tax most people are familiar with who reside in New Jersey. Again, this tax is based upon who receives your estate, classes of beneficiaries, and their relationship to the deceased.

Class A beneficiaries include father, mother, grandparents, spouses, civil union partner or domestic partner after 2/19/07, children and grandchildren. Class A beneficiaries are exempt from the inheritance tax.

Class B beneficiaries were exempted from this tax in 1963.

Class C beneficiaries include brother or sister of the deceased as well a spouse of a child.

The Rate for Each Beneficiary

First $ 25,000 No Tax
Next $1,075,000 @ 11%
There are other break points after $1,100,000 however for the purpose of this column I will omit.

Class D beneficiaries include all others such as cousins and friends.

The Rate for Each Beneficiary

First $700,000 @15%
Over $700,000 @16%

Class E beneficiaries include charities and they are exempt from this tax.

Here is one quirk in the Inheritance Tax for Class D beneficiaries. Let’s assume you want to bequeath $500 each to various friends. Don’t!! Instead, bequeath $499 to each of these friends. Why, because if you leave $500 to a Class D beneficiary they will be subject to a $15 inheritance tax whereas $499 is exempt from tax for this class of beneficiaries.

Here is another quick NJ Inheritance tax planning point. Let’s assume you want to leave your daughter and her husband a $100,000 bequest. Don’t!! Why? Because, $50,000 will be exempt because your daughter is an exempt beneficiary. However, her husband is treated as a Class C beneficiary. His $50,000 will be subject to a $2750 tax. The first $25,000 is exempt and the remaining $25,000 is subject to an 11% tax or $2750. Just leave the $100,000 to your daughter and let her share it with her husband.

You may think that because you may have all Class A beneficiaries there will be no tax due on your Estate. It is true that there will be no Inheritance Tax but remember if your estate is over $675,000 you will owe an Estate Tax to New Jersey.

Planning is so important no matter the size of your estate. Each state has their own rules so please check with a trusted professional.

This month’s topic relates in part to last month’s column concerning your choice of executor. You certainly don’t want to choose an executor that will be learning “on-the-job” especially when it comes to tax issues.

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About Ira Brower

I have been in the financial service industry for more than 40 years primarily providing wealth management solutions for retired and soon-to-be retired individuals. I am President and Founder of Garden State Trust Company. Our clients depend on us for elder care solutions, such as; trust and estate planning, investment services, and lifestyle management. We also administer to “special needs” or “supplemental needs” trusts. www.gstrustco.com

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