The Tax Man Cometh – New Jersey Transfer Inheritance Tax

Most of us pay taxes our entire lives – income taxes, property taxes, sales taxes, gasoline taxes, and more. It seems like everywhere we turn, there is some sort of tax to be paid to a municipal, state or federal government agency.   Unfortunately, this pattern doesn’t end when we pass away.

Depending on many factors, the New Jersey state government might take a tax bite out of any money you leave to your heirs. In fact, some people are subject to two separate taxes – the NJ Estate Tax and the New Jersey Transfer Inheritance Tax. Here, we are only addressing the Inheritance Tax.

Generally, a bequest over $500 will automatically trigger the Inheritance Tax. It’s a graduated tax – so the more you leave behind, the more it will be taxed.  The beneficiaries are also required to go through the hassle of filing an inheritance tax return. That’s the bad news. The good news is that you can leave money to several classes of people without triggering the inheritance tax.

Decedents can leave money (or its equivalents) or personal property to most immediate relatives without triggering the tax, including:

• Spouses
• Domestic partners
• Children
• Grandchildren
• Stepchildren
• Parents
• Grandparents

In most cases, beneficiaries who are immediate relatives are also spared the inconvenience of filing a return.

A 2005 decision of New Jersey’s Chancery Division extended the tax exemption to children who receive a bequest from a non-biological parent who is in a domestic partner relationship with the biological parent of the children.  Although, the recent Supreme Court decision requiring states to issue and recognize same sex marriage licenses likely rendered this tax exemption void.

If you intend to make bequests to non-relatives, you might consider making a living gift rather than including the person in your will. Before doing so, it is important to contact a qualified estate attorney. Depending on the nature and timing of the gift, it may be deemed a substitute for a bequest, and thus remain subject to the inheritance tax.

If you intend to leave substantial assets to non-relatives, your estate might also benefit from a trust created during your lifetime. Given the ever-changing nature of our tax laws, and the inherent complexity of estate law, it is highly recommended that anyone considering such an arrangement obtain timely advice from a qualified professional. A knowledgeable estate planning attorney can assess the needs and intentions of the testator and develop an overall estate plan. For counsel on estate planning in Union or Hunterdon counties, contact Alec Borenstein, Esq., at alec@bmcestateplanning.com or call 908-236-6457 today.