The Impact of New Jersey Inheritance Taxes on Estate Planning
Ensuring the orderly transfer of one’s estate and assets after death is an important responsibility. This often results in the creation of an estate plan that identifies potential tax issues, explores tax-saving strategies, and implements them over time. All of this is designed to limit exposure to various federal and state taxes which may be imposed on beneficiaries. Increases to the federal estate tax exemption limit ($11.58M for individuals and $23.16M for married couples in 2020) and the elimination of the New Jersey estate tax have left many believing there is no need for an estate plan. While these changes are certainly welcome news for many, it is essential not to forget about inheritance tax planning. The New Jersey Inheritance Tax is imposed on inheritances with the tax rate determined by the relationship between the decedent and beneficiary. For example, immediate relatives such as children, parents, or spouses pay no tax, whereas others are required to do so. There are key points to consider.
Inheritance Tax Classes
The state uses beneficiary classes to determine how the taxes will be assessed. These classes include:
- Class A Beneficiaries– These include the decedent’s spouse, civil union partner, children, grandchildren, great-grandchildren, stepchildren, mother, father, or grandparents. These beneficiaries are exempt from paying inheritance taxes.
- Class B Beneficiaries – This class is not currently used.
- Class C Beneficiaries– This includes the decedent’s siblings, half-siblings, son or daughter in law, and widow/widower of deceased children. These beneficiaries are required to pay tax on amounts greater than the $25,000 exemption. Amounts higher than $25,000 are taxed at rates between 11% and 16%.
- Class D Beneficiaries – This includes everyone not listed in other categories such as a niece, nephew, and friends. There is no tax if the amount transferred is $500 or less. Amounts higher than $500 are taxed at rates between 15% and 16%.
- Class E Beneficiaries– This includes tax-exempt organizations such as charities, religious institutions, and other non-profit organizations. These beneficiaries are exempt from paying inheritance taxes.
Tax Planning Considerations
While there is far less focus on estate planning with the recent changes, it’s important to consider how the inheritance tax may impact your situation carefully. Many believe if they leave assets in their will, then the tax is avoided, but this is not always the case. There are several situations in which exceptions may occur, such as;
- Retirement/Annuity Accounts– Assets held in these types of accounts will pass to the named beneficiary. If they are someone other than a Class A beneficiary, the inheritance tax is triggered, and an inheritance return must be filed.
- Three Year Lookback – Any gifts made before the decedent’s death are subject to a three-year lookback period as they are considered gifts in contemplation of death. If a gift over $500 was given to someone other than a Class A beneficiary (i.e., sibling, niece, nephew, cousin, or friend), then an inheritance tax return must be filed.
- Asset Titling After Death– It may surprise some to learn the way an asset is titled may also create a tax exposure. It’s common for an individual to add another person to a bank account to ensure bills can be paid if they become incapacitated or worse. Upon death, the account will pass to the joint owners. If this person is anyone other than a Class A beneficiary, there could be an inheritance tax requirement.
There are many strategies available to plan for the inheritance tax. Our team of seasoned estate planning professionals can review your situation and determine the best way to move forward. If you have questions about the information above or need assistance with another estate or trust issue, Klatzkin can help. For additional information, call us at 609-890-9189 or click here to contact us. We look forward to speaking with you soon.