Life’s Certainties: Death and Taxes

Author: Wolfe Ossa LawCategories: Estate, Trust, Wills

 

New Jersey previously imposed two death taxes – estate tax and inheritance tax. However, as of 2018, the estate tax was completely repealed, leaving only the lesser-known inheritance tax. Inheritance taxes are based upon the beneficiary’s relationship to the decedent.

New Jersey categorizes beneficiaries into “classes.”

The specific class that a beneficiary falls into dictates how much, if any, inheritance tax will be attributable to an asset passing to such beneficiary. The classes of beneficiaries are as follows:

Class A: This class includes a surviving spouse, civil union or domestic partner of a decedent; a father or a mother of the decedent, a grandparent of the decedent, child or children of the decedent; stepchildren of the decedent; and any child or children adopted by the decedent. Class A beneficiaries pay 0% inheritance tax.

Class C: This class includes a brother or sister of the decedent; and son- or daughter-in-law of the decedent. They receive a $25,000 exemption, any amount over that is taxed under a tiered system.

Class D: Any other beneficiary not specifically otherwise classified falls into Class D. This includes beneficiaries such as step-grandchildren, nieces, nephews, cousins, significant others, and friends. Class D beneficiaries receive no exemption but also pay on a tiered basis.

Class E: Tax-exempt charities and governmental bodies can receive any amount from an estate without incurring inheritance tax.

No, we didn’t miss anyone, there are no Class B beneficiaries.

Certain assets may be exempt from inheritance tax, regardless of the beneficiary. For example, life insurance is usually exempt from inheritance tax, so long as an entity or living individual is named as the beneficiary. If the life insurance becomes part of the decedent’s taxable estate it may be subject to inheritance tax.

If there is inheritance tax owed, the decedent’s estate is legally required to file a New Jersey Inheritance Tax Return, as well as pay the tax due to the State, within 8 months of the decedent’s death. Preparing an inheritance tax return can be a daunting task for any Executor, and even CPAs, given that you must obtain the values for all of the assets the decedent owned as of the date of his or her death, even if some of the assets are going to tax-exempt beneficiaries. Once all of the assets are properly valued, the tax must be calculated based on the various classes of the taxable beneficiaries.

It is important to note that a person can specify in his or her estate planning documents how any inheritance taxes attributable to his or her estate are to be paid. Specifically, a person can provide that the taxes are to be apportioned among the beneficiaries or paid from the decedent’s residuary estate. To apportion the tax means that each beneficiary is responsible for his or her respective tax based on the amount that he or she is inheriting. The tax is then generally deducted from his or her respective share of the estate prior to distribution. Alternatively, if a person states that the taxes are to be paid from the estate, the total amount of the tax will be paid off the top of the residue. However, if your estate has different classes of beneficiaries, providing that the estate is to pay the inheritance taxes can create unintended results.

If you have any questions about New Jersey inheritance tax, or any other estate planning or estate administration matter, please call our office to schedule a consult with one of our attorneys.

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