Inheritance and Estate Tax in New Jersey
Last Updated: July 05, 2022 • 8 min read
Author: Zach L.
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The inheritance tax in New Jersey ranges from 0%-16% depending on the heir’s relation to the decedent. Currently, there is no state estate tax in New Jersey.
New Jersey has an inheritance tax of up to 16%, and it is all determined by how you are related to the deceased. If the decedent was a New Jersey resident or owns real property or tangible property in New Jersey their heirs may owe taxes on their inheritance.
Iowa, Kentucky, Maryland, New Jersey, Nebraska, and Pennsylvania are the six states that continue to have an inheritance tax. New Jersey also used to have an estate tax, but that was repealed and no longer claimed against the estate of anyone who passed away after January 1, 2018.
New Jersey Inheritance Tax Rate Classes
There are five different classes of inheritance tax rates in New Jersey. They range from the spouse at 0% to a fiancé at 16%, no matter the value of the estate these classes still apply. The class distinctions and tax rates are as follows.
Class A. The inheritance tax rate for this class is 0%. This class pertains to the deceased’s surviving spouse or domestic partner, children/step-children, grandchildren, great-grandchildren, parents, and grandparents.
Class B. This class was removed in 1963.
Class C. The inheritance tax rate for this class ranges from 0%-16%. Class C beneficiaries are the deceased’s sons-in-law, daughters-in-law, siblings/half-siblings, and spouse of a deceased child. The tax rates work like the federal income tax, and are broken down into these categories:
- $0 - $25,000 taxed at 0%
- $25,001 - $1,100,000 taxed at 11%
- $1,100,001 - $1,400,000 taxed at 13%
- $1,400,001 - $1,700,000 taxed at 14%
- $1,700,001+ taxed at 16%
Class D. The inheritance tax rate for this class ranges from 0%-16%. This is the catchall class, Class D beneficiaries are any heir that doesn’t get classified into Class A, C, or E. A few examples are a cousin, friend, fiancé, nephew, niece, step-grandchild, or non-civil union partner. The tax rates here also work like federal income tax rates and are broken down into the following categories:
- $0 - $500 taxed at 0%
- $501 - $700,000 taxed at 15%
- $700,001+ taxed at 16%
Class E. The inheritance tax rate for this class is 0%. Class E beneficiaries are entities that are tax-exempt like not-for-profit organizations and charities. It also includes donations to the state of New Jersey, any of its political subdivisions, an educational institution, or many charitable purposes.
New Jersey Inheritance Tax Exemptions
There are a few exemptions from the New Jersey inheritance tax. Things like small transfers under $500, life insurance policy payouts to named beneficiaries, and New Jersey public employee pensions. Here’s a more in-depth breakdown.
- Annuities that are paid by the United States government. These include the Survivor Benefit Plan and the Retired Serviceman’s Family Protection Plan. These must have a beneficiary that is not the estate of the annuity holder.
- Life insurance that is paid to any named beneficiary. The important note is that the life insurance needs to have a named beneficiary.
- Any inheritance transfer that is under $500. So you could pay $500 to a lot of people and they wouldn’t have to pay inheritance tax on that inheritance.
- Federal Civil Service Retirement benefits. Like the other exemptions, this also needs to be in the name of a beneficiary and not in the name of the decedent’s estate.
- Pensions that are paid for being employed by the State of New Jersey. These include but are not limited to the New Jersey Teachers’ Pension, New Jersey Police and Fireman’s Retirement System, and the New Jersey Public Employees Retirement System.
Taxable Gifts
New Jersey taxes gifts made within three years of death if the gift would qualify as a material part of the estate. This could include a baseball card collection, a car collection, paintings, etc. If the heir is exempt using the classes of beneficiaries above there is no concern. If not, then it is essential to prove whether or not the decedent was gifting in contemplation of death.
If the decedent did not gift in contemplation of death, the gift falls under the gift tax laws and is not subject to New Jersey inheritance tax. This is to block the avoidance of the inheritance tax through gifting shortly before passing.
FAQ
Is Inheritance Money Taxable in NJ?
Yes. Depending on the inheritance tax class that you as an heir fall under you can owe up to 16% of your inheritance. If you are a direct descendent, spouse, or direct ancestor of the decedent your inheritance is tax-exempt.
Inheritance tax can be avoided by the estate owner using a revocable trust while they are alive, and working with an estate planner to correctly plan the future of their estate after they pass on.
What is NJ Transfer Inheritance Tax?
The New Jersey Transfer Inheritance Tax can range from 0%-16% it all depends on how close genealogically speaking the heir is to the deceased. The Transfer Inheritance Tax can also be referred to as an inheritance tax, but shouldn’t be confused with an estate tax. New Jersey used to have an estate tax as well but eliminated that New Jersey law in 2018.
Do Beneficiaries Have to Pay Taxes on Inheritance?
Maybe. Depending on the state the deceased person was a resident in. If they were a resident of New Jersey, the answer is yes. On top of that, if there is an executor of the will they will file the corresponding inheritance tax return to pay the necessary inheritance taxes that are owed by the estate of the deceased. This could include offloading real estate, accessing bank accounts at a financial institution, intangible personal property, etc to pay the debt.
What if there is no executor of the will? What if there is no will, but it is determined in probate that you are the heir to a large inheritance in New Jersey? Yes, you’ll be paying the taxes on the inheritance that you received.
There are other cases like tax-advantaged retirement accounts, rental property income, etc that all provide taxable events for an heir as well. This is why it is imperative to consult with professionals to plan your estate and lower the tax burden on your heirs. Would you rather leave them a small slice of the pie or the entire pie?
Who Pays NJ Inheritance Tax?
It depends. If you fall in Class A, or E you pay no inheritance tax at all. If you are in Class C or D you could be paying upwards of 16% on your inheritance. If you are a direct descendent or direct ancestor, you will be classified in Class A and have no tax liability. However, if you are a friend or even a fiancé of the decedent you are looking at a minimum inheritance tax rate of 15%.
How Do I Avoid Inheritance Tax in NJ?
To avoid the inheritance tax in New Jersey, be directly related to the deceased. If that isn’t an option there are a few estate planning options to use before the estate owner passes away. They can use a gifting strategy, revocable trusts, etc.
Finding a trusted professional for estate planning will be key to a successful plan for the distribution of an estate, large or small. They can help determine which legal entities make the most sense for structuring the estate, whether it makes sense to start gifting money to your heirs many years before the date of death, if you should invest in assets now so the step-up basis can be of benefit to your heirs in the future, etc.
Final Thoughts
New Jersey is one of six states that still have an inheritance tax. This has been referred to as "death taxes" or the new "NJ estate tax", but it is really an inheritance tax. Usually, the executor of the will manages the payment of the inheritance tax. There are many ways to legally avoid inheritance tax.
Discuss your estate plans with a legal advisor as we are not legal professionals. The more information you can consume the better plan you can put in place while planning your estate.
