New Jersey remains one of the few States that imposes an inheritance tax. The inheritance tax is not based on the size of the estate, but on who receives the estate. There is no inheritance tax imposed on transfers to a parent, grandparent, spouse, domestic partner, child or step-child (Class “A” beneficiaries). Inheritance tax is, however, imposed on transfers to nieces and nephews (Class “D” beneficiaries). The tax rate is between 15%-16% depending on the amount transferred. Transfers made within three years of death are presumed to be “in contemplation of death” and, may, also, be subject to inheritance tax. In addition, transfers intended to take effect at or after death are included in one’s estate for inheritance tax purposes.
Due to the inheritance tax, it would be financially advantageous to gift funds to your nieces and nephews during your lifetime (if you can afford it and the gifts do not compromise your own standard of living). This could be accomplished by outright gifts or the payment of your nieces’ and nephews’ medical costs or educational expenses. Inheritance tax can also be avoided through the use of an irrevocable trust under certain circumstances. The trust can be used to pay expenses for the benefit of your nieces and nephews as well. This, however, requires giving up control and use of the assets placed in trust. You cannot have the right to revoke, amend, modify or regain a beneficial interest in the trust. Likewise, the transfer of the trust property to your nieces and nephews cannot be specifically triggered by your death.
In addition, life insurance paid directly to your nieces or nephews (or any beneficiary, including a testamentary trust) is not subject to inheritance tax. As a result, if you designate your nieces and nephews as a beneficiary of a life insurance policy no inheritance tax will be imposed. If you are insurable, you can use a portion of your liquid assets to fund a life insurance policy.
Inheritance Tax is imposed on residents of New Jersey and non-residents owning real or tangible personal property in New Jersey. (The tax is not based on where the beneficiary resides). Accordingly, a simple way to avoid or reduce the inheritance tax is to change domicile to a State that does not impose an inheritance tax (which is every State other than Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania).
Originally appeared on NJBIZ Biz Brain December 2019.
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