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Be aware of how the inheritance tax could affect family finances

New Jersey taxpayers expecting an inheritance may also receive something else less pleasant along with it - a hefty inheritance tax. A recent article by The Motley Fool discusses the inheritance tax some states charge to generate additional revenue for themselves. According to the article, New Jersey charges taxes in the 11 percent to 16 percent range. Five other states also charge an inheritance tax, but New Jersey tops the list.

Estate taxes are not the same as inheritance taxes. States collect estate taxes before the heirs receive any payouts, so there is no chance of an estate tax liability afterwards. Inheritance taxes work differently in that the recipient of an inheritance may be required to pay the state a portion of it, to take care of the inheritance tax liability. When drawing up a will and planning for the distribution of assets, families need to know this information to avoid nasty surprises.

But there's a silver lining to this. New Jersey has a long list of family members who may be exempt from the estate tax, such as spouses, parents, grandparents and descendants. Domestic and civil union partners are also exempt. Siblings of the deceased or spouses of a child or other descendants are eligible for exemptions of as much as $25,000, and distant relatives can receive a $500 exemption before the state levies the tax.

Suddenly facing an unexpected inheritance tax bill after someone dies can make it more difficult to pay for medical and funeral expenses. Failure to pay taxes is a guaranteed red flag for the state revenue department. Honest hard-working families need good legal information on how estate planning and inheritances can impact their tax status. Those worried about how this law will affect them and their loved ones can get answers specific to their situation from an attorney specializing in estate planning.

Source: The Motley Fool, "These 6 States Tax Inheritances the Hardest", Dan Caplinger, May 18, 2013

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