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What is the impact of New Jersey’s inheritance tax?

On Behalf of | Jan 7, 2021 | Inheritance And Estate Tax |

Most people dread the prospect of having taxes levied on their estate. While this event happens to few people, the amount that taxes can reduce an estate’s value by is significant. In New Jersey, though, not only could your estate face taxation, some of your beneficiaries could as well. Because the state has an inheritance tax, it is important to understand whether – and how – it could affect them and how you can mitigate its impact.

How New Jersey’s inheritance tax works

Since 1892, New Jersey has imposed an inheritance tax on the transfer of assets from decedents to their beneficiaries. Some of your beneficiaries – like your immediate family – can receive their share of your estate tax-free. Most other beneficiaries to your estate, though, will have to pay taxes on their inheritance. Your beneficiaries’ tax burden will depend on their relationship with you, as well as the value of your estate and their inheritances. Likely, though, they will lose between 11% to 16% of their inheritances to taxes.

Reducing your beneficiaries’ inheritance tax burden

If your beneficiaries could shoulder a significant tax burden once you die, you have ways to reduce its impact. For one, you have the option of transferring your assets to an irrevocable trust. Yet, you must fund your trust at least three years before your death, and you cannot use or derive income from any assets you place in it. Alternatively, you can gift assets to your beneficiaries while you are alive, though you must also do so at least three years before your death. When making gifts, you will want to make sure their value – per individual – exempts them from the federal gift tax. Or, you may want to consider moving to a state, such as New York, that does not impose an inheritance tax. If moving is a feasible option for you, your beneficiaries will avoid paying taxes on their inheritances, no matter where they live.

Because inheritance taxes can diminish the share of your estate that your beneficiaries will receive, you will want to make sure you minimize – or eliminate – their burden during your lifetime. With an estate planning attorney’s assistance, you can determine your best option for doing so.