New Jersey poses unique challenges for passing on your wealth. The Garden State still has an inheritance tax, despite the state estate tax ending in 2018. You must understand both the New Jersey inheritance tax and the federal estate tax if you have significant assets.
Thoughtful planning can significantly lower your tax bill. Knowing which strategies to use and when to use them makes all the difference.
Lessening your tax burden
The New Jersey inheritance tax depends on the beneficiary’s relationship to the deceased. Your spouse, domestic partner, children, grandchildren, parents and other Class A beneficiaries do not pay this tax. However, other relatives, like siblings or friends, are not exempt.
You can use lifetime gifting to reduce the size of your estate. Each year, you can give away a certain amount tax-free, which is especially helpful for beneficiaries who are not Class A. Under current rules:
- You can gift up to $19,000 per person in 2025 without triggering gift tax reporting
- This annual exclusion allows you to transfer wealth over time, reducing your taxable estate
- Consider gifting to non-Class A beneficiaries to help them avoid or lessen their inheritance tax liability
Properly structured irrevocable trusts can also remove assets from your taxable estate. For instance, an Irrevocable Life Insurance Trust (ILIT) keeps life insurance proceeds out of your estate, which can result in savings on both state and federal taxes.
Charitable planning is another powerful tool. You can use Qualified Charitable Distributions (QCDs) or Charitable Remainder Trusts (CRTs). These options reduce your taxable estate while supporting causes you care about.
When paying taxes may make sense
Sometimes, paying the tax can be a smart move. This involves understanding the “stepped-up basis” rule, a federal provision. When assets are part of your federal taxable estate, their value is reset. The reset happens on the date of your death.
For assets that have grown significantly in value, this can be very beneficial. Your heirs receive the asset at its new, higher value, often meaning they pay far less in capital gains taxes when they sell it. In such cases, the capital gains tax savings can outweigh the federal estate tax cost. Including the asset in your taxable estate becomes the better financial choice in the long term.
Plan your estate with confidence
Effective tax planning is complicated. You must balance the state’s onerous inheritance tax with federal tax issues, such as capital gains and estate taxes. Simple, one-size-fits-all solutions do not work in New Jersey.
A knowledgeable estate tax planning attorney can offer sensible solutions for these complexities. They understand Class A exemptions, various trust structures and the stepped-up basis rule. A skilled lawyer can help you create a plan tailored to your unique situation, ensuring your legacy passes on as you intend.