If you are planning your estate in New Jersey, you are probably thinking about including your next of kin, friends and other important people in your life. And in the state’s inheritance laws, this relationship will also determine their tax liability. Here is a brief guide that can help you understand and plan accordingly.
Three different classes
New Jersey inheritance law operates differently than other from a federal estate law, and it divides beneficiaries into classes, with their proximity to the deceased person determining their tax liability:
- Class A: This includes parents, grandparents, spouses, children (including legal adoptions), grandchildren and stepchildren (but not step-grandchildren or great-step children). They are fully exempt from inheritance tax
- Class C: This encompasses siblings and the spouses or widow/widower of a child. The inheritance tax rate ranges from 11% to 16%
- Class D: This reunites everyone else like friends, neighbors and other unrelated individuals. It ranges from 15% to 16%.
There is also a Class E that includes but is not limited to charities, religious or scientific institutions and the state of New Jersey.
A planning challenge
If you are planning your estate, you must ensure that assets go to your chosen beneficiaries while handling this tax in the best way possible.
- The risk: Without proper planning, certain non-probate assets like bank accounts designated as “transfer on death” can lead to significant taxes for non-exempt relatives.
- The strategy: An experienced law firm can suggest a structure of asset transfers that include gifts and trusts, which will legally lower the taxable amount going to Class C and Class D beneficiaries, thus protecting the estate from unnecessary tax costs.
Estate planning in New Jersey requires thorough understanding of both state and federal regulations, particularly how they interact with federal gift tax limits but with the help of a lawyer, you can manage these complex matters.