New Jersey has had an Inheritance Tax since 1892, when a tax was imposed on property transferred from a deceased person to a beneficiary.
Inheritance Tax is based on who specifically will receive or has received a decedent’s assets, and how much each beneficiary is entitled to receive.
The amount of tax imposed depends on several factors:
There are two types of Inheritance Tax, resident and non-resident. This is based on where the person legally lived when he or she passed away.
With advance planning, it may be possible to reduce or even eliminate transfer inheritance tax. Certain transfers in trust, for example, are subject to the related compromise tax. Structured gifts and lifetime transfers may also help avoid inheritance tax.
Talk to an experienced tax attorney to better understand how the inheritance tax will impact your estate plan.
Jack dies in 2022 a resident of the State of New Jersey. Jack’s estate consists of a home worth $575,000, a car worth $20,000, a bank account worth $15,000, a brokerage account worth $485,000, and an IRA worth $60,000.
Jack is survived by his estranged son, Jordan, and Jordan’s 3 kids. Jack is divorced but has been living with his girlfriend Greta for the past 10 years. Jack is close with his sister Stacey and Stacey’s kids. Jack is charitably minded and donates to veteran’s groups each year.
Jack has a will that omits Jordan. Jack gifts $10,000 to each of his grandchildren, and $60,000 to Wounded Warrior Project. $100,000 is left to Stacey, and the balance is left to Greta.
Jordan was excluded as a beneficiary which is permissible. Jordan’s kids (Jack’s grandchildren) are each Class A beneficiaries exempt from tax. Each will receive $10,000.
Stacey is Jack’s sister which makes her a Class C beneficiary. A gift of $100,000 will incur a transfer tax of $8,250.
Greta and Jack are not married. The length of their relationship does not matter. The law treats her as a Class D beneficiary and her share is taxed at the highest rate. Her share of the estate valued at $965,000 will trigger a tax of $147,400!
The $60,000 gift to Wounded Warrior Project is not subject to transfer tax.
What planning opportunities were missed in this scenario? What could Jack have done different?