New Jersey estate tax structure looms large in the estate planning process. New Jersey is an incredibly aggressive tax state. They are one of the most expensive and complicated estate tax structural states in the country.
New Jersey has two different kinds of death taxes:
Video: New Jersey Estate Tax Considerations
Table of Contents
New Jersey Inheritance Tax
The inheritance tax is a relationship-based tax. The tax focuses on what the relationship is between the giver and the givee. New Jersey allows an unlimited exemption from the inheritance tax. The inheritance tax says if you give an inheritance to a child, a parent, a grandchild, and spouse, so it’s basically linear up and down, there’s a 100% exemption. If you give it to a sister or a brother, those kinds of relationships, then the first $25,000 is exempt from tax, but everything over that is taxed at between 11% and 13%.
Charities and New Jersey Estate Tax
If you give it to a charity, there’s also an unlimited exemption. However, if you give it to a charity that is in a state that doesn’t honor a New Jersey charity, if it doesn’t have a reciprocal arrangement, then New Jersey will not accept that as an exempt inheritance tax transfer.
Class D Beneficiaries
Everyone else is what is called a class D beneficiary. The tax rate for class D beneficiaries is between 15% and 16%. For example, if you leave your best friend or your godchild or your housekeeper $10,000, you’re paying $1,500 in tax. Maybe you’re fine with that, but whose pocket does that 15% come from? If your will is silent on which pocket it comes from, it may be that it is coming from your wife’s share, your husband’s share, or your children’s share. It’s important to know, number one, that the tax exists; and then number two, it’s important to decide whose pocket it’s coming from.
Trusts Under a Will
Let’s say you have a trust under a will. You have said you want everything to go to your wife during her lifetime and then on her death, you want it to go to your son-in-law. The daughter is deceased. The son-in-law is special to her. You want it to go to the son-in-law and his new wife. If the daughter is deceased or if there are other issues, you can have that be a class D beneficiary. When the first person dies, when the spouse dies, and they’ve left this trust for the benefit of the spouse, New Jersey says I want you to calculate now how much the likelihood is that that person who’s a class D will inherit.
New Jersey Compromise Tax Calculation
They have you fill out what’s called the compromise tax calculation. As part of this calculation, you have to figure out factors such as your wife’s physical and mental well-being. Is she going to live for this period of time-based on the actuarial tables? If she doesn’t live beyond that time, what is the likelihood of the next line of people inheriting? Are they in sound mental health? Will they predecease the remainder who is a class A? The calculation is incredibly complicated and expensive on the death of the first spouse. The misperception is that clients usually believe that there is no inheritance tax because it’s going to a spouse.
New Jersey Estate Tax
New Jersey has the estate tax, which is another death tax. Let’s say everything is going to Class A beneficiaries. It’s going to a spouse, children, grandchildren, all exempt, nice and clean. Now let’s say the first spouse dies. Now if the surviving spouse dies, you would think that there will be no tax due to New Jersey because all beneficiaries are class A’s, but New Jersey has another tax based on the exemption that was allowed by the federal government in the year 2001. At that time, that exemption was $675,000. The net of this is that in New Jersey, if you have an estate going to children or grandchildren or people that you would otherwise think to be exempt other than a spouse, then you’re going to have a tax on amounts over $675,000.
The New Jersey estate tax construct is linked to the federal rules and the internal revenue code. For example, the internal revenue code says that if you have a noncitizen spouse (the surviving spouse is not a citizen), then transfers on death to that spouse are not exempt.
Does New Jersey Have a Gift Tax?
New Jersey does not have a gift tax, but there is an exception. They don’t have a gift tax; in other words, a tax imposed on that same passing while I’m alive. However, they do bring back into the estate transfers that I made three years before I died. If you happen to be so unlucky as to make that wonderful gift and then die within a three-year period, effectively New Jersey has a gift tax.
One Last Thought
When you are creating estate planning documents, in your will, at a minimum, pay attention to who the beneficiaries are, including the people who will be a beneficiary right away and the people who will be a beneficiary later. Also, decide whose pocket the money comes from. If you are giving the housekeeper or godchild $25,000, do you want it to come out of your children’s pocket? It is an engaged conversation with your lawyer.
The New Jersey estate tax team at Gartenberg Howard has experience helping New Jersey families work through these and many other issues that go into a comprehensive estate plan. Give us a call or fill out the form below.