02 Dec Changes for the inheritance tax?
Q. My daughter is single, 55 years old, lives in New Jersey and has a $400,000 IRA and a mortgage-free home worth $475,000. She won’t have to worry about the estate tax but what about the inheritance tax? Her beneficiary is her sister, and half goes to a trust for her minor niece. The entire beneficiary family resides in Pennsylvania. What is the inheritance tax liability if my daughter should pass away in 2017?
A. You’re correct that New Jersey’s estate tax is being phased out as part of the new gas tax bill.
But there was no change to the inheritance tax.
“Unlike the estate tax which is based on the size of the estate, the inheritance tax is based on the relationship of the heirs to the person who died,” said Yale Hauptman, an estate planning attorney with Hauptman and Hauptman in Livingston.
He said different classes of heirs pay tax at different rates. Class A beneficiaries are exempt from tax. This includes spouses, children, grandchildren, parents and grandparents.
For single people with no descendants, such as your daughter, the inheritance tax kicks in.
Her sister is a Class C beneficiary.
“The first $25,000 she receives is exempt from tax and then the tax rate starts out at 11 percent and goes up from there,” Hauptman said. “Her niece is a Class D beneficiary and the tax rate starts out at 15 percent.”
The total inheritance tax, covering both inheritances, is roughly $110,000, Hauptman said.
It does not matter where the heirs live – in or outside of New Jersey. The tax is based on where the decedent lived, he said.
“A way to avoid the inheritance tax is for your daughter to leave her estate to you,” Hauptman said. “As a parent you are a Class A beneficiary, not subject to inheritance tax, but of course that only works to the extent that you survive your daughter.”
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This post was first published in December 2016.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.