Q. It’s great that the estate tax will eventually be eliminated, but the inheritance tax is inherently unfair. My only relative is a sibling, a so-called class “C” beneficiary, subject to the inheritance tax. Is there any chance New Jersey will modify this or do I have to move to escape this unfair tax?
— Delaware bound?
A. You’re correct that the inheritance tax can be tough for some family members to swallow, but for now, swallow it you must.
Here’s the deal.
Although New Jersey’s estate tax exemption amount has been increased to $2 million in 2017 and the state’s estate tax will be phased out entirely as of Jan. 1, 2018, New Jersey will continue to levy a transfer inheritance tax on assets passing to anyone other Class “A” beneficiaries, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.
Class “A” beneficiaries include a spouse, parents or lineal descendants, including children, grandchildren, and step-children but not step-grandchildren.
Charities, which are referred to Class “E” beneficiaries, are also not subject to the tax.
“This means that an inheritance tax will continue to be levied on siblings, nieces, nephews, cousins and friends, referred to as Class `C’ beneficiaries,” Whitenack said. “The tax rates imposed on Class `C’ beneficiaries range from 11 to 16 percent, depending on the relationship and amount that is inherited.”
Certain assets, such as life insurance, are not subject to the transfer inheritance tax, Whitenack said.
She doesn’t think the inheritance tax will face the same fate as the estate tax any time soon.
“According to the New Jersey Office of Legislative Services, transfer inheritance tax revenues are a significant part of the state’s budget,” she said. “In 2014, 4.9 percent of New Jersey estates were subject to the state’s estate tax while 6.8 percent of New Jersey deaths that same year resulted in the levy of a transfer inheritance tax.”
Take a look at the analysis, specifically pages A-13 through A-16.
While the imposition of a transfer inheritance tax may seem unfair to those who do not have or who do not want to benefit Class “A” beneficiaries, the rationale for the transfer inheritance tax rate structure is the promotion of close family relationships and charitable gifts, Whitenack said.
Before you move, pay attention to what property you want to leave to your sister.
Whitenack said if you own no real property, there would be no inheritance tax even though the beneficiary lives in New Jersey.
“However, if the reader moves to Delaware but still owns real property in New Jersey, there would be an inheritance tax levied on the real property,” she said.
Whitenack notes that life insurance proceeds are not subject to an inheritance tax so long as there are named beneficiaries. If the estate is named as a beneficiary and the beneficiaries of the estate are Class “C” beneficiaries then an inheritance tax would be imposed, she said.
She doesn’t believe the New Jersey legislature will eliminate the inheritance tax in the next few years.
“For the past several years, bills had been introduced to phase out the New Jersey estate tax but that has not been the case with the inheritance tax,” she said. “Legislators care more about the imposition of a tax adversely affecting close familial relationships than a tax adversely affecting more distant relationships.”
But as you said, who are they to decide you’re not “close” to your sister? But it is what it is.
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