What the inheritance tax means for step-families

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Q. I have three stepsons and no biological children. Each stepson has two children which are my step-grandchildren. All of my and my wife’s assets, including our house, are in a revocable trust. My wife and I are each other’s primary beneficiaries. The secondary beneficiaries are the three stepsons and their six children. If I die second, the grandchildren would be Class C beneficiaries but they would be Class A if my wife dies second. What happens if we die at the same time?
— Not liking the law

A. The New Jersey inheritance tax law seems unfair to people in your situation.

Let’s clarify: Although stepchildren are Class A beneficiaries — who like a spouse, parents, grandparents and descendants are exempt from the inheritance tax — step-grandchildren are considered Class D (not Class C) beneficiaries and are taxed.

The rate would be 15 percent on inheritances up to $700,000 and 16 percent for higher amounts, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

She said legislation has been proposed to make step-grandchildren Class A beneficiaries, but to date, this legislation has not been enacted.

If you were to pass away leaving a trust for the benefit of your wife with your stepchildren and your step-grandchildren as the remainder beneficiaries to take upon her death, then at the time of your death, the Division of Taxation and your estate would agree on a “compromise tax,” Romania said.

“The compromise tax will be paid eight months from the date of your death and is based on the inheritance tax on what your step-grandchildren might receive some time in the future taking into consideration your wife’s age, her state of health, her financial needs, the terms of the trust, etc.,” Romania said.

If the terms of the trust provided that your stepchildren were the remainder beneficiaries upon your wife’s death and your step-grandchildren only inherited if their parent predeceased, it is likely that the compromise tax would be extremely small and in some cases can be zero, she said.

You’re not going to like what happens if you die at the same time.

“Should you both die simultaneously, without a term in the trust document that stated which of you would be deemed to have predeceased whom in the event of a simultaneous death or otherwise directs what occurs in the event of a simultaneous death, then assets in your name and one-half the assets in joint names would pass pursuant to the terms of your trust as if your wife predeceased you,” Romania said.

Similarly, assets in your wife’s name and one-half the assets in joint names would pass pursuant to the terms of your wife’s trust as if you predeceased her, she said.

We recommend you speak to your estate planning attorney to take whatever steps necessary to minimize the tax.

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