21 Jul Can N.J. tax a Pennsylvania inheritance?

Q. I’m expecting an inheritance of about $100,000 from an uncle who lives in Pennsylvania. I know New Jersey has an inheritance tax. Do I have to worry about that? It will be $50,000 from life insurance and about $50,000 from bank accounts.
– Planning ahead

A. It’s all about where the person who dies has been living.

The New Jersey inheritance tax will not apply to this inheritance because your uncle lives in Pennsylvania, said Gary Botwinick, an estate planning attorney and chair of the taxation/trusts and estates department at Einhorn Harris in Denville.

“The New Jersey inheritance tax applies to individuals who die while they are New Jersey residents, as well as non-New Jersey residents who own New Jersey real estate,” Botwinick said. “The domicile of the recipient of the inheritance has no bearing on this tax.”

If your uncle had lived in New Jersey, the inheritance tax would apply, but only on the amount inherited from the bank accounts, he said.

The state’s inheritance tax doesn’t apply to life insurance proceeds payable to a designated beneficiary.

That’s where your beneficiary designations are so important.

Botwinick said if a New Jersey resident fails to properly designate a beneficiary for life insurance death benefits, and the death benefit is instead payable to the estate of the decedent, in that case, the inheritance tax will be imposed.

He said you should keep in mind that New Jersey’s inheritance tax does not apply to transfers to spouses, children and grandchildren, so only inheritances by more remote beneficiaries are typically subject to this tax.

Also note that while the New Jersey estate tax is scheduled for repeal on Jan. 1, 2018, the New Jersey inheritance tax will remain, he said.

But alas, you are not out of the woods just yet. Pennsylvania has an inheritance tax of its own.

“Based upon these facts, your uncle’s estate would be subject to the Pennsylvania inheritance tax, and based upon your relationship — more remote than a spouse or lineal descendant — the tax rate would be 15 percent,” Botwinick said. “Like New Jersey, the life insurance would not be subject to the tax, but the cash bequest would.”

So it seems that there will be a modest haircut on the bequest. Sorry about that.

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This post was first published in July 2017.