Is the inheritance tax discriminatory?


Q. Please explain the New Jersey inheritance tax. I am widowed with no children. It’s my understanding that my beneficiaries – my siblings and niece – will be subject to this. Perhaps this tax should be viewed as discriminatory based on a person’s marital status and reproductive capabilities.
— Really angry

A. We can’t say we disagree with you, but even though New Jersey has repealed its estate tax, we don’t expect the inheritance tax to go anytime soon.

In your case, the inheritance tax will apply with respect to any transfers at death to the siblings and nieces and nephews, said Steven Holt, an attorney and chair of the taxation, trusts and estates department at Mandelbaum Salsburg in Roseland.

Transfers to a spouse and children are exempt from the tax.

“The way to avoid the tax is to transfer the property during your lifetime,” Holt said. “However, if the transferor dies within three years after the transfer, the transferred assets are brought back into the estate and will be subject to the tax.”

Whether or not an heir is subject to the tax depends on his or her relationship to the deceased.

Class A beneficiaries, which include the deceased person’s spouse, domestic partner, or civil union partner, parent or grandparent, child (biological, adopted, or mutually acknowledged), stepchild (but not step-grandchild or great step-grandchild), grandchild or other lineal descendant of a child are exempt from the inheritance tax, Holt said.

Then there are Class C beneficiaries, which include the deceased person’s brother or sister, spouse or civil union partner of the deceased person’s child, surviving spouse or civil union partner of the deceased person’s child.

“The first $25,000 of property inherited by someone in Class C is not taxed,” Holt said. “On amounts exceeding $25,000, the tax rates are: next $1,075,000, 11 percent; next $300,000, 13 percent; next $300,000, 14 percent; and over $1,700,000, 16 percent.”

Class D includes everyone else.

There is no special exemption amount, Holt said, and the applicable tax rates are 15 percent for the first $700,000 and 16 percent for amounts over $700,000.

The inheritance tax is not collected on transfers of less than $500, life insurance proceeds paid to a named beneficiary or charitable transfers. Also exempt are payments from the New Jersey Public Employees Retirement System, the New Jersey Teachers’ Pension and Annuity Fund, or the New Jersey Police and Firemen’s Retirement System, Federal Civil Service Retirement benefits payable to a beneficiary other than the deceased person’s estate, and annuities payable by the U.S. government under the Retired Serviceman’s Family Protection Plan or the Survivor Benefit Plan to a beneficiary other than the estate.

It’s hard to avoid the tax for assets not listed among the exempt – unless you want to try a drastic step.
Marriage is one way to avoid the tax.

“Adopting a Call C or Class D beneficiary also sometimes works, although that strategy needs to be carefully considered and may not work,” Holt said. “For example, adopting a step-grandchild.”

Learn more about the inheritance tax here.

Email your questions to .