My sister and I will owe the inheritance tax. What can we do?


Q. I am single and own a townhouse with my sister. We want to bequeath our halves to each other in the event of our deaths. When we went to have wills made, we learned we are both Class C beneficiaries and will owe inheritance taxes. I think siblings should be Class A beneficiaries and I wrote to Gov. Murphy and several legislators about changing the law. What can we do?
— Sister

A. There’s not much you can do.

Let’s first go over how the inheritance tax works.

Being subject to the inheritance tax – and what tax rate applies – is based on the inheritor’s relationship to the deceased, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.

He said New Jersey categorizes relationships into four categories.

Class A includes a spouse, domestic partner, or civil union partner, parent or grandparent, child, stepchild or grandchild.

Class C includes a 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.

Class D is everyone else, Class E is the State of New Jersey and most charities and nonprofits, and Class B was eliminated.

Classes A and E are exempt from the inheritance tax, Novick said.

“The first $25,000 of property inherited by a Class C beneficiary is exempt, but additional amounts are taxed at 11 percent up to $1.075 million, with rates ranging from 13 to 16 percent on higher amounts,” he said. “Class D beneficiaries pay 15 to 16 percent depending on the transferred amount.”

So how can you and your sister avoid the inheritance tax? You can’t, but you may be able to mitigate it with life insurance, Novick said.

“Life insurance proceeds are generally exempt for all classes of beneficiaries,” Novick said. “For the life insurance to be exempt, the beneficiary must be a named person or a trust for the benefit of such person and not `your estate.’”

Novick said securing some life insurance with your sister named as the beneficiary will not only be a tax-efficient way to transfer wealth to her at your death, but will also provide her with cash to pay the inheritance tax due on inheriting your half of the home.

She can also secure insurance with you named as the beneficiary, he said.

As an example, if the value of the property left to a sibling is worth $250,000, then $11,000 of inheritance tax will be due. This is calculated as follows:
· $250,000 home value times 50 percent ownership = $125,000 value of sister’s interest in home
· $125,000 less $25,000 exemption for Class C = $100,000 taxable amount
· $100,000 times 11 percent rate = $11,000 inheritance tax

Novick said the amount of inheritance tax due in your situation will vary depending on the exact value of the house, any other assets you plan to leave to your sister – or assets that she plans to leave to you – and certain other adjustments.

Finally, note that New Jersey abolished its separate estate tax in 2018.

“My understanding is that New Jersey legislators do not have much interest in eliminating the inheritance tax or changing the classes at this time,” Novick said.

Your only other option, though extreme, would be to sell the home and move to another state that doesn’t impose an inheritance tax on siblings, Novick said.

Read this story to learn more about how the inheritance tax works.

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This story was originally published on June 19. 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.