04 Jul Do I have to file an inheritance tax return?

Q. I’m trying to make sure I understand the inheritance tax. Can you confirm that if all beneficiaries are Class A, no inheritance tax return is required for a death in 2018?
— Beneficiary

A. Ah, the New Jersey inheritance tax.

It’s yet another way to state reaches into your pocket – but not for everyone who dies or for every beneficiary.

When someone dies, the assets he or she owns must go somewhere or to someone, said Matt Mignon, a certified financial planner with RegentAtlantic in Morristown.

He said when these assets are transferred from the name of the person who died (the decedent) to someone else (the beneficiary), the State of New Jersey may impose a tax on this transfer of ownership.

As you alluded to in your question, the amount of tax imposed depends on several factors, including who the beneficiaries are and how they are related to the decedent.

The State of New Jersey recognizes five beneficiary classes: Class A, B, C, D, and E.

Class “A” beneficiaries are best described as immediate family members, he said. This includes spouses, civil union partners (after Feb. 19, 2007), domestic partners (after July 10, 2004), children, legally adopted children, grandchildren and great-grandchildren. It also includes parents, grandparents and stepchildren but not step-grandchildren.

Class “A” beneficiaries are exempt from the inheritance tax.

But what if there are non-Class “A” beneficiaries? The taxation of their inheritance will depend on their relationship to the decedent.

Class “C” beneficiaries are siblings, sons- and daughters-in-law, and civil union partners or surviving civil union partners of a child of a decedent (after Feb. 19, 2007), he said.

“There is no tax on the first $25,000. Then, 11 percent is charged on the next $1.075 million, 13 percent on the next $300,000, and 14 percent on the $300,000 after that,” he said. “Then, the rate is 16 percent for anything over $1.7 million.”

Class “D” includes everyone else, including nieces, nephews and friends.

The first $700,000 is subject to a 15 percent tax and everything over that amount is taxed at a 16 percent rate, Mignon said.

Class “E” includes qualified charities, religious institutions, educational and medical institutions, non-profit benevolent or scientific institutions, The State of New Jersey and any of its political subdivisions. Class “E” beneficiaries are exempt from the inheritance tax.

The final group, Class “B,” was repealed in 1963.

Mignon said understanding your beneficiary “class” is the first important step in determining the next steps necessary in filing with the state and how the tax may, or may not, impact
your inheritance.

“As part of the estate settlement process, if there are only Class A beneficiaries, then Form L-8 – Affidavit for Non-Real Estate Investments: Resident Decedents must be filed,” he said. “There are several questions on this form used to identify the type of beneficiary who is receiving the assets. If all the questions apply, the L-8 Form can be used to release the assets.”

As always, there can be some nuances to the inheritance tax law so it is important to work with your tax preparer to ensure that you are properly reporting any inheritance to the state.

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This story was originally published on July 4, 2019.

NJMoneyHelp.com 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.