How does the inheritance tax work for siblings?

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Q. If two siblings inherit their sister’s estate, is each entitled to a separate $25,000 exemption from the inheritance tax? Or is the estate entitled to just one $25,000 exemption?
— Sister

A. New Jersey inheritance tax is based on the relationship of the beneficiary to the decedent, the type of property transferred and the value of the property transferred.

Class A beneficiaries, which include grandparents, parents and their descendants, spouses, civil union partners, domestic partners and stepchildren, do not incur an inheritance tax, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

Class C beneficiaries, which include siblings, sons-in-law and daughters-in-law, incur a tax at the rate of 11 to 16% percent, she said.

“The first $25,000 bequest to each Class C beneficiary is exempt,” Romania said. “Therefore, if a decedent had three siblings and left each sibling $25,000, no inheritance tax would be assessed as they each received a $25,000 exemption.”

All other beneficiaries — other than charities — are Class D beneficiaries. These are taxed on transfers at the rate of 15 to 16% with no exemption unless the bequest to the beneficiary is less than $500.

Not every asset is subject to the inheritance tax.

Life insurance — if paid to a named beneficiary, not through the estate — and state retirement benefits are types of property that are exempt from the inheritance tax regardless of the amount the beneficiary receives or the beneficiary’s class, Romania said.

“Thus, for example, a sibling — Class C beneficiary — could receive a $100,000 life insurance payout upon the death of decedent and will pay no inheritance tax,” she said. “That same $100,000 bequest paid out of other assets of the estate instead of life insurance would be allowed a $25,000 exemption and the balance taxed at 11 percent thus incurring a tax of $8,250.”

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This story was originally published on Feb. 7, 2020.

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