06 Apr Do I have to pay inheritance tax to N.J.?

Q. I am working on our will. We have no children and live in New Jersey. All our nieces and nephews are in our will. Do I have to pay the State of New Jersey $16,000 for each niece that resides in Connecticut?
— Planning

A. We’re glad you’re getting your affairs in order.

There are a few important issues here, including your understanding of where the $16,000 figure comes in.

First, although the State of New Jersey no longer has an estate tax, it does have an inheritance tax, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

Absent an exception, the inheritance tax is imposed when property is transferred upon the death of a New Jersey resident, she said.

“Transfers made within three years of death are presumed to be made in contemplation of death and taxed at death absent proof to the contrary,” she said. “The residence of the beneficiary is irrelevant when computing the tax.”

Class A beneficiaries consisting of a parent, grandparent, child, grandchild or step-child are exempt from the tax, she said. Additionally, transfers under $500 to any beneficiary are exempt from the tax, she said.

Finally certain assets such as life insurance paid directly to a designated beneficiary and certain governmental pensions are exempt from the tax, Romania said.

Bequests to nieces or nephews are not exempt from the inheritance tax, she said

Nieces and nephews are Class D beneficiaries and taxed at the rate of 15% on amounts up to $700,000 (with no exemption) and at the rate of 16% on amounts in excess of $700,000, she said.

Therefore, for example, a bequest of $100,000 to a niece would generate a tax of $15,000; a bequest of $1 million to a niece would generate a tax of $153,000 (15% of the first $700,000 = $105,000 plus 16% of the balance $300,000 = $48,000).

You should speak to your estate planning attorney about your options for how the eventual inheritance tax would be paid — from your estate or if your heirs would pay it.

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This story was originally published on April 6, 2023.

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.