What’s the best way to avoid the inheritance tax?

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Q. How best to avoid or minimize inheritance taxes in New Jersey?
— Planning ahead

A. Certain beneficiaries may have a hard time avoiding the inheritance tax.

But the best way to minimize it is to understand the implications of leaving assets to certain types of beneficiaries at your death.

New Jersey used to impose both an estate tax and an inheritance tax, said Anna Pelligra, a trusts and estates attorney at Avelino Law in Morristown.

The state estate tax was repealed in 2018, so residents only need to deal with the inheritance tax, she said.

A decedent’s estate may be subject to federal estate tax, though.

Let’s understand how both taxes work.

An estate tax is imposed based on the size of the taxable estate, Pelligra said.

“The taxable estate does not include transfers to a surviving spouse — the marital deduction — nor transfers to charitable beneficiaries — the charitable deduction,” she said. “The tax is imposed when the size of the taxable estate exceeds a specific threshold referred to as the `applicable exclusion.’”

For federal estate tax purposes, the applicable exclusion amount is $12.92 million, she said.

Before New Jersey repealed its estate tax, transfers to children and grandchildren were subject to the estate tax, she said.

The New Jersey inheritance tax works differently. It’s based on the relationship between the deceased person and the beneficiary.

There is no tax on assets left to a Class A beneficiary, which includes a parent, spouse, child, stepchild or grandchild. Same for charities, which are Class E beneficiaries, she said.

Assets left to Class C (siblings, children-in-law) or Class D (all individuals who are not class A or C Beneficiaries) are taxed at rates between 11% and 16%, she said.

“The exemption for gifts made to Class C beneficiaries is $25,000, whereas the exemption for gifts made to Class D beneficiaries is only $500,” she said.

So the best way to avoid or minimize exposure to the New Jersey inheritance tax is to leave assets to your parent(s), spouse, child(ren), stepchild(ren), grandchild(ren) and/or one or more qualified charities at your death.

“If you are thinking about leaving assets to anyone other than a Class A or Class E Beneficiary, you should contact an experienced estate planning attorney to determine whether there is a more tax-efficient plan that will allow you to meet your estate planning goals,” she said.

And one important note: The New Jersey inheritance tax also applies to non-resident decedents who own real estate in New Jersey, Pelligra said.

“Living trusts and other estate planning techniques can be used by non-resident decedents to avoid paying inheritance tax where the property is being left to Class C or D beneficiaries,” she said.

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This story was originally published Aug. 28, 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.