05 May Do non-residents pay estate/inheritance tax?

Q. Assuming the New Jersey estate tax remains in place, does it apply to a non-resident who may own a piece of property in New Jersey?
— Property owner

A. We’re going to make some basic assumptions in order to answer your question: that the decedent is a non-resident of New Jersey, and/or the heir is a non-resident of New Jersey.

Also note the New Jersey estate tax is on its way out, but the federal estate tax remains.

A non-resident who owns or inherits real estate in New Jersey will not be subject to New Jersey estate tax, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

However, the property may be subject to inheritance tax, which will range between 11 and 16 percent — depending on the relationship between the decedent and the heir. This must be paid within eight months from the date of the decedent’s passing, DeFelice said.

He said the inheritance tax applies if the real property in New Jersey passes to Class C or Class D beneficiaries, which include cousins, aunts, uncles and siblings. If the property passes to Class A beneficiaries, which include a spouse or civil union/domestic partner, children, lineal ancestors, and stepchildren, there is no inheritance tax.

“Assuming the decedent or heir is a non-resident, be aware that the property will have to pass through ancillary probate to get the deed into their name – and there are some costs involved there as well,” he said. “When an estate is processed and distributed, the real property has to go into the decedent’s estate and is subject to probate costs in the state where the property is located before being distributed to the heirs.”

DeFelice said if the property owner is still alive, there are ways to avoid the property going to probate.

For example, if the property is owned for personal use, you can establish a Revocable Living Trust and transfer the deed into the trust.

“The property is still included in the decedent’s estate for federal estate tax purposes, but since the trust owns the property it will avoid probate costs in any state,” he said.

If the property is owned for investment purposes, you can establish an LLC to own the property and you would instead own shares of the LLC, DeFelice said. In addition to avoiding probate, there is no New Jersey inheritance tax here because shares of the LLC are considered intangible personal property, he said.

He recommends as with any complicated estate tax planning matter, you should consult an estate planning attorney and a knowledgeable tax advisor or CPA to find out what if any tax returns need to be filed and to make sure you are using the correct forms.

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This story was first published in May 2017.