On October 14, 2016, Governor Chris Christie enacted a new law that will dramatically change the role of “death taxes” in New Jersey. “Death taxes” refer to estate and inheritance tax, which are incurred by heirs following the death of a relative. New Jersey, along with Maryland, are the only two states that levy both an estate tax and inheritance tax on beneficiaries. An estate tax is placed on the net value of the estate of a deceased person before distribution to the heirs. The inheritance tax is one that is imposed on someone who inherits property or money. Inheritance tax is levied on non-lineal relatives, such as siblings, nieces, and nephews (Class C). Class A relatives, or lineal descendents, are spared from paying tax on inheritance. According to New Jersey state law, spouses, parents, grandparents and descendants — children, grandchildren, and great-grandchildren are all considered Class A.
Each state sets distinct provisions regarding “death taxes.” In the case of New Jersey, the estate tax exemption was only $675,000 prior to the recent legislation. A $675,000 exemption was by far the lowest in the United States, resulting in exponentially more New Jersey residents having to pay such taxes. The federal government also sets its own estate tax on beneficiaries, with an exemption set at a hefty $5.45 million.
In the near future, New Jersey residents will no longer have to pay state estate tax. The new legislation raised the tax exemption to $2 million for decedents dying on/after January 1st, 2017 to January 1st, 2018. For the remainder of 2017, the tax rate will start at 7.2% and reach 16% for estates over $10 million. However, in 2018, the estate tax will be completely repealed! The recent legislation also eradicated the imposed estate tax on the New Jersey property of nonresident decedents, benefiting out-of-state vacation home owners.
Although the estate tax will be repealed at the beginning of next year, New Jersey’s inheritance tax will still be fully enforced. With the exemption being a mere $500, most non-lineal relatives will eventually have to pay this tax.
Typically, the flat rate for inheritance tax is 11-16% of the value of the inheritance, depending on the relationship between the recipient of the inherited asset and the decedent and the total transfer amount. The table above portrays New Jersey’s variable inheritance tax rates.
So, how will this law specifically affect New Jersey residents? As a result of the law, many estate plans will have to be reviewed in order to avoid inadvertent consequences. Because many plans were designed to minimize the estate tax, the new law may affect how assets get divided between beneficiaries. If you believe you are affected, it is pertinent to contact your advisor to revise your plan in order to align it with the new legislation.
 Garber, Julie. “Do You Have to Pay Tax on an Inheritance? Maybe If You Live in New Jersey.”The Balance, 3 Feb. 2017, www.thebalance.com/overview-of-new-jersey-inheritance-tax-rates-and-laws-3505343. Accessed 19 June 2017.