As an elder law attorney, I am always surprised that no one ever talks aboutNew Jersey’s death taxes. We hear a lot about the federal estate tax, comparatively-speaking, but very little about theNew Jerseydeath taxes.
New Jersey has two death taxes—the estate tax and the inheritance tax. Many states, such asFlorida, have no death tax at all. TheNew Jerseyestate tax, like the federal estate tax, is a tax on the gross value of the estate. If a decedent’s estate exceeds $675,000, then his estate is subject toNew Jerseyestate tax.
The gross estate includes all of the assets that the decedent owned at the time of his death, including the death benefit of any life insurance policies that he owned. Most people do not believe that the death benefit of life insurance is included for purposes of calculating a death tax. One reason for this is that they have been told that life insurance isn’t taxable.
Life insurance isn’t taxable, in most instances, for income tax purposes. But life insurance is very much includible in a decedent’s estate for estate tax purposes.
Furthermore, many people think that the gross estate only includes probate assets. “Probate assets” are assets that the decedent’s last will and testament controls. Accounts with beneficiary designations would not be probate assets because the beneficiary designation, not the decedent’s last will and testament, would control who receives the asset.
But what controls how an asset passes after a person dies—his Will or a beneficiary designation—has nothing to do with whether or not the asset was owned by the decedent at the time of his death and nothing to do with whether or not it is includible in his estate for estate tax purposes. (I will discuss inheritance tax issues in a moment.)
Think of it this way, if having a beneficiary designation on an asset prevented it from being taxed, the government would pass a law the next day simply including assets with beneficiary designation in the gross estate. It’s so simple that it’s rather silly and it’s rather silly because it’s simply a myth.
The exemption amount, $675,000, is quite low. If a person dies with a house, a brokerage account, and some life insurance, his estate could easily exceed $675,000 and be subject to theNew Jerseyestate tax.
If a person dies and leaves his estate to his spouse, there is no tax because a surviving spouse is exempt from the estate tax; however, without proper planning, which goes outside the scope of this article, the children of the couple may unnecessarily pay tax when the wife dies.
New Jerseyinheritance tax is a tax primarily based on the relationship of the person to whom you leave your estate. There are four “classes” of beneficiaries—A, C, D, and E.
Class A beneficiaries are the surviving spouse, children, grandchildren, and parents. Because most often a person’s beneficiaries are people who fall into these categories, most estates do not pay inheritance tax or have to file an inheritance tax return.
Class C beneficiaries are siblings and son-/daughter-in-laws. These individuals receive a $25,000 exemption. After that, they pay inheritance tax at rates between 11% and 15%.
Class E beneficiaries are charities andNew Jerseygovernment entities. These organizations pay no tax but the decedent’s estate must file an inheritance tax return.
Class D beneficiaries are all other possible beneficiaries. They pay tax at rates between 15% and 16% on everything they receive if they receive more than $499.
All assets of which the decedent died owning are taxed except life insurance that names a beneficiary. Unlike with estate tax, life insurance that names a beneficiary is not subject to the tax.