Understanding New Jersey’s Inheritance Tax
New Jersey remains one of the few States that imposes an inheritance tax. The inheritance tax is not based on the size of the estate, but who receives the estate. There is no inheritance tax imposed on transfers to a parent, grandparent, spouse, domestic partner, child or stepchild (Class “A” beneficiaries). Inheritance tax is, however, imposed on transfers to siblings (Class “C” beneficiaries), nieces, nephews, friends, and everyone else other than charities. (Class “D” beneficiaries).
Tax Rates and Considerations
The tax rate for non-Class A beneficiaries is between 11% – 16%. Transfers made within three years of death are presumed to be “in contemplation of death” and, may, also, be subject to inheritance tax. In addition, transfers intended to take effect at or after death are included in one’s estate for inheritance tax purposes.
Case Study: Impact of Divorce on Taxation
Recently, our firm had a case where the Decedent’s Will left the estate to his spouse and her children. At the time of his death, the Decedent and his wife were divorced. (Decedent made a handwritten notation on the Will reaffirming the bequests to the spouse and her children after the divorce).
Ordinarily, a spouse is exempt from inheritance tax as a Class A beneficiary. However, since the couple was no longer married at the time of Decedent’s death, the ex-spouse is characterized as an unrelated Class D beneficiary subject to tax.
Quirks in Tax Structure: Ex-Spouses vs. Ex-Stepchildren
One would think the same analysis applies to stepchildren. This is not the case. According to the NJ Division of Taxation (and Pennsylvania Department of Revenue), ex-stepchildren are considered Class A beneficiaries, exempt from inheritance tax. In other words, once a stepchild always a stepchild.
This result is counterintuitive. If the divorce converts an ex-spouse from a Class A beneficiary to a Class D beneficiary, why wouldn’t it also change the classification of an ex-stepchild? Maybe it’s because the stepchild is indirectly impacted by the divorce without having a say in the outcome? Or maybe it’s just a quirk in the tax structure. Either way, it is helpful information to know, particularly in a world where blended families are common and divorces frequent.
Conclusion
Understanding these nuances is crucial, especially in a world where blended families are common and divorces frequent. It highlights the importance of seeking professional advice to navigate the complexities of inheritance tax laws effectively. The Elder Law attorneys at Mandelbaum Barrett PC are here to answer any questions you may have.