By: Thomas Morr, CFP®, CAIA
You’ve probably heard the old saying about death and taxes being the only things that are certain in life. Well, it turns out that you might not be able to escape taxes even in death.
If you possess a large estate when you die, your estate and/or your beneficiaries could owe taxes to the federal and/or state governments. Currently, estate taxes are collected by the federal government and thirteen states (including the District of Columbia). While inheritance taxes are collected by some, but not all, states.
Which States Collect Inheritance Tax?
Inheritance taxes are currently collected by six states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If a decedent lives in one of these states, his or her beneficiaries may have to pay an inheritance tax regardless of where they live. In other words, inheritance tax liability is based on where the decedent lived, not where the beneficiaries live.
For example, if you die while living in New Jersey and your estate is larger than the applicable state inheritance tax exemption, your beneficiaries could have to pay inheritance tax on assets they inherit. But if you die while living outside of New Jersey or any of the other five states, your beneficiaries will not have to pay inheritance tax even if they live in New Jersey.
Do Beneficiaries Have to Pay the New Jersey Tax?
In New Jersey, inheritors are broken out into different groups for tax purposes. Where an individual falls in this breakout is entirely dependent on his or her relationship to the deceased individual.
Class A Beneficiaries
The good news is that close relatives of New Jersey decedents will not have to pay inheritance tax. This includes the following Class A beneficiaries:
- Spouses, domestic partners, and civil union partners
- Parents and grandparents
- Children (including biological and adopted children) and stepchildren
- Grandchildren and other lineal descendants of children
Class C Beneficiaries
The following Class C beneficiaries will pay inheritance tax on inherited assets worth more than $25,000 if the decedent dies in New Jersey:
- Brother and sister
- The spouses or civil union partners of children
- The surviving spouses or civil union partners of children if the decedent’s child is deceased
The tax rate paid by these beneficiaries will depend on the value of the inheritance as follows (after the first $25,000 in assets, which is exempt from inheritance tax):
- The next $1.075 million: 11%
- The next $300,000: 13%
- The next $300,000: 14%
- Over $1.7 million: 16%
Class D Beneficiaries
Class D beneficiaries include anyone who doesn’t fall into Class A or Class C. If an estate is over $500, there is no exemption and the following tax rates would apply:
- The first $700,000: 15%
- Over $700,000: 16%
Class E Beneficiaries
There is a final class of beneficiaries that is exempt from New Jersey inheritance tax. These Class E beneficiaries include the State of New Jersey, educational institutions, churches, hospitals, public libraries and most 501(c)(3) charitable organizations.
Future Taxes on Inherited Assets
Keep in mind that if inherited assets appreciate after they are inherited, additional tax might be owed when the assets are sold. The tax rate will be based on how much profit is earned on the sale and the nature of those gains. For example, if a stock portfolio worth $500,000 when a decedent dies is sold two years later for $750,000, capital gains taxes might be due on the $250,000 gain.
Also, some inheritances could create future taxable income, especially retirement accounts. For example, required minimum distributions from an inherited IRA could be subject to taxation.
How A Financial Advisor Can Help
Which class you fall into as a beneficiary, is largely what determines if, and how much, inheritance tax you could owe. A Simon Quick Advisor can help you understand your personal situation and devise strategies to minimize your overall tax burden.
To learn more, call us at (973) 525-1000 or send an email to firstname.lastname@example.org.
About Tom Morr
Mr. Morr joined Simon Quick in 2012 and currently serves as the Head of the Client Advisor Group based in Morristown, NJ. In this role, Tom is responsible for managing various aspects of the firm’s client advisory team, which includes Advisors, Associates, Analysts and Client Service Administrators to ensure they are providing the highest level of service to our clients. Tom completed Bryant University's Program for Financial Planners and became a CERTIFIED FINANCIAL PLANNER™ practitioner in 2016. He earned his CAIA Charter in 2014 and is a member of the Chartered Alternative Investment Analyst Association. Tom graduated from Siena College with a B.A. in History and a minor in Business. To learn more about Tom visit his LinkedIn.
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