How does New Jersey’s inheritance tax work?

Inheritance taxes are one of the most confusing aspects of estate planning and asset protection law. New Jersey’s inheritance taxes have a few twists and turns that you should know as you’re making plans.

1. Your relationship to the deceased determines the inheritance taxes they pay

Some people don’t have to worry about the state’s inheritance taxes. Those “Class A” beneficiaries are the spouses, domestic partners, parents, grandparents, children and stepchildren of the deceased.

Siblings and children-in-law are considered “Class C” beneficiaries. They will pay up to 16% in taxes on what they inherit, although the first $25,000 they receive is tax-exempt. Everyone else (except charities) are only permitted $500 tax-free from your estate. The rest is taxed at 15%-16%.

2. Some of your assets can be legally diverted directly to your heirs’ hands

Not every asset you have even goes into your estate — and it may not be subject to the state’s estate tax, either. For example, life insurance policies typically pay directly to the listed beneficiary.

What does this mean for your plans? Essentially, if you want to pass your assets along to your family when you die, consider carefully how you do so and what fund you use to do it. A $100,000 insurance policy that’s directed toward your brother or sister, for example, would not be subject to New Jersey’s estate taxes, while $75,000 of that would be taxed if you will $100,000 out of your bank account to your sibling instead.

Effective estate planning takes time and experience — as well as a clear understanding of how taxation can affect what your heirs ultimately receive. Talk to an experienced attorney about your goals today.