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New Jersey has a well-earned reputation as a state that heavily taxes its residents. This is certainly true for real estate property taxes and income tax rates, and the taxes continue even after the residents pass away. The New Jersey Division of Taxation taxes estates of many New Jersey residents in the form of inheritance taxes, estate taxes and seller’s transfer taxes on real estate sold by an estate.
Below is a brief summary of these taxes and some steps that may be taken to minimize the first two taxes.
With respect to New Jersey inheritance taxes, these taxes are assessed against estates of New Jersey residents who provide inheritances to beneficiaries who are NOT parents, spouses, children and grandchildren of the decedent. In other words, there will be NO New Jersey inheritance tax when those close relatives inherit, but there will be NJ inheritance tax assessed when the beneficiaries are siblings, nephews, nephews, cousins, and friends. The inheritance tax rates range from 11 to 16% and apply to virtually all assets in the estate of the NJ resident. In fairness to the State of New Jersey, some states, such as Pennsylvania, impose an inheritance tax on a child’s inheritance from their parents, so it could be worse!
On the other hand, New Jersey is also one of the few states which also impose an estate tax on its residents. Unlike the NJ inheritance tax, the NJ estate tax primarily focuses on the size of the estate and not the relationship between the decedent and the beneficiaries. The New Jersey estate tax is assessed on estates valued over $675,000, which includes most assets including bank accounts, stocks, bonds, real estate, retirement accounts and insurance policies. The New Jersey estate tax has fluctuating tax rates depending upon the size of the estate, but a $1 million estate is taxed about $33,000 and a $2 million estate is taxed about $99,000 in NJ estate taxes.
New Jersey estate taxes can be reduced if the decedent had reduced his or her estate by making annual gifts of $13,000 to various individuals in the years prior to his or her death. Gifts by the decedent of more than $13,000 in the 3 years prior to death, however, will be added back to the estate and taxed on the tax return. New Jersey inheritance taxes also counts on any gifts made by the decedent in the 3 years prior to death for gifts of at least $500. New Jersey inheritance taxes would not be imposed on the death benefit of life insurance policies as long as the beneficiary of the policy is a named individual, not the estate.
For married couples, New Jersey estate taxes are assessed on the second spouse’s death, which means that the second spouse may avoid the estate tax by spending down their taxable estate to less than $675,000 before their passing. Perhaps better estate tax planning may be achieved by setting up a trust option in the spouses’ wills that allows the second spouse to shelter all or part of the first spouse’s estate in a trust.
Finally, there is no way to avoid sellers’ transfer taxes on the sale of a New Jersey decedent’s residence. Transfer taxes are assessed on the sale of all real estate sold in New Jersey whether the seller is alive or deceased. This tax ranges from a few hundred dollars to a few thousand dollars, depending on the sales price of the home.
In sum, I recommend that New Jersey residents contact our office to discuss planning options seeking to minimize or avoid these taxes.