Death taxes in New Jersey in 2015: A time for change?

New Jersey is one of few states that imposes two taxes on transfers of property after death of the owner.

New Jersey is a state with much to offer. Beautiful beaches, boardwalks, museums, theaters and business opportunities paired with its close proximity to Washington and New York are just a few of the offerings of the Garden State. Unfortunately, in addition to these positives the state is also known as one of the few to impose two different types of state death taxes.

Death taxes apply to property transferred after the passing of the owner. Many states do not tax these transfers and state legislators are pushing for New Jersey to change its aggressive stance of death taxes by proposing repeals, plans to phase out the tax or exemptions.

New Jersey death tax: Inheritance tax

One of the two taxes at issue is the inheritance tax. The New Jersey Division of Taxation explains that the state has imposed an inheritance tax since 1892. The tax currently ranges from 11 to 16 percent of the transfer of real and personal property with a value that exceeds $500.

The amount of tax imposed is based on the beneficiary class of the recipient. Essentially, the spouse, children, stepchildren, parents and grandparents are exempt. In some cases, depending on the dates, civil union partners and domestic partners are also exempt. Generally siblings are required to pay a tax on any transfer over $25,000. The amount of tax applied on larger transfers increases with the amount of property transferred. For example, the next $1,075,000 after the first $25,000 is taxed at 11 percent while the next $300,000 is taxed at 13 percent.

Some notable exemptions include:

  • Life insurance. If the policy is paid to a named beneficiary.
  • Charitable contributions. Donations to educational institutions, hospitals, libraries, churches and other qualifying nonprofit agencies.
  • Retirement benefits. Payments from certain retirement policies are also exempt. Examples include the New Jersey Public Employees Retirement System, Teachers' Pension, Police and Firemen's Retirement System and Federal Civil Service Retirement benefits.

Unfortunately for residents of New Jersey, this may just be the beginning of applicable state taxes on these transfers.

New Jersey death tax: Estate tax

A second tax may also apply: the estate tax. New Jersey enacted the estate tax in 1934. This tax is imposed in addition to the inheritance tax. In fact, some estates that are exempt from the inheritance tax are still subject to fees under the state's estate tax.

A recent article in Forbes notes that New Jersey is one of only 19 states that requires a state estate tax. In addition, New Jersey also has the lowest exemption rate of any state at $675,000. This low exemption amount certain pales in comparison to the federal exemption amount of $5.43 million. The exact amount due is determined with a complex calculation but can cost as much as 16 percent.

The power of estate planning

Although the future of New Jersey's death taxes remains unclear, one thing is certain: estate planning can help mitigate these costs. Various legal tools are available that can help reduce an estate's tax obligations. Contact an experienced New Jersey estate planning attorney to discuss your options.

Keywords: estate planning