New Jersey has many different types of taxes, including two different taxes on death: the NJ Estate Tax and the NJ inheritance tax. The New Jersey estate tax is a tax on transfers at death and certain transfers in contemplation of death.
Transfers to charities, a surviving spouse or a surviving Civil Union partner are exempt from the NJ estate tax. Transfers to anyone else are taxable to the extent that the transfer exceeds $675,000. New Jersey never does anything in a simple manner, and it does not technically offer a $675,000 exemption from the estate tax. NJ actually exempts the first $60,000 of transfer and then taxes the next $615,000 at 0%. The effect of this is that the first $675,000 can almost always pass to whomever you want tax free.
Each New Jersey resident is entitled to the NJ estate tax exemption. Accordingly, married couples and Civil Union couples can double the amount that they pass on to their children with proper planning. (This usually involves setting up a bypass trust for the surviving partner or spouse rather than leaving them money outright.)
The New Jersey estate tax is a progressive tax, meaning that the more you pass on, the higher the tax rate. The NJ estate tax rate generally varies from 0% to 16% depending upon the amount of the transfer. The major exception is that for the first $52,175 over $675,000, there is a 37% tax. For a detailed breakdown of the tax rates, see page 10 of the NJ Estate Tax Return.
New Jersey offers two different method of calculating the state estate tax on the NJ Estate Tax Return: the 706 method and the so called "Simplified Method". The Simplified Method allows the executor or administrator of the estate to avoid filing a 2001 version of the federal estate return, but it often results in a higher tax. For this reason, it is often advisable to hire a competent estate planning attorney to minimize this tax liability.
A decedent's estate can be subject to both the NJ estate and inheritance taxes. New Jersey does offer some relief if an estate is subject to both taxes. For example, if a person with $1,000,000 dies and leaves the entire amount to her nephew, this transfer would be subject to both taxes. A transfer of one million dollars in normally subject to a $33,200 New Jersey estate tax. A transfer of this amount though is also subject to a $150,000 New Jersey inheritance tax. In such an instance, New Jersey would only collect only the higher tax, the 15% inheritance tax in this case.
The NJ estate tax is due within 9 months from the date of the decedent's death. This is different than the NJ inheritance tax, which is due within 8 months from the date of the decedent's death.
The NJ estate tax should not be confused with the federal estate tax. Unless Congress acts to extend the repeal of the federal estate tax (which I think to be highly unlikely), the United States will have a separate and additional tax on death.
32 comments:
Reminds me of the saying that 'nothing in life is permanent except death and taxes'
WHY would anyone in his right mind with assets want to die in NJ when there is no estate taxes of any kind in Florida and some other states??
Anonymous - because there are lot of business opportunities in the NJ, NY and PA area that allow people to accumulate vast sums of money. Also, all those high taxes go towards a lot of services that people enjoy - particularly services for the elderly and special needs children.
Kevin, I am confused by your comment "Transfers to charities, a surviving spouse, a surviving Civil Union partner or a surviving Domestic Partner are exempt from the NJ estate tax."
See: http://www.state.nj.us/treasury/taxation/domparttax.shtml
Which says "The New Jersey Estate Tax is not affected by the Domestic Partnership Act. The New Jersey Estate Tax is based upon the Federal Estate Tax credit for state death taxes allowable under the provisions of the Internal Revenue Code. The Internal Revenue Code does not provide a Federal Estate Tax deduction for property passing to a domestic partner."
I think it is only civil union partners that can claim a marital deduction.
See: http://www.state.nj.us/treasury/taxation/transinher.shtml
"If the decedent was a partner in a civil union and died on or after February 19, 2007, survived by his/her partner, a marital deduction equal to that permitted a surviving spouse under the provisions of the Internal Revenue Code in effect on December 31, 2001, is permitted to the surviving civil union partner for New Jersey estate tax purposes. In these cases, a “dummy” 2006 Form 706 should be completed as though the Internal Revenue Code treated a surviving civil union partner and a surviving spouse in the same manner."
Both civil union partners and domestic partnership partners are exempt from Inheritance Tax, it would appear. Let me know if you concur.
Dear Anonymous,
You are correct. Thank you for spotting that oversite, I will correct the article. I will point out that there is no NJ inheritance tax on assets passing from one Domestic Partner to another on death.
In your example regarding the nephew that inherits $1,000,000, why (or by what means) does he only have to pay the higher inheritance tax? I thought you paid both inheritance and estate taxes in NJ.
Thank you.
Kevin, I'm a US citizen. My wife, who has a green card, is not. She will have lived in the US for three years next September. Assuming I were to die now, am I correct in my understanding that a QDOT will save her from paying the federal estate tax if she takes no distributions from it until after her citizenship is granted? Based on the same assumption, that I were to die now and she were to apply for citizenship immediately, am I correct to understand that the QDOT will NOT save her from paying the NJ estate tax?
Dear JJVA,
A QDOT should generally be created within 9 months from the date of your death. It does not matter how long your non-citizen spouse has been married to you or how long she has been a green card holder.
So, to answer your questions, if you die and a QDOT is created for your wife, if no distributions (other than income) are made to her before she becomes a citizen, she can shut the trust down and take the money out once she becomes a citizen.
So, your second assumption is incorrect. A QDOT will save both on the federal and NJ Estate tax.
Dear Anonymous of 10/1,
Sorry, thought I replied earlier. New Jersey gives a credit on its estate tax for inheritance taxes paid. The effect of this is that you wind up paying the higher of the two. Look at line 11 of the NJ Estate Tax Form for confirmation.
Are assets that are not part of a probate estate in NJ (e.g., bank savings acct. registered as payable on death), included when calculating the state estate tax?
Dear Anonymous of November 10,
Yes, assets that are not part of the probate estate are usually part of the taxable estate. The general rule in NJ is that if the Decedent had an ownership interest in it at the time of death, 100% of it is presumed to be taxable.
This presumption can be overcome if you can show that the the asset wasn't paid for by the decedent. For example, you and I own a house together, we each put up 50%. I die. The house is presumed to be 100% taxable unless my estate can prove you paid 50%. If you were my spouse, and a citizien, no such proofs are required.
Hi Kevin,
Thank you for posting an easy to understand article about the NJ Estate Tax as well as pointing out that Page 10 of the NJ Estate Tax Form shows the actual estate tax rates. However, when I do look at Page 10 I am confused about the rates. I know there is no tax upto $675,000 but Page 10 shows the following rates:
0-$615,000 0%
$615,000-$667,175 37%
$667,175-$840,000 4.8%
Can you help me clarify these rates?
Thanks!
If a bank account is joint titled with daughter and I pass. Is she subject to estate or inheritance taxes?
Dear Lino,
Take $60,000 off whatever the net estate is. It's a weird calculation, but that's just the way they do it. Technically it is a $60,000 exemption and taxed at 0% up to the next $615,000. That's why it's easier for everyone just to say the first $675,000 goes free of tax.
Dear Anonymous of 12/5,
A joint bank account in NJ is presumed to be owned 100% by the decedent unless the survivor can prove otherwise. So, if the money in the account was put into the account by a parent, it will be subject to the NJ estate tax when it goes to the daughter if the entire estate is over $675,000. The NJ inheritance tax does not apply to children.
If a bank acct is payable upon death to a sibling, or niece, how will it be taxed?
Is the NJ teachers pension (VALIC) taxable to the estate as well as the individual beneficiaries. (All beneficiaries are children of the deceased).
Also - do you do estate planning for non-married couples who reside in both Florida and NJ?
Dear Anonymous of 2/18/13,
If you leave more than $25,000 to a sibling, it will be subject to a NJ inheritance tax (starting at 11%). If you leave more than $500 to a niece or nephew, it will also be subject to a NJ inheritance tax starting at 15%.
For NJ inheritance tax purposes, it doesn't matter if the money is payable on death or goes through your estate.
Note, you have to worry about the NJ inheritance tax more than the estate tax in this scenario.
Dear Anonymous of 2/25/13,
With respect to a NJ pension, first, you must make sure that there is a death benefit. If not, then you do not have to worry about a tax. I mention this because most pensions do not have a death benefit.
Second, if there is a death benefit payable to children, it is subject to the NJ estate tax if the Deceased is a resident of New Jersey at the time of death and the Deceased's estate is over $675,000. (I know NJ exempts certain pensions from an inheritance tax, but you asked about the NJ estate tax, and there is no similar exemption that I am aware of.) The only additional tax to the beneficiaries would be the income tax when a pension is paid.
Finally, yes, I can do estate planning for non-married couples in New Jersey and Florida. Kindly call if you have any additional questions.
I understand that gifts made by the decedant are added back to the estate for purposes of calculating the NJ Inheritance Tax.
Does this include all gifts, or only "taxable " gifts (meaning gifts that exceed the annual gift tax exclusion)?
Lastly, does the 3-year lookback rule also apply to the NJ Estate tax?
Thank you.
Dear Anonymous of 5/15/13,
For purposes of the NJ inheritance tax, they add back all gifts made within the last 3 years, including annual exclusion gifts. The gift may be eligible for an exemption though depending upon the amount and who it goes to.
The 3 year lookback rule does not apply to the NJ Estate Tax, it is much more complicated than that. For a more detailed explaination, please see: http://willstrustsestates.blogspot.com/2011/04/deathbed-transfers-in-new-jersey.html
For non resident decedent, is there a tracing requirement that NJ assets be left to Class D beneficiaries to create inehritance tax liability?
Stated another way, if non resident decedent leaves residuary to children, but makes pecuniary cash gifts to Class D beneficiaries, is there still NJ tax exposure?
Dear Anonymous of 8/24/13,
Yes, there is a tracing requirement for a non-resident decedent. NJ only has the authority to impose an inheritance tax on NJ based assets.
Your solution to the problem appears to be a good one.
This is the first time that I've heard that an estate only pays the larger of the NJ inheritance tax or the NJ estate tax. I had read that if there is NJ and Federal estate tax, if the Federal estate tax amount is more, the NJ estate tax is taken from it.
Thus, I thought the total owed = NJ inheritance tax + Federal estate tax, if the Federal estate tax was more than the NJ estate tax. Is this correct, or would it be: total owed = higher of NJ estate tax or NJ inheritance tax + Federal estate tax?
(any opinion on how strict the due dates are would be appreciated - how common is it to get a NJ and Federal tax filing extension for an estate above $1,000,000?)
Dear Anonymous of 10/26/13,
It used to be (prior to 2001), that the federal government would give you a dollar for dollar credit for state estate taxes paid. Now there is merely a deduction for state estate & inheritance taxes paid, which is not as beneficial.
As far as formulas go, it really isn't that simple because of a myriad of credits and deductions and calculations that need to be made for past gifts...
As far as the due dates, it is easy to get an extension on the time to file, but there is no leeway on the time to pay. If you are later than 8 months for the inheritance tax or 9 months for the NJ estate tax, there will be interest and penalties due.
Quick question : If a parent dies in NJ and leaves $2,500,000 to their child; about what percentage rate would the child be taxed at for the assets over the $675,000 exemption?? Thank you in advance for your help.
Is the 10% interest on an Estate tax liability calculated as straight interest or compound interest?
Dear Anonymous of October 28, 2013,
As a general rule of thumb, it is probably easiest to presume a 10% tax on the overage. Here, a more accurate answer would be a little under $145,000 in taxes.
Dear Anonymous of November 6, 2013,
I am pretty sure, but not positive, that it is straight interest, and not compounded. It is also something that can be, and frequently is, negotiated.
Kevin,thank you for your clarity and willingness to share information. When preparing an inheritance return and there are deductions, how do you determine allocation of the deductions when you have a number of Class A beneficiaries and one Class C?
Kevin, my brother died and left all his money to his mother which is under $100,000. There was one pension fund where the beneficiary was his girlfriend who was paid 50,000. I am the estate administrator. My question is who pays the inheritance and estate taxes to NJ...the girlfriend or the estate?
Dear Wil,
You never mentioned whether there was a Will and if it had a tax allocation clause. If there is a tax allocation clause, you must follow the instructions. (Often Wills say that the taxes get paid out of the residuary estate meaning your mother will pay the tax.)
If there is no tax allocation clause, you are required to report it on the inheritance tax return, but the girlfriend will be responsible for paying for it.
Please let me know if you would like consultation to review the Will or regarding the preparation of the NJ inheritance tax return.
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