Many people assume that New Jersey has eliminated its inheritance tax, but this is not the case. While NJ abolished its estate tax in 2018, it still imposes an inheritance tax on certain beneficiaries. Understanding the difference between these taxes and who is affected is crucial for estate planning.

The Difference Between Estate Tax and Inheritance Tax

• Estate tax is a tax on the total value of a deceased person’s estate before distribution to heirs. NJ eliminated its estate tax as of January 1, 2018.
• Inheritance tax is a tax imposed on certain beneficiaries based on their relationship to the deceased. This tax remains in effect in New Jersey.

Who Pays NJ Inheritance Tax?

NJ classifies beneficiaries into different groups, determining whether they owe inheritance tax:

• Class A Beneficiaries – Exempt from inheritance tax. Includes:
  • Spouses
  • Domestic partners
  • Parents
  • Grandparents
  • Children (including stepchildren and adopted children)
• Class C Beneficiaries – Taxed at rates between 11% and 16% but with a $25,000 exemption. Includes:
  • Siblings
  • Sons-in-law and daughters-in-law
• Class D Beneficiaries – Taxed at 15% or 16%. Includes:
  • Nieces, nephews, cousins, friends, and non-relatives
• Class E Beneficiaries – Exempt from inheritance tax. Includes:
  • Charities, religious institutions, and tax-exempt organizations

 

NJ Inheritance Tax Rates

• 0% for Class A and Class E beneficiaries
• 0% on the first $25,000 for Class C beneficiaries
• 11%-16% for Class C and D beneficiaries, depending on the amount inherited

How to Reduce Inheritance Tax in NJ

Since inheritance tax is still in effect, careful estate planning can help minimize its impact. Strategies include:

• Gifting assets before death (outside the three-year lookback period)
• Setting up trusts
• Naming tax-exempt beneficiaries, such as charities or Class A heirs

Final Thoughts

While New Jersey eliminated its estate tax, inheritance tax is still in place for certain beneficiaries. Understanding who is taxed and at what rate can help individuals plan their estates more effectively. Consulting an estate planning attorney can help ensure the most tax-efficient strategy.