Transfer Inheritance Tax
How the Tax Works
Unlike the Federal Government and many States, New Jersey has an inheritance tax rather than an estate tax. This means that when a New Jersey resident dies, his or her assets will be taxed on the basis of who inherits the assets and not on the value of the estate (although the value passing to each beneficiary is important).
No Tax on Most Inheritances
For most estates, there will be no tax. If a decedent's estate goes to a spouse, child or further descendant (e.g., grandchild), parent, grandchild, grandparent or stepchild, no tax is due. These beneficiaries are called "Class A" beneficiaries.
If a decedent leaves money to a charity, and educational institution, a church, a hospital, a library or the State of New Jersey or its political subdivisions, no tax is due.
Recipients That Pay Tax
If property is given to other family members, such as the decedent’s brother, sister, son-in-law or daughter-in-law the first $25,000 is not taxed (an exemption applies). The balance of the inheritance is presently taxed at 11% for the next $1,075,000 and thereafter at rates that range from 13% to 16%.
All other beneficiaries (persons not included in the above definitions of family) are presently taxed at 15% for the first $700,000 and at 16% on amounts over that figure.
Approvals Required to Transfer
Certain Assets; Forms
Some assets (real estate, stocks and bank accounts) require the written consent of the director of the New Jersey Division of Taxation before they can be transferred. This consent is commonly known as a Waiver. Waivers are not generally required to transfer cars, personal property such as household goods and jewelry and most employee benefits.
In most cases for decedents dying after 12/31/2001 leaving estates valued at less than $675,000 to Class “A” beneficiaries (spouse, child, parent, grandchild, grandparent or stepchild) may transfer bank accounts, stocks and bonds by utilizing a Self-Executing Waiver, form L-8. The Self-Executing Waiver is filed with the bank, financial institution or broker where the asset is located.
Real Estate
For Class “A” beneficiaries of decedents dying after 12/31/2001 leaving estates valued at less than $675,000 the transfer of real estate can normally be effectuated by the filing of form L-9, Real Property Tax Waiver. The L-9 form must be filed with the Individual Tax Audit Branch, Inheritance and Estate Tax office in Trenton. If a husband and wife own real estate as tenants by the entirety, the surviving spouse need not file a form L-9; the property may be transferred at any time.
Inheritance Tax
If a decedent does not leave all assets to a Class “A” beneficiary, a formal Inheritance Tax Return will have to be filed. All of the necessary forms for filing the Inheritance Tax Return can be obtained from the Individual Tax Audit Branch, Inheritance and Estate Tax, New Jersey Division of Taxation, P.O. Box 249, Trenton, New Jersey 08695-0249. In addition, the Branch will answer questions if you call (609) 292-5033.
If a formal Inheritance Tax Return is required, it is important to remember that you will need to attach a copy of the decedent’s Will and any amendments (Codicils), a copy of the decedent’s last full year’s federal income tax return (Form 1040), and a certified check for any tax due. Formal tax returns are due eight (8) months after the decedent’s death. If the inheritance tax is not paid within eight months, interest will accrue and no tax waivers will be issued until payment is received. Caution: This is one month earlier than the federal and New Jersey estate tax returns are due.
*********************Important Notice*********************
New Jersey Transfer Inheritance Tax
Subsequent to the publication date of this booklet entitled How to Probate a Will in the Bergen County Surrogate's Court, the New Jersey Legislature enacted N.J.S.A. 54:38-1. This legislation provides for a New Jersey estate tax; an estate tax return must be filed if the gross estate exceeds $675,000 as determined pursuant to the Internal Revenue Code in effect 12/31/2001.
It is important to contact your attorney to ensure your estate planning properly provides for potential tax consequences arising from this new legislation.
Federal Estate Tax
The estate tax was set to be repealed in 2010. In December 2010 Congress passed the “Tax Relief Act of 2010.” The act applies the estate tax to estates of decedents dying after December 31, 2009 and before January 1, 2013. However, for estates of decedents who died in 2010 there is special treatment of the estate tax that would allow the executor to elect no estate tax but instead apply the modified carryover basis. This means that the executor chooses that the estate tax on the decedent’s estate not apply, as if the tax relief act had not been passed. If the executor makes this choice there is no estate tax, but the carryover basis rules of the act would apply. These carryover basis rules affect the assets being transferred to heirs through the estate. Since the generation skipping tax (GST) rate in 2010 is zero, the choice of the modified carryover basis, rather than the estate tax is not available.
Passage of the act increased the Federal estate tax exemption amount to $5,000,000 with a top tax rate of 35%. In addition it reunified for 2011 and 2012 the estate and gift tax exclusion, each to be $5,000,000 and the top tax rate for each at 35%.
Included in the “Tax Relief Act of 2010” is the provision for the exclusion amount to be adjusted for inflation in 2012. The adjustment for inflation applies to both the estate and gift tax. The act also provides for the legislation to expire effective January 1, 2013. There is no clear determination what the exclusion amount and top tax rate will be following the expiration of the act. Once again, as it stands now, the exclusion amount and top tax rate would revert to the January 1, 2001 amount and rate ($675,000 and 55% respectively).
Federal and New Jersey estate taxes are each due nine (9) months after the decedent’s death. Those taxes are collected and due from estates with a net value (the estate’s value after taking all allowable deductions) at the time of a decedent’s death that exceeds the applicable exemption. The law is actually much more complex than these statements indicate. For example, if you gave away your house while alive, but retained the right to live there, known as a “life estate,” the value of your house will be included in your estate. There are a host of other “rights” which most people would not consider to be assets, which the tax laws may consider part of your estate and subject to estate tax.
Applicable exemption and top tax rate refer to those amounts in effect in the year of the decedent’s death. Since these numbers change in accordance with the law, people with substantial estates, I suggest exceeding $1 million, should consult with an attorney and/or accountant who specializes in estate taxes. In a similar manner, Executors of estates which appear to be below the applicable exemption are cautioned to at least consult with an estate attorney or tax accountant to determine if the estate they are administering is in fact subject to federal estate tax.
Because of this Federal tax, as well as the legal and personal complexity which accompany most larger estates, every individual with (or couple with combined) net assets that might possibly exceed $1 million (including the net value of your house, life insurance, pension and all other assets) should consult with a New Jersey attorney or accountant who specializes in estate tax planning. A proper estate tax plan can cost between $1,000 and $3,000 and up, depending on the complexity and the size of the estate. However, this fee can be very cost effective in offsetting estate tax. Individuals in this asset category can face large estate tax liability which can be reduced by having a properly drawn Will, durable power of attorney with gift provisions, and other planning steps.
Recognizing the uncertainty of the law as it now stands, every Executor should consider at least having a consultation with a tax professional to ascertain the status of the law at the time of any decedent’s death.
