In addition to the Estate Tax, New Jersey also has an Inheritance Tax. New Jersey applies the inheritance tax based on the relationship the decedent had with his/her beneficiaries. The inheritance tax recognizes five beneficiary classes as follows:
Class "A" - Father, mother, grandparents, wife, husband, civil union partner (after 2/19/07), child or children of a decedent, adopted child or children of a decedent, issue of a child or legally adopted child of a decedent, mutually acknowledged child, stepchild (includes a grandchild and great-grandchild but not a step grandchild or a great-step grandchild), and domestic partner (after 7/10/04). Class A beneficiaries are exempt from the inheritance tax.
Class "C" - Brother or sister of a decedent, wife or civil union partner after 2/19/07 or widow or surviving civil union partner after 2/19/07 of a son of a decedent, or husband or civil union partner after 2/19/07 or widower or surviving civil union partner after 2/19/07 of a daughter of a decedent.
Class “D” - Includes everyone else. Inheritance taxes may apply to an amount of as little as $500 payable to a Class D beneficiary. So make sure that if any bequest was made to a friend, partner, fiancé, nephew, niece or neighbor, the Inheritance taxes are paid to avoid penalties or interest.
Class "E" - Transfers to the State of New Jersey or any of its political subdivisions for public or charitable purposes, an educational institution, church, hospital, orphan asylum, public library, and certain other nonprofit agencies, etc. Rate: Totally exempt.
There are circumstances, when the amount that a beneficiary will receive from a decedent is not known or it is contingent upon future events. When the tax on a transfer of property cannot be definitely determined until the occurrence of contingencies, the tax liability may be immediately adjusted by the payment of a compromise tax.
The compromise tax is the amount of tax that the New Jersey Division of Taxation will accept in satisfaction of a tax liability which, if not settled in this manner, will be held open for an indefinite period.
The settlement of tax on the contingent portion of an estate prior to the occurrence of the contingencies is advantageous to both the New Jersey Division of Taxation Branch and the estate representatives.
The New Jersey Division of Taxation prefers an immediate, fair and equitable settlement of the tax. In most cases it eliminates the need to maintain active files for an indefinite period, it eliminates the necessity of making multiple assessments of tax in the same estate, and it provides for the immediate receipt of tax revenue.
The Executor usually prefers the immediate settlement of the transfer inheritance tax liability because it results in a more expeditious completion of the inheritance tax proceeding and because it eliminates the requirement that a bond be filed for twice the highest amount of tax that may become due until the contingencies have occurred and the resulting tax liability has been satisfied.
Certain property can’t be transferred out of the estate until the inheritance tax is paid and the state issues a tax waiver. If no tax is due, someone who is a Class A beneficiary can file a “Request for Real Property Tax Waiver.” If the waiver is granted, an inheritance tax return doesn’t have to be filed.
Generally, if the decedent made gifts in the three years before his/her death, those gifts are also subject to New Jersey Inheritance Tax, unless the recipients are exempt under the rules discussed above. The gifts aren't taxed if it can be proved that you didn't give away the money or property "in contemplation of death."
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Taxes • Estates • Estate Planning