New Jersey inheritance tax: who pays, rates and tax waivers

Inheritance tax vs. estate tax in New Jersey

These two taxes get mixed up all the time. An estate tax is based on the size of the whole estate. An inheritance tax is based on who receives each share. New Jersey used to have both. According to the Division of Taxation, there is no New Jersey estate tax for deaths on or after January 1, 2018, and no estate tax return is required. For deaths during 2017, the estate tax applied only to estates over $2 million, so families settling older estates may still run into it.

The inheritance tax was never repealed. It still applies to many transfers, and it can surprise families who assumed New Jersey stopped taxing estates. It mainly affects the estates of New Jersey residents, and there is a separate nonresident return (Form IT-NR) for some estates of people who lived elsewhere.

The beneficiary classes

The tax depends entirely on the beneficiary's relationship to the person who died. The Division of Taxation groups beneficiaries this way:

• Class A (exempt): spouse, civil union partner, domestic partner, children (including adopted children), stepchildren, grandchildren and further descendants, parents and grandparents. Step-grandchildren are not Class A.
• Class C: brothers and sisters, and the spouse or civil union partner (or surviving spouse or partner) of a child.
• Class D: everyone not in Classes A, C or E, such as nieces, nephews, aunts, uncles, cousins, friends and unmarried partners who are not registered domestic or civil union partners.
• Class E (exempt): qualified charities, religious, educational and medical institutions, and the State of New Jersey and its political subdivisions.

Rates for Class C and Class D

For Class C beneficiaries, the first $25,000 is not taxed. After that, the Division of Taxation lists rates of 11% on the next $1,075,000, 13% on the next $300,000, 14% on the next $300,000, and 16% on anything over $1,700,000.

For Class D beneficiaries, the rate is 15% on the first $700,000 and 16% on the amount above $700,000. There is one small exception: under the Division's return instructions, a Class D beneficiary who receives a total of $499 or less is exempt. It is not a $499 deduction. If a Class D beneficiary receives $500 or more, the whole amount is taxable.

To put that in perspective, a niece who inherits $100,000 is in Class D, so the tax on her share would be 15%, or $15,000. A brother inheriting the same $100,000 is in Class C, so his first $25,000 is exempt and the remaining $75,000 is taxed at 11%, or $8,250.

Larger shares move through the brackets. If a sister inherits $1,200,000, the first $25,000 is exempt, the next $1,075,000 is taxed at 11% ($118,250), and the last $100,000 falls in the 13% bracket ($13,000), for a total of $131,250. These are simplified examples. The real calculation depends on how assets are valued, what debts and expenses are deducted, and how the will or trust allocates the tax.

Relationship details matter. A stepchild is Class A, but a step-grandchild is not. A civil union partner or registered domestic partner is Class A, while an unregistered partner is Class D no matter how long the couple was together.

What isn't taxed

Several common assets fall outside the tax even when a Class C or D beneficiary is involved. The Division's instructions say life insurance proceeds paid to a named beneficiary are exempt, while proceeds payable to the estate are included. Real property held by spouses or civil union partners as tenants by the entirety is not subject to the tax when it passes to the survivor.

Joint accounts with someone other than a spouse are not automatically reported at half value, so they need a closer look. Transfers to Class E beneficiaries, such as qualified charities, are exempt as well, so a charitable gift in a will is not reduced by the tax. Because the rules on joint assets, gifts made before death and trusts can be technical, executors often work with an attorney or accountant on the return.

Deadlines, returns and interest

Inheritance tax is due within 8 months after the date of death. Tax not paid by then accrues interest at 10% a year. You can request more time to file the return with Form IT-EXT, but there is no extension of time to pay, so interest still runs.

Resident estates file Form IT-R when a return is required. Nonresident estates file Form IT-NR. The Division's executor guide says a full return is required if there are any Class C, D or E beneficiaries, even if no tax ends up being due. Inheritance tax returns cannot be filed electronically, so they are paper filings.

Tax waivers: L-8, L-9 and Form 0-1

When someone dies, the state has a lien on their New Jersey property until the tax is resolved, and that is why banks and title companies ask for tax waivers. A waiver releases the lien so assets can be transferred.

The Division of Taxation describes these forms:

• Form L-8 (self-executing waiver affidavit): used for bank accounts, stocks, bonds and brokerage accounts passing to Class A beneficiaries when no tax is due. It goes directly to the financial institution, not the Division.
• Form L-9: filed with the Division to get a real estate waiver when all beneficiaries are exempt (L-9 NR for nonresidents).
• Form 0-1 (tax waiver): issued only by the Division, generally after a return is filed. It is not available on the Division's website. Real estate transfers always require a waiver.
• Before a waiver arrives, banks may release up to 50% of the funds to the executor, administrator or a joint owner, and may pay inheritance tax checks drawn on the account.