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The Unknown Tax: New Jersey Inheritance Tax
While the New Jersey Estate Tax was abolished 5 years ago and the Federal Estate Tax applies to taxpayers with estates over $12 million, the NJ Inheritance tax is relatively unknown and impacts thousands of modest taxpayers every year.
The State of New Jersey imposes a transfer inheritance tax on property with a total value of $500 or more that passes from a decedent to a beneficiary. This is a tax that applies on the beneficiaries of an estate. It is different from the federal and New Jersey estate taxes that apply on the value of the estate. The estate tax is paid from the assets in the estate before property is distributed to the beneficiaries. The inheritance tax falls on the beneficiaries.
Exemptions and Tax Rates
The New Jersey transfer inheritance tax is levied at graduated rates of from 11% to 16% based on different groups, or classes of beneficiaries. Each class of beneficiaries has its own exemption amount and tax rate.
There are various persons related to the decedent who are entirely exempt from this transfer inheritance tax. They include the surviving spouse or domestic partner, the decedent’s parents, grandparents, children, adopted children, stepchildren, and grandchildren.
Another class of beneficiaries includes other family members, such as the decedent’s brothers, sisters, half brothers and sisters, son-in-law, and daughter-in-law. These beneficiaries are allowed an exemption of $25,000. The balance of their inheritance is taxed at 11% for the next $1,075,000 and thereafter at rates of from 13% to 16%.
All other beneficiaries who are not included in the groups described above are taxed at 15% for the first $700,000 and then at 16% for proper transfers with a value over that amount.
Transfers of the decedent’s property that have a value of less than $500 are exempt. In addition, no New Jersey transfer inheritance tax is due on money or the value of property that a decedent leaves to a charity, an educational institution, church, hospital, library or the State of New Jersey or its political subdivisions.
Exempt and Taxable Property
When the decedent was a resident of New Jersey, taxable property transfers include all real or tangible personal property located in New Jersey or intangible personal property wherever located. If the decedent was not a resident of New Jersey, taxable transfers include real or tangible personal property located in New Jersey. Real and personal property located in another state would not be taxable, and intangible personal property of a nonresident, wherever located, is not taxable.
There are certain types of transfers that are specifically exempt from the New Jersey inheritance tax. The transfer of real and personal property held in New Jersey by a husband and wife as tenants by the entirety to the surviving spouse is not subject to New Jersey inheritance tax. Intangible personal property such as stocks, bonds, securities, and bank deposits are subject to the inheritance tax if the decedent was a resident of New Jersey, but not when he or she was a nonresident.
The proceeds of a life insurance contract on the decedent, whether a resident or nonresident of New Jersey, that are payable directly to named beneficiaries, and not to the decedent’s estate, are exempt from the New Jersey inheritance tax. Life insurance proceeds would also be exempt if they are payable to a trust set up by the decedent during life for the beneficiaries.
Payments from the New Jersey Public Employees’ Retirement System, the New Jersey Teachers’ Pension and Annuity Fund and the New Jersey Police and Fireman’s Retirement System; federal civil service retirement benefits payable to a beneficiary other than the estate; and annuities payable to survivors of military retirees are exempt.
Death benefits paid by the Social Security Administration or Railroad Retirement Board to the surviving spouse are exempt from the New Jersey inheritance tax. An exemption is also provided for payments to a surviving spouse from a pension, annuity or retirement plan the decedent had with his or her employer, that are considered qualified plans under the Internal Revenue Code.
Filing and Payment of Tax
Many times when all of a decedent’s property passes to the beneficiaries who are exempt from the inheritance tax (surviving spouse, domestic partner, civil union partner, children, stepchildren, parents, grandparents, or grandchildren), it is not necessary to file an inheritance tax return.
In these cases, Form L-8 can be used to release bank accounts, stocks, bonds, and brokerage accounts. Form L-8 is a Self-Executing Waiver and is filed with the bank, financial institution, or broker. Form L-9 can be used to release the State’s lien on real property. Form L-9 is a Real Property Tax Waiver that is filed with the Individual Tax Audit Branch – Inheritance and Estate Tax office in Trenton, New Jersey. These forms can be downloaded from the State of New Jersey Treasury website at www.state.nj.us/treasury/taxation.
When a husband and wife own real estate as tenants by the entirety, the surviving spouse does not have to file a Form L-9, and the property can be transferred at any time. The same applies if the decedent and surviving spouse hold a membership certificate or stock in a cooperative housing corporation as joint tenants with right of survivorship.
If there are beneficiaries subject to the inheritance tax and an inheritance tax return has to be filed, Form IT-R should be used for decedents who were residents of New Jersey and Form IT-NR for nonresident decedents. The inheritance tax return must be filed and the tax paid within eight months of the decedent’s death. Any balance of tax due after that period is subject to interest.
Some assets, such as real estate, stocks, and bank accounts, require written consent from the Director of the New Jersey Division of Taxation before they can be transferred. This consent, known as a waiver, applies when Forms L-8 and L-9 described above do not apply. These waivers will not be granted until the inheritance tax has been paid. Normally waivers are not required to transfer automobiles, household goods, personal effects and most employee benefits.
Banks and financial institutions can release up to 50% of any bank account, certificate of deposit, or other account to the survivor, if it is a joint account, or to the executor or administrator of the estate, under a blanket waiver. The blanket waiver does not apply to brokerage accounts with stocks and bonds.
Once the assets of the estate have been distributed the executor will have the beneficiaries sign a refunding bond and a release. By signing the refunding bond, the beneficiary agrees to return part or all the assets in the unlikely event they are subsequently needed to pay debts of the estate. The release absolves the executor from any liability and allows the estate to be closed.
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