August 16, 2005 -- Much has been written recently about the Federal Estate Tax system. There is speculation about the possible repeal of the Federal Estate Tax in 2010 or sooner. If  this tax is not repealed there is a possibility of a significant increase in the amount that can pass free of Federal Estate Tax.  Although these are interesting issues, there are many states that have a State Inheritance and/or Estate Tax that continue to have implications and should be reviewed and considered. Many states have made changes to their Inheritance and/or Estate Tax laws. This article will highlight some of the provisions of both the New Jersey Inheritance and Estate Tax.

The State of New Jersey imposes a Transfer Inheritance Tax on property transferred from a resident decedent to a beneficiary. The tax is imposed based upon the beneficiary’s relationship to the decedent.  Property that passes to a surviving spouse or lineal relatives (parents, grandparents, children, stepchildren or grandchildren) is entirely exempt from the tax.  Transfers to non-lineal relatives will be subject to inheritance tax at rates ranging from 11% to 16%.  Transfers to most charitable organizations are exempt from tax and life insurance proceeds payable to a named beneficiary other than the estate are also exempt from tax.

Non-resident decedents will be subject to the New Jersey Inheritance Tax only if they owned real estate and/or tangible personal property physically located in the State of New Jersey . 

The State of New Jersey also imposes an estate tax, which is in addition to the inheritance tax, on certain resident decedents. The estate tax is somewhat more complicated because it has “decoupled” from the Federal system.  Prior to 2002 the New Jersey Estate Tax equaled the amount that the IRS would allow as a credit for State death taxes paid less any inheritance taxes payable to New Jersey or other states.  Up through December 31, 2001 the tax paid to the States did not increase the total Estate Tax burden as the IRS provided a dollar-for-dollar offset for the amount paid as New Jersey Estate Tax. Since New Jersey legislation has decoupled from the federal system, New Jersey estates must now calculate the New Jersey Estate Tax “as if” the Federal law in effect at December 31, 2001 had not changed or utilize a “simplified” system that the New Jersey Tax Director developed to approximate that result.  As a result of these changes, the New Jersey Estate Tax has become an added cost for some estates since the tax will not offset the amounts payable to the IRS . 

As a result of the New Jersey legislation changes, estates with a value of $675,000 or more (after the marital deduction and other allowable deductions under the 2001 Federal rules) will be subject to the New Jersey Estate tax even through the Federal exempt amount in 2004 has increased to $1,500,000. The New Jersey Estate Tax rates start at 3.7% and rise to 16% for larger estates. 

Because of the changes to the Federal Estate Tax rules and to the New Jersey Inheritance and Estate Tax rules it is important to keep your estate plans current.  It is important to periodically review your estate plan to make sure it reflects your goals for the protection of your family and the distribution of your assets. 

For more information, call an Asher tax professional at 215-564-1900 .

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