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If you’re planning your estate, you’ve probably asked yourself, “Will my family owe taxes on what I leave them?” It’s a common concern, and in New Jersey, the answer depends on who your beneficiaries are. Although the state no longer has an estate tax, the inheritance tax remains in effect.
This tax doesn’t apply to everyone, and many close relatives are exempt. However, for others, especially friends and distant relatives, the costs can quickly add up. In this blog, we’ll walk through who is subject to the New Jersey inheritance tax, what rates apply, and how you can plan ahead to minimize the burden on your loved ones.
Understanding the Inheritance Tax in New Jersey
An inheritance tax is a state tax charged to certain individuals who receive property or money from someone who has passed away. It’s not a tax on the estate itself, but on the person receiving the inheritance.
This is different from the federal estate tax, which applies to estates above a certain size. Inheritance tax, on the other hand, is based on the relationship between you and the person receiving your assets.
New Jersey no longer has a state estate tax, as it was phased out in 2018. However, the inheritance tax remains in place and can apply depending on who your beneficiaries are. So even if your estate wouldn’t be large enough to trigger federal estate tax, your heirs may still face a tax bill in New Jersey if they don’t fall into an exempt category.
Who Has to Pay? The Role of Beneficiary Classifications
New Jersey breaks beneficiaries into classes. Whether someone owes inheritance tax depends entirely on which class they fall into.
Class A beneficiaries (fully exempt):
These individuals are exempt from paying inheritance tax, regardless of the amount they inherit. This group includes:
- Your spouse or civil union partner
- Your children, grandchildren, and stepchildren
- Your parents or grandparents
Class C beneficiaries (partially exempt):
These people may owe tax depending on the value of the inheritance:
- Siblings
- Sons-in-law and daughters-in-law
The first $25,000 they receive is generally tax-free. Anything above that amount may be taxed.
Class D beneficiaries (almost always taxed):
This group includes:
- Friends
- Distant relatives (like cousins, aunts, uncles)
- Unrelated individuals
There is no exemption amount for Class D. The tax applies to the entire inheritance, and the rates are typically higher.
Class E beneficiaries (fully exempt):
This class includes charities, religious institutions, and other non-profit organizations. They do not pay inheritance tax.
How Much Tax Will They Owe?
Once you know which class your beneficiary is in, the next step is understanding the tax rates. These rates depend on both the class and the size of the inheritance.
- Class C
- First $25,000: tax-free
- Next $1.075 million: taxed at 11%
- Higher amounts can be taxed up to 16%
- Class D
- Generally taxed starting at 15%
- Larger inheritances taxed at 16%
This means even a modest inheritance could create a tax bill if it’s going to someone outside your immediate family.
Planning Ahead Can Help Protect Your Beneficiaries
While inheritance tax may feel frustrating, there are ways to reduce or avoid it with thoughtful planning.
Consider these strategies:
- Name Class A beneficiaries as direct recipients of accounts or insurance policies when possible
- Use trusts to control how and when assets are distributed
- Make lifetime gifts to certain individuals. These are not taxed under New Jersey’s inheritance tax laws
- Support charities with gifts that qualify for Class E exemption
The right plan depends on your goals, your assets, and your family. However, these tools can help you ensure that more of your legacy remains with the people you care about.
Common Misunderstandings About Inheritance Tax
It’s easy to confuse inheritance tax with other kinds of taxes. Here are a few common misconceptions:
- “All family members are exempt.” Not true—siblings, in-laws, and more distant relatives may still owe taxes.
- “Small inheritances are never taxed.” That depends on the relationship. Friends inheriting even a few thousand dollars can still owe tax.
- “If I already paid estate taxes, there’s nothing more to worry about.” Estate and inheritance taxes are separate and can both apply in some cases.
Understanding the rules can help you make better decisions now, before they impact your family later.
How We Can Help You Build a Tax-Smart Plan
At Bozanian McGregor, LLC, we work with New Jersey families to create estate plans that reflect their values and reduce tax exposure where possible. We’ll walk you through your options, explain the tax rules in plain language, and help you make confident decisions about the future.
If you’re wondering how inheritance tax might affect your loved ones, or if you want to make sure your assets go exactly where you intend, we’re here to help. Contact us today to get started.