How can I avoid inheritance tax for my nephews?


Q. I am trying to plan my estate. I have three nephews to whom I want to give everything but I don’t want them to have to pay the inheritance tax. Is there a way to avoid the tax?

– Uncle

A. We are happy that you are trying to plan ahead.

You have a few options, but it will take a little planning. Let’s start with the beginning.

New Jersey inheritance tax is a tax levied on certain transfers from a deceased person to a beneficiary, based on beneficiary relationship to the deceased, said Samantha Rocco, a lawyer at Einhorn. Barbarito, Frost & Botwinick in Denville.

There are four categories of beneficiaries: Class A, C, D and E. Class B was phased out in the 1960s, she said.

“The nieces and nephews are Category D beneficiaries “ Rocco said. “As a general rule, a bequest of $ 700,000 or less to a Class D beneficiary is subject to an inheritance tax of 15% and any amount over $ 700,000 is subject to an inheritance tax of 16%.

However, there are exceptions to this general rule.

An exception is that the product of a death benefit life insurance payable to a named beneficiary, or beneficiaries, are not subject to New Jersey inheritance tax.

She offered this example. Let’s say Joan Smith dies, leaving her nephew $ 100,000 in cash. The nephew’s inheritance will be subject to an inheritance tax of 15%. This means that on the bequest of $ 100,000, a tax of $ 15,000 will be imposed ($ 100,000 * 15%). The net amount the nephew will receive is $ 85,000 ($ 100,000 less inheritance tax of $ 15,000).

Now, imagine rather that Jeanne designates her nephew as beneficiary of her life insurance policy, who has a death benefit of $ 100,000, rather than giving him $ 100,000 in cash. Since the life insurance death benefit proceeds are paid to a named beneficiary, the proceeds are exempt from New Jersey inheritance tax and, therefore, the nephew will inherit the entire $ 100,000, a declared Rocco.

In this case, no inheritance tax will be due, she said.

Rocco noted that certain specifically defined pensions are also exempt from New Jersey inheritance tax. Namely, by NJAC Section 18: 26-6.14, “All payments on death under the Teachers ‘Pension and Annuity Fund, the Public Employees’ Retirement System of New Jersey, and the Police and Firemen’s Retirement System of New Jersey, and any other state, county and may have a tax exemption clause as broad as that of the three major state regimes discussed in this section. . . are exempt from New Jersey inheritance tax.

Rocco said another effective way to minimize the amount of inheritance tax in New Jersey is to start asset donations over its lifetime, whether directly or in trust.

It won’t be right for everyone, as some people might not be able to afford it in their lifetime, she said.

With respect to living donations, it is important to note that under the law, donations made within three years of death are considered “given for the purpose of death”.

“Gifts given in anticipation of death are subject to inheritance tax, even if the person was alive at the time the gifts were made,” Rocco said. “To rebut this presumption, one must convince the New Jersey Division of Taxation that the gifts made within three years of death were not gifts given in contemplation of death.

Thus, if you bequeath your estate to your nephews, unless your estate is made up solely of life insurance policies designating your nephews as beneficiaries or one of these pension plans, inheritance tax will be charged, a declared Rocco.

Also note that your will may address the issue of who will pay the inheritance tax.

“The two main options are your estate – the amount left over after your debts and specific bequests, if any, are satisfied – will pay inheritance tax, which will reduce the amount each nephew receives, or each nephew can pay. his. part of inheritance tax due.

Email your questions to [email protected].

Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Register for‘s weekly electronic newsletter.


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