How Do I Avoid Inheritance Tax in NJ?

New Jersey imposes an inheritance tax, which is paid by the person who inherits assets, known as the beneficiary. The tax amount depends on the inheritance value and the beneficiary’s relationship to the decedent. This differs from an estate tax, which is paid by the estate itself. New Jersey’s estate tax was repealed for individuals who died on or after January 1, 2018.

The tax is levied on property transfers, and the estate’s executor or administrator must file the tax return, Form IT-R for residents. This return and any tax owed are due within eight months of the decedent’s death to avoid interest penalties.

Understanding New Jersey Beneficiary Classes and Exemptions

New Jersey’s inheritance tax system categorizes heirs into classes based on their relationship to the decedent. This classification dictates whether an inheritance is taxed and at what rate. The structure favors close family members by granting them significant or complete exemptions.

Class A beneficiaries are entirely exempt from New Jersey’s inheritance tax. This class includes:

• Spouses, domestic partners, and civil union partners
• Parents and grandparents
• Children, grandchildren, and other direct descendants
• Stepchildren

Also included are “mutually acknowledged” children, a legal designation for a person who had a parent-child relationship with the decedent that began before the child’s 15th birthday and lasted for at least ten years.

Class C beneficiaries include the decedent’s siblings, half-siblings, and the spouse or civil union partner of a child of the decedent. This class receives a $25,000 exemption, meaning the first $25,000 of inherited assets is not taxed. Amounts exceeding this exemption are taxed at a progressive rate, starting at 11% and rising to 16% for larger inheritances.

Class D is a catch-all category for anyone not in Classes A, C, or E, including nieces, nephews, cousins, and friends. There is no initial exemption for this class unless the total bequest is under $500. The tax rate is 15% on the first $700,000 and 16% on any amount above that.

Class E beneficiaries are also completely exempt from the inheritance tax. This class is composed of qualified charitable organizations, educational institutions, religious organizations, and government entities.

Lifetime Gifting Strategies

Giving assets away during your lifetime can reduce the value of your estate subject to inheritance tax. By transferring ownership of assets to others, you decrease the value of your estate that will be assessed for tax purposes. This is effective for providing for beneficiaries who would otherwise face a tax liability, such as those in Class C or D.

New Jersey has a “contemplation of death” rule, also known as the three-year look-back period. Under this rule, gifts made within three years of death are presumed to be an attempt to avoid inheritance tax. The value of these gifts can be included in the estate to calculate the tax due from Class C and Class D beneficiaries.

Within this three-year window, gifts to Class C beneficiaries exceeding the $25,000 exemption are taxed. For Class D beneficiaries, any gift over $500 made during this period is taxable. To be effective for tax avoidance, gifts to these beneficiaries must be completed more than three years before death.

The federal annual gift tax exclusion operates independently of New Jersey’s rules. For 2025, federal law allows an individual to give up to $19,000 to any recipient annually without incurring a federal gift tax. This federal rule does not override New Jersey’s three-year look-back period, but it can be a complementary strategy for transferring wealth.

Utilizing Trusts for Tax Planning

Trusts can be used to manage assets and shield them from inheritance tax. The effectiveness for tax avoidance depends on whether the trust is revocable or irrevocable. To remove assets from an estate for tax purposes, an irrevocable trust is required.

When you transfer assets into an irrevocable trust, you, as the grantor, permanently give up ownership and control. The assets are then legally owned and managed by a trustee for your beneficiaries. Because you no longer own the property, it is not considered part of your estate upon death and is not subject to New Jersey inheritance tax.

An Irrevocable Life Insurance Trust (ILIT) is a common example. Life insurance proceeds are included in an estate if the decedent owned the policy. By creating an ILIT and making the trust the owner and beneficiary of the policy, the death benefit can pass to the trust’s beneficiaries outside of the taxable estate.

Using an irrevocable trust requires careful planning and a formal, permanent transfer of assets. This loss of control is a significant consideration, making professional guidance important to ensure the trust is structured correctly.

Strategic Titling of Assets and Beneficiary Designations

How an asset is legally owned or who is named to receive it can determine if it is subject to inheritance tax. Certain ownership structures and beneficiary designations allow assets to bypass probate, but the tax implications still depend on the recipient’s beneficiary class.

A common ownership structure is Joint Tenancy with Right of Survivorship (JTWROS). When an asset is owned as JTWROS, it automatically passes to the surviving joint owner upon death. While this avoids probate, it does not automatically avoid inheritance tax. If the joint owners are a parent and child (Class A), the transfer is tax-free, but if they are two siblings (Class C), half of the asset’s value is considered a taxable inheritance for the survivor.

Financial products like life insurance, retirement accounts (401(k)s, IRAs), and payable-on-death (POD) bank accounts allow you to name a beneficiary. These assets pass directly to the person named, overriding a will. The tax treatment is determined by the beneficiary’s class; naming a Class A beneficiary results in a tax-free transfer, while naming a Class D beneficiary makes the proceeds taxable.

Avoid naming your estate as the beneficiary for these accounts. If the estate is the beneficiary, the funds are distributed according to the will. This pulls the assets into the probate estate, making them fully subject to inheritance tax based on the heirs’ beneficiary class and potentially exposing them to creditors’ claims.