Taxes are a valid concern when planning how to distribute your estate. Everyone wants to maximize the amount they can leave behind for their loved ones. However, the larger your estate, the more taxes you will likely have to pay.
Types of taxes that may affect estates
Several types of taxes can potentially affect the value of your estate and the amount your beneficiaries or heirs will receive. These include:
- Estate tax: Also called “death tax,” is a federal tax levied on your property when you die.
- Inheritance tax: Unlike estate tax, which authorities determine based on the value of your estate before it is transferred, inheritance tax is based on the amount your beneficiaries receive.
- Gift tax: This type of tax applies to any asset you transfer to someone else as long as you don’t receive anything in return.
- Generation-skipping tax: This federal tax only applies if you skip a generation when nominating beneficiaries, such as leaving assets to your grandchildren instead of your adult children.
No estate or gift tax in New Jersey
Fortunately, residents of the Garden State generally do not have to worry about two types of taxes. The state doesn’t require gift tax and repealed its estate tax completely in 2018. However, if you exceed the amount set for the annual gift tax exclusion, you may need to pay federal gift tax. The same applies if you exceed the lifetime gift and estate tax exemption.
State rules on inheritance tax
Although New Jersey does not have estate and gift taxes, it still imposes inheritance tax. The good news is that there are some inheritance tax exceptions. These exceptions are based on your relationship with the beneficiaries:
- Fully exempt from inheritance tax: Class A beneficiaries or your spouse, domestic partner, parents, children, stepchildren and grandchildren
- No inheritance tax on assets up to $25,000: Class C beneficiaries or your siblings and children’s spouses
Maximize the inheritance you leave behind
Early and careful estate planning helps ensure your beneficiaries get the most out of your estate. An estate planning attorney can assist you in finding the right strategies to help minimize your estate’s tax liabilities and achieve your estate planning goals.