AVERY & AVERY
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Vol. L · No. I FOL. LArticles

Avery & Avery, Esqs. Ridgefield, NJ Robert W. Avery, Esq.

NJ Inheritance Tax vs Estate Tax — What's the Difference

RW·A

By Robert W. Avery, Esq.

Founding Partner · Former Mun. Ct. Judge

By Robert W. Avery, Esq.

NJ has historically taxed estates two ways: an inheritance tax (still in effect) and an estate tax (repealed effective 2018 for decedents dying after January 1, 2018). The federal estate tax sits separately on top. The three taxes operate on different tax bases. Understanding the distinctions matters for estate planning. This post walks through them.

Estate-tax framework walkthrough. Not legal advice. Free consultation: (201) 943-2445.

The Three Death Taxes

Three separate taxation regimes have applied (or apply) to NJ estates:

1. NJ Inheritance Tax — Still in Effect

Tax based on the relationship between the decedent and the beneficiary. Different classes pay different rates.

2. NJ Estate Tax — Repealed for 2018+ Decedents

Tax based on the gross value of the decedent’s estate, with a federally-aligned threshold. Repealed effective January 1, 2018.

3. Federal Estate Tax — Active

Tax based on the gross value of the decedent’s worldwide estate, with a high threshold ($13.61M individual / $27.22M married for 2024, scheduled to revert to ~$7M individual in 2026 unless extended).

The NJ Inheritance Tax (In Effect)

NJ inheritance tax under N.J.S.A. 54:34-1 et seq. classifies beneficiaries into five groups:

Class A — Exempt

  • Spouse / civil-union partner
  • Domestic partner
  • Children (biological, adopted, mutually-acknowledged step-children)
  • Grandchildren and other lineal descendants
  • Parents and grandparents

Class A beneficiaries pay zero NJ inheritance tax.

Class C — Taxed at 11-16%

  • Siblings (brothers and sisters)
  • Children’s spouses (sons-in-law, daughters-in-law)
  • Civil-union partners’ children’s spouses

Tax rates:

  • First $25,000 — exempt
  • $25,000 to $1.075M — 11%
  • $1.075M to $1.4M — 13%
  • $1.4M to $1.7M — 14%
  • Above $1.7M — 16%

Class D — Taxed at 15-16%

All other beneficiaries (friends, distant relatives, charities not qualifying for E):

  • First $500 — exempt
  • $500 to $700,000 — 15%
  • Above $700,000 — 16%

Class E — Exempt

Qualifying charities, religious organizations, NJ governmental entities.

(Class B was eliminated.)

NJ Estate Tax (Repealed)

NJ estate tax was repealed for decedents dying after January 1, 2018. For decedents dying before that date, the prior framework applied — a $675,000 threshold (much lower than the federal threshold) with rates up to 16%.

The repeal was politically significant; NJ had one of the lowest-threshold estate taxes in the country.

Federal Estate Tax

Federal estate tax under 26 U.S.C. § 2001 et seq. applies to estates above the unified credit threshold:

  • 2024: $13.61M individual / $27.22M married (with portability election)
  • 2025: $13.99M individual
  • 2026: scheduled to revert to ~$7M individual unless Congress extends

The federal rate schedule reaches 40% on estates above the threshold.

How They Interact

For a typical NJ estate today (post-2018):

  • Federal estate tax applies only to estates above the threshold ($13.99M individual in 2025)
  • NJ estate tax does not apply (repealed)
  • NJ inheritance tax applies based on beneficiary class — Class A pays nothing, Class C and D pay graduated rates

So a NJ resident with a $5M estate leaving everything to spouse and children pays zero NJ tax — Class A inheritance, no estate tax (federal threshold not exceeded, NJ estate tax repealed).

A NJ resident with a $5M estate leaving everything to a sibling pays NJ inheritance tax (Class C, 11-16% rates) — substantial tax even though no federal or NJ estate tax applies.

Planning Implications

Planning around the three regimes:

  1. Class A beneficiaries pay no inheritance tax — direct bequests to spouse and lineal descendants are tax-efficient
  2. Class C beneficiaries can be partially mitigated through beneficiary structure — trust arrangements, life-insurance pass-through, retirement-account beneficiary designations
  3. Class D beneficiaries carry the highest exposure
  4. Federal-threshold planning for high-net-worth estates uses gifting, trust strategies, and tax-deferred vehicles

Frequently Asked Questions

Is there a NJ death tax for spouses?

No. Spouses are Class A and pay zero NJ inheritance tax.

What about life insurance?

Life-insurance proceeds paid to a named beneficiary are not subject to NJ inheritance tax (treated as separate from the estate). Federal estate tax may apply if the decedent was the policy owner.

What about retirement accounts?

IRA / 401(k) accounts pass to named beneficiaries outside probate but are subject to NJ inheritance tax based on beneficiary class.

Is gifting before death effective?

Gifts made within 3 years of death are pulled back into the NJ inheritance-tax computation under N.J.S.A. 54:34-2(c). Federal gift-tax / estate-tax aggregation also applies.

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