As another year wraps up, here at Lighthouse we are doubling down on tax projections and ensuring our clients are prepared for April 15^th.  Sometimes we find ourselves researching uncommon tax situations. This year, Estate and Inheritance Tax seems to be a recurring topic. While the Federal rules are fairly well known ($13.61M per person exemption in 2024), state rules and regulations can be complex and confusing. Only seventeen states and the District of Columbia have estate or inheritance tax laws and it’s important to know if your estate will be subject to those laws.

If you’re a NJ resident the good news is there’s no estate tax (Chris Christie repealed it in 2016) and for most descendants any inheritance is also tax free. But, as expected, there are a few exceptions. For immediate family, i.e. spouses (common law and civil unions included), children and step-children, and grandchildren, there is no tax liability on inheritance in New Jersey. But one step away from immediate family is a category which includes brothers and sisters of the deceased as well as the spouses/civil partners of the deceased’s children who will be taxed on any inheritance over $25,000. Any other inheritor will be taxed at a 15% rate on amounts up to $700k and at 16% for anything over $700k. And maybe none of this sounds concerning until an aunt with no direct heirs leaves you her $2,000,000 estate. Now you’re hit with a $300K tax bill! It’s also important to remember that New Jersey has a three year look back period for material gifts. This stipulation is in place to prevent gifting away huge portions of an estate when death is imminent. Your aunt should gift away her estate over a long period ($18k/per person for 2024) and hopefully her advisor suggests this!

By comparison, New York laws are vastly different. New York taxes the value of a resident’s estate up to $6.58M for 2023. The estate value is derived from real and personal property in addition to gifts given in the previous three years. There are exceptions made for the estates of New York nonresidents unless you hold property in the state and exceed the Federal Estate Exemption. Additionally, New York state has an estate tax cliff, meaning that once you exceed the exemption by 5%, you “fall off the cliff” and the entire estate becomes taxable. Taxpayers can also donate amounts over the exemption limit to charity to avoid the tax cliff but this requires specific language in your will giving your executor authority to make this type of charitable donation.

Countless taxpayers are blind-sided by inheritance and estate taxes each year. It’s an important, albeit delicate, conversation to have with your financial advisor as you move into retirement or as your parents age.