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New Jersey tax laws for wills naming Class D beneficiaries

People who take steps to create carefully-worded wills with provisions for their beneficiaries usually don't imagine their loved ones will face any difficulties with their inheritance. Unfortunately, this is not always the case as some beneficiaries find themselves dealing with tax issues after receiving their inheritance. In a piece published on NJ.com's business section, one forward-thinking New Jersey woman posed a question about possible tax hurdles associated with her benefactor's inheritance.

The woman explained that she and her husband had arranged for their wills to benefit each other according to who dies first, but she also stated that upon both of their deaths, their estate would pass to an unrelated beneficiary, also known as a Class D beneficiary. One of her questions was about the percentage of tax her beneficiary might owe on the inherited estate.

New Jersey does impose an inheritance tax in some cases. Because the beneficiary is not related to the couple, he would be required to pay a 15 percent inheritance tax if the transfer of property took place after the couple's death for an estate valued at $700,000 or less. An inheritance exceeding $700,000 would require a 16 percent tax.

However, if the transfer of property, or gifting, takes place before the couple's death and the couple continues to live for three more years, the inheritance would not be subject to any federal gift tax because of a $5.34 million federal gift tax exemption.

Sometimes it's difficult to know how to proceed in matters of estate planning. Clearly, the beneficiary mentioned in the article could possibly derive greater tax benefits by receiving the estate before the couple passes away, but then that brings up issues of ownership and questions about what might happen if he decides to sell or give away the couple's property before they die. Estate planning and creating wills are both delicate legal processes and many times require advice from legal professionals for the best results.

Source: NJ.com, "Your Money: The taxing truth about inheritances" Karin Price Mueller, Apr. 09, 2014

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