Many families in New Jersey assume that siblings are automatically exempt from paying inheritance tax. Unfortunately, that is not the case. Although New Jersey eliminated its estate tax in 2018, the inheritance tax still applies to certain family members, including siblings, nieces, and nephews.
At Cohler Law, we help families in Marlton and across Burlington County, Camden County, and Gloucester County plan ahead to reduce the impact of inheritance tax. Understanding how the rules work for siblings (and other relatives like nieces and nephews) can make all the difference in protecting the people you care about most.
Do Siblings Pay Inheritance Tax in New Jersey?
Yes. Under New Jersey law, siblings are considered Class C beneficiaries. This means:
- The first $25,000 inherited is exempt.
- After that exemption, the tax rate ranges from 11% to 16% depending on the total value.
For many families, these taxes come as an unexpected burden.
To illustrate, let’s say your brother or sister inherits $100,000. The first $25,000 would be exempt. The remaining $75,000 would be taxed at 11%, resulting in a tax bill of $8,250.
What About Nieces and Nephews, Other Relatives or Even Friends?
The rules are even stricter for this class of beneficiaries. Under New Jersey law, nieces & nephews, along with cousins, friends, and other non-immediate relatives, are considered Class D beneficiaries. This means:
- They do not receive any exemption.
- Their inheritances are taxed at 15%-16%.
This can result in significant taxes if you plan to leave a portion of your estate to extended family members. Without advance planning, much of the inheritance you intended for them could be lost to taxes.
Is Life Insurance Subject to Inheritance Tax in New Jersey?
Life insurance can be a powerful planning tool because proceeds paid directly to a named beneficiary are exempt from New Jersey inheritance tax. This distinction often surprises families, which is why regularly reviewing and updating your beneficiary designations is essential.
It’s important to understand:
- If life insurance is payable to your estate, it becomes subject to inheritance tax.
- Proper beneficiary designations help ensure your loved ones receive the full benefit you intended.
For many families, life insurance can be an effective way to leave assets to siblings, nieces, or nephews while minimizing tax exposure.
Planning Strategies to Reduce Inheritance Tax
With careful planning, it is possible to reduce or even avoid the New Jersey inheritance tax. Strategies may include:
- Naming beneficiaries on life insurance policies to take advantage of NJ’s inheritance tax exemption when proceeds are paid directly to a named beneficiary. Note that beneficiary designations on many financial accounts may avoid probate but can still be subject to inheritance tax depending on who inherits.
- Creating trusts to control how assets are transferred while providing tax advantages.
- Using lifetime gifting strategies, which can reduce the value of the taxable estate. Gifts made during your lifetime are not subject to New Jersey inheritance tax, though federal gift tax rules may still apply.
- Carefully structuring your estate plan to balance inheritances between Class A beneficiaries (who are exempt, such as children and spouses) and those who would otherwise face higher tax rates.
- Consulting an NJ estate planning attorney before naming or changing beneficiaries ensures your designations coordinate with the rest of your estate plan.
Going back to our earlier example: Instead of leaving $100,000 to a sibling, of which $75,000 would be taxed at a whopping 11%, you might direct some of your assets into life insurance payable directly to that sibling since those proceeds would not be subject to New Jersey inheritance tax. This type of advance planning, along with other tactics, can help ensure more of your legacy reaches your loved ones.
Every family situation is unique, there is no one-size-fits-all solution. The right approach depends on your assets, your goals, and your loved ones’ circumstances. New Jersey generally requires an inheritance tax return and payment within eight months of a loved one’s passing. Interest begins to accrue after that deadline, which can increase the cost if families delay. Planning ahead can help your family avoid unnecessary costs.
Common Mistakes Families Make
Families often face higher taxes than necessary because of simple oversights. Some of the most common are:
- Not updating beneficiary designations after major life events such as marriage, divorce, or the birth of a child,
- Assuming all relatives are exempt from inheritance tax when many are not,
- Waiting too long to plan, which can lead to missed deadlines and unexpected costs.
By avoiding these pitfalls, you can preserve more of your estate for the people you care about most.
Why Work With an Experienced New Jersey Estate Planning Attorney?
Inheritance tax laws are complex, and New Jersey is one of only a few states that still impose them. Families often overlook the impact of these taxes until it is too late. At Cohler Law, we regularly advise clients across South Jersey. We provide guidance that is:
- Personalized: Your plan is tailored to your family’s specific needs.
- Compassionate: We focus on protecting your loved ones and reducing stress during what can already be a difficult time.
- Practical: We help you use available tools, like life insurance, trusts, and beneficiary designations, to achieve real results.
Taking the Next Step
If you plan to leave assets to siblings, nieces, nephews, or other relatives in New Jersey, it is essential to understand how the inheritance tax will apply. With the right planning, you can protect your family from unnecessary costs and ensure your legacy is preserved.
Contact Cohler Law today to schedule a consultation. Serving families in Marlton and throughout Burlington, Camden, and Gloucester Counties, we are here to help you create an estate plan that reduces inheritance tax and provides peace of mind for you and your loved ones.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. For advice specific to your situation, please contact our law firm directly.