How to Pass on Wealth Without Burdening Your Heirs with Taxes: A New Jersey Perspective

January 27, 2025
Erin Calpin, Esq.

Passing on wealth to your heirs is a thoughtful way to ensure their financial security and preserve your legacy. However, without careful planning, your loved ones could face significant tax burdens that diminish the assets you’ve worked hard to build. New Jersey has its own set of tax laws and regulations that make estate planning unique compared to other states. Understanding these rules and employing strategic planning can help you minimize the tax burden on your heirs.

Understand New Jersey's Inheritance and Estate Taxes

New Jersey stands out because in the past it had both an estate tax and an inheritance tax. While the estate tax was repealed in 2018, New Jersey still enforces an inheritance tax. The inheritance tax applies based on the relationship between the deceased and the beneficiary. Immediate family members, such as spouses, children, and parents, are exempt. However, siblings, nieces, nephews, and other non-lineal descendants may face taxes ranging from 11% to 16% or more.

New Jersey could reinstate the estate tax.  This tax is imposed on the gross value of a decedent’s assets, and is not controlled by the relationship of the beneficiaries to the decedent.  If the gross estate exceeds the taxable exemption amount, then an estate tax is imposed unless a deduction applies.  

It’s important to evaluate who your beneficiaries are and the value of your gross estate, to understand the tax obligations that may be imposed at death. Identifying potential inheritance tax or estate tax liabilities early on allows you to structure your estate in a way that minimizes these taxes.

Create a Trust to Protect and Transfer Assets

One of the most effective tools for estate planning in New Jersey is the use of trusts. A properly established trust can help you transfer assets to your heirs while minimizing taxes. Trusts such as irrevocable life insurance trusts (ILITs) can keep the proceeds of a life insurance policy out of your taxable estate. Similarly, grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs) are useful for transferring wealth at reduced tax rates.

The type of trust you choose will depend on your specific assets and goals. Consulting with an experienced estate planning attorney is essential to ensure compliance with New Jersey laws while maximizing tax advantages.

Make Annual Gifts to Reduce Taxable Estate Value

Another way to pass on wealth without burdening your heirs with taxes is through gifting. Under federal law, you can give up to $19,000 per recipient annually (as of 2025) under the annual gift tax exclusion, and there is no requirement to pay a gift tax or file a gift tax return.  For married couples, this limit doubles to $38,000 per recipient per year.   New Jersey does not impose a gift tax, making annual gifting a powerful strategy to reduce the size of your estate over time.

This approach is particularly effective for individuals with significant assets who want to gradually transfer wealth to their heirs. Gifts in excess of the annual exclusion amount would require the filing of a gift tax return, but so long as the gift is below the lifetime gift tax exemption, which is currently $13.99 million for an individual, or almost $28 million for a married couple, no gift tax should be due.

Leverage Life Insurance to Offset Tax Burdens

Life insurance is another valuable tool in estate planning. In New Jersey, life insurance proceeds are generally not subject to state inheritance tax if an individual beneficiary or multiple individual beneficiaries are designated on the policy. However, if the proceeds are payable to your estate or a non-exempt beneficiary, the life insurance could become taxable for inheritance tax.

To avoid this, consider naming beneficiaries directly on your life insurance policies or creating an irrevocable life insurance trust (ILIT). An ILIT removes the policy from your estate and ensures that your heirs receive the full benefit of the insurance payout without inheritance or estate tax complications.

Consider Charitable Contributions to Reduce Taxable Estate

Philanthropy can play a dual role in your estate plan—supporting causes you care about while reducing your taxable estate. In New Jersey, charitable donations made through your estate are generally exempt from inheritance taxes. Establishing a charitable trust or including charitable bequests in your will allows you to pass on wealth while decreasing the value of your taxable estate.

Charitable giving not only benefits the community but also serves as a strategic tool to reduce potential tax liabilities for your heirs.

Plan for Real Estate and Business Assets

If you own property or a business in New Jersey, special considerations may be necessary to prevent tax burdens. Real estate can be transferred through joint ownership or trusts to bypass inheritance taxes. For business owners, creating a succession plan ensures that your company continues to thrive while minimizing tax liabilities for your heirs.

Options such as family limited partnerships or buy-sell agreements can be effective in transferring ownership smoothly and efficiently.

Work with Estate Planning Professionals

The complexities of New Jersey’s inheritance tax laws and the interaction with federal estate taxes make professional guidance essential. An experienced estate planning attorney can help you navigate these regulations, craft a customized plan, and implement strategies tailored to your family’s needs.

Additionally, working with a financial advisor ensures that your investments and assets align with your long-term goals. These professionals can provide insights into tax-efficient wealth transfer methods that comply with New Jersey’s laws.

Passing on wealth without burdening your heirs with taxes requires careful planning, particularly in New Jersey, where inheritance tax laws still apply. By utilizing strategies like trusts, annual gifting, life insurance, charitable giving, and proper planning for real estate and business assets, you can protect your legacy while minimizing tax implications. Seeking advice from estate planning and financial professionals is the key to ensuring your heirs benefit fully from your hard-earned wealth.

Start your planning today to provide peace of mind and financial security for your loved ones.

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Borenstein, McConnell & Calpin, P.C. is a Wills & Estate Planning law firm serving Central and Northern New Jersey, as well as New York City. We strive not only to give you a great client experience, but to become your trusted adviser for life. To reach Alec, please send an email to alec@bmcestateplanning.com.

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