Does a Trust Pay Inheritance Tax in NJ?

The inheritance tax applies to transfers of assets from a deceased person to their surviving heirs. It exists on the state and federal levels, and the failure to plan for it can result in unexpected financial consequences. How does the inheritance tax apply to trusts in New Jersey?

Under the law, this obligation extends to assets beneficiaries receive through a trust. This can result in unexpected debts, so discussing these issues with an experienced estate planning lawyer is a good idea.

Understanding the Inheritance Tax

New Jersey has an inheritance tax, but many of a person’s closest relatives are exempt from liability. All surviving relatives and interested parties are divided into different classes that determine whether they owe anything to the government.

There are four classes of survivors: A, C, D, and E. Class A includes some of the closest loved ones, like spouses, children, parents, grandparents, and domestic partners. Anyone in this category is not required to pay the tax. The same goes for Class E, which is exclusively for charities.

Anyone in classes C and D can owe a tax debt. Usually, a set amount is exempt, and everything transferred over that amount is taxed at a specific percentage.

Before worrying about how these rules apply to a trust, it is important to understand the relationship between the creator of the estate and their beneficiaries. An attorney at Nesevich Law, LLC, could determine whether there is a tax obligation.

Determining When Transfers From a Trust Trigger Tax Laws

Whether or not trust payments involve inheritance tax payments in NJ depends on what class the beneficiary falls in. No singular rule determines if transfers from a trust will meet this standard. It is possible that money paid from a trust could result in an obligation for one beneficiary but not another.

Even though trusts become legal owners of an asset, they do not remove it entirely from the creator’s estate. For tax purposes, that means a person cannot help their beneficiaries avoid paying obligations by putting their property into the name of a legal trust.

Differentiating Estate and Inheritance Taxes

New Jersey does not have an estate tax, but there is a federal estate tax that is still in effect.

Inheritance taxes are based on the transfer of assets to specific individuals. A person’s closest relatives are generally exempt from this debt after their death. Estate taxes, on the other hand, apply to the total value of a decedent’s property. That means a beneficiary could be on the hook for one, both, or neither of these tax debts.

Talk to an Attorney in New Jersey About Trusts and the Inheritance Tax

Managing issues of taxation as they relate to a trust can be complicated, and any mistakes you make can have lasting consequences. To ensure you avoid issues with state and federal authorities, it is a good idea to rely on the guidance of experienced legal counsel. Schedule an appointment and bring your questions about trusts paying inheritance taxes in New Jersey to a lawyer.