- While New Jersey did away with its estate death tax in 2018, it still has an inheritance tax, although the number of estates that must pay inheritance tax is small. That’s because most decedents leave their assets to spouses, children and grandchildren who are exempt from inheritance tax.
- Yet, there are a number of estates where the estate administrator must file an inheritance tax return even though no inheritance tax is owed.
Why file a tax return if no tax is due?
The reason is New Jersey’s tax waiver system. New Jersey places a lien on New Jersey assets until the state issues a waiver releasing that lien. It is designed to insure that the inheritance tax is paid. Once the state is satisfied, it issues a document called a tax waiver. Financial institutions and buyers of real estate can then be assured that it has been paid and the lien is released, so the state doesn’t come after them for any tax owing. One way to obtain the tax waiver is to file a completed inheritance tax return.
A Self-Executing Affidavit Avoids the Need to File Inheritance Tax Returns
There is, however, an alternative designed to allow for the state to issue a waiver in cases when no tax is due and the alternative does not require that a full tax return be filed. New Jersey has created affidavits that can be used instead. The affidavits have a series of questions which will allow the state to issue a waiver without the need to file a tax return. There is one form for real estate and another form for financial accounts.
These affidavits are called self-executing affidavits which will automatically release the lien. There are a series of questions on the affidavits – one is used for New Jersey real estate and the other for New Jersey bank accounts, stocks, bonds and brokerage accounts. Using these forms allows most estates to avoid filing a complete inheritance tax return just to obtain the waivers.
Given the small number of estates that owe inheritance tax, you would think that using these affidavits would apply in just about every instance, but that is not the case.
Remember that the inheritance tax is based on the relationship of an heir to the decedent – the person who died. The NJ death estate tax is based on the size ($$$-value) of the estate. If any assets of the estate pass to – or could pass to – non-Class A beneficiaries, then a full inheritance tax return must be filed. Class A beneficiaries are spouses, civil union partners, parents, grandparents, children, grandchildren, and any other descendants in a direct line up or down from the person who died.
The first question on each form asks whether any of the assets will pass to non-Class A beneficiaries. If so, there may be inheritance tax on that specific bequest, depending on the relationship of the heir to the decedent. A small bequest to a niece or to a housekeeper of $1000, for example, means you cannot use the affidavits and a full tax return will be necessary. The tax is small in that example, only $150, but the return must be filed. Stupid isn’t it but it’s the law.
To discuss your NJ Estate and Probate Administration matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq., of Hanlon Niemann & Wright, a Freehold Township, Monmouth County NJ Estate and Probate Administration Attorney