You may have heard the term “estate tax” (colloquially known as the “death tax”) thrown around. It’s a hot-button political topic that seems to crop up every so often, typically on the federal level, usually with proposals from members of Congress to either decrease the exemption or eliminate it outright. Many states even have their own estate tax (including New York, the subject of a separate blog post).
If you’re a resident of New Jersey or live and work in the tri-state area, you may also have heard of New Jersey’s infamous “inheritance tax.” Most people believe that inheritance and estate taxes are essentially the same, just using interchangeable language. However, these are two very separate and distinct taxes.
So what’s the difference? The essential difference between the two is who/ what is being taxed. With an estate tax, it is not the beneficiaries but rather the estate as a whole that is taxed. In contrast, with an inheritance tax, the focus of the taxation is the beneficiary receiving a distribution from the estate.
Our neighbors in New Jersey (where I am proudly licensed) provide a good example. New Jersey used to have both an estate tax and an inheritance tax, having eliminated the estate tax in 2018. Before its elimination, the estate tax was applicable on the value of an estate in excess of $2mm. Any amount of $2mm would have been subject to the estate tax, regardless of who received it.
On the other hand, the inheritance tax focuses more on who is receiving an asset. The inheritance tax is calculated based on the value of assets transferred to a particular beneficiary and the beneficiary’s relationship to the decedent. A close family member such as a spouse, child, or parent would owe no inheritance tax, versus an unrelated beneficiary that may owe between 15-16% inheritance tax.
It is worth noting that while New York has an estate tax, it does not have an inheritance tax. If you’re looking for somewhere without an estate or inheritance tax, then consider Florida (another state in which I am proudly licensed), as many snowbirds have done over the years.
Christian is Senior Counsel of the Trusts & Estates practice area at Chaves Perlowitz Luftig, LLP. Christian is licensed in New York, New Jersey & Florida.