nj.com’s recent article, “How can I avoid the inheritance tax for step-grandchildren?” explains that the New Jersey Inheritance Tax is a tax imposed on inheritances, depending on the relationship between the deceased and the inheritor, or beneficiary. The relationship between the deceased and the inheritor can be placed into four different categories, and depending upon the category, a tax may be imposed.
Most inheritors fall into Class A. This category includes a spouse, child, parent, grandparent, stepchild, and grandchild. The next most common category is Class C—siblings and daughters-in-law or sons-in-law, and the surviving spouse of a deceased child are included here. Class E beneficiaries include charities, religious institutions and other exempt organizations. Finally, there’s Class D. These beneficiaries includes anyone who’s not a member of another class. In case you’re wondering, there’s no longer a Class B.
Class A beneficiaries will not see any inheritance tax. For Class C, the first $25,000 is exempt and the rate on amounts in excess of that begins at 11% and goes up to 16%. Class D rates range from 15 to 16%. There’s no inheritance tax for Class E.
Step-grandchildren are considered Class D beneficiaries, despite the fact that grandchildren and stepchildren are Class A beneficiaries. You can avoid the tax, by leaving life insurance death benefits to a step-grandchild, because these benefits aren’t subject to New Jersey’s inheritance tax. If the step-grandchild is the step-child of your child or the child of your step-child, leave the bequest to your child or your step-child and make an unenforceable request that she use the bequest for that step-grandchild.
Another option is to make a gift to the step-grandchild, while you’re living. If the gift is made more than three years before your death, then it won’t be subject to the inheritance tax. However, if it’s within that three-year period, there’s a presumption that the gift was made in contemplation of death, so it will be subject to inheritance tax.
You could avoid this, by making a lifetime gift to your child or stepchild, even within the three-year period preceding death, and request that they use it for the benefit of the step-grandchild. The only issue here is that it's not an enforceable obligation. Otherwise, the gift will be deemed to have been made to the step-grandchild and subject to the three-year gift in contemplation of death rule.
If you have real estate outside of New Jersey, you may want to leave some of that property to the step-grandchild, because out-of-state real estate isn’t subject to New Jersey’s inheritance tax.
Reference: nj.com (October 31, 2019) “How can I avoid the inheritance tax for step-grandchildren?”