June 4, 2014
By Kenneth Lackey
In a decision approved for publication (available here), the New Jersey Tax Court held that a woman who was the beneficiary of her male live-in companion's federal retirement benefits had to pay inheritance tax on those benefits as a Class D beneficiary.
New Jersey imposes an inheritance tax based on the relationship of the beneficiary to the deceased. Relationships are categorized by Class. Here is a list of the various Classes (from a county Surrogate's website):
Class "A" - father, mother, grandparents, husband, wife, child or children of a decedent, adopted child or children, issue of any child or legally adopted child of a decedent, mutually acknowledged child and step child.
Class "B" - Eliminated by statute effective July 1, 1963.
Class "C" - Brother or sister of decedent, wife or widow of a son of decedent, or husband or widower of a daughter.
Class "D" - Every other transferee, distributee or beneficiary.
Class "E" - Includes transfers for public or charitable purposes to the State of New Jersey or any of its political subdivisions, an educational institution, church, hospital, orphan asylum, public library, and certain other nonprofit agencies, etc.
In addition, unmarried couples are exempt from inheritance tax if they qualify as a domestic partners as defined in the New Jersey Domestic Partnership Act ("DPA"). Among the requirements under the DPA for heterosexual couples is that: 1) they are each at least sixty-two years old; and 2) they have executed an Affidavit of Domestic Partnership and filed it with the local registrar.
In Lugano v. Director, Division of Taxation, Claudette Lugano argued she should be exempt from inheritance tax as a domestic partner. She lived with the decedent for approximately eight years before he passed away. The decedent was a federal employee and they had to file a form with the federal government indicating they were domestic partners. Ms. Lugano and decedent filed that form with the federal government.
Ms. Lugano argued the filing of the form with the federal government should be deemed substantial compliance with the New Jersey DPA requirements. The Tax Court disagreed, focusing on the facts that Ms. Lugano and the decedent did not file the appropriate form under the New Jersey DPA and that Ms. Lugano was not yet sixty-two when the federal form was filed. The Tax Court held that Ms. Lugano had to pay New Jersey inheritance tax as a Class D beneficiary on the decedent's retirement benefits she received.
The takeaway here is that if you are in a relationship that would qualify as a domestic partnership under the New Jersey Domestic Partnership Act it is crucial that you formalize that status per the requirements of that Act. Failure to do so, can subject the survivor to New Jersey inheritance tax as a Class D beneficiary.