In addition to the New Jersey estate tax, New Jersey imposes an inheritance tax on certain transfers occurring at death. In general, whether a transfer is subject to the inheritance tax and, if so, the rate of tax, will depend upon the relationship of the recipient to the decedent. For example, spouses and lineal descendants are designated as Class A beneficiaries. Distributions to Class A beneficiaries are not subject to inheritance tax. On the other hand, distributions to siblings, Class C beneficiaries, are subject to inheritance tax.
While this may seem fairly straightforward, there are times when the appropriate New Jersey Inheritance Tax cannot be accurately determined until a future event occurs. For example, a trust under a decedent's will may direct that an amount be held in trust for the decedent's surviving spouse ("X") for X's lifetime, and upon X's decease, the balance of the trust is to be distributed to Y, contingent upon Y being alive at the time of X's death. If Y is not a Class A beneficiary, there may be an inheritance tax due upon distribution to Y, but the distribution to Y may not occur for many years, depending upon the life of X. The amount of that future distribution, giving rise to the inheritance tax, is currently indeterminable. Under these circumstances, how is the inheritance tax handled?
In such a case, the executor of the decedent's estate and the New Jersey Division of Taxation may agree upon the immediate payment of a "compromise tax," rather than waiting for the distribution to Y after X's death. The Division of Taxation has just issued a revised (2012) Guide for the Computation of the Compromise Tax to assist in proposing and reaching a compromise amount. This guide will serve as a useful tool for practitioners of this arcane art.
For a general summary of the New Jersey estate and inheritance taxes, a description of their interrelationship, and an explanation of how one may offset the other, you may consult our Technical Summary of the New Jersey Inheritance and Estate Tax, which is also posted on our Client Resources page.