The Effect of Joint Ownership on a New Jersey Estate’s Inheritance Tax Liability

Except in the case of spouses, civil union partners and domestic partners, when a New Jersey resident dies owning a jointly held asset, whether it is real estate, stocks, bank accounts, etc.,  the entire value of the asset will be taxed as if it belonged to the decedent.  If the surviving joint tenant can prove that a portion of it actually belongs to the surviving joint tenant and not the decedent, the New Jersey Division of Taxation may grant an exemption from taxation for that portion of the value of the asset.  This makes selecting an estate administration and tax planning attorney extremely important.

In order to prove that a portion of the asset actually belonged to the surviving joint tenant, you must be able to show the surviving joint tenant’s financial contribution to the asset or that the surviving joint tenant inherited their portion of the asset from another.  Depending upon the relationship between the decedent and the surviving joint tenant, the asset will be subject to inheritance tax at a rate between 11 percent and 16 percent.   Class A Beneficiaries (which include spouses, civil union partners, registered domestic partners, parents, grandparents, and children) do not pay any tax on inheritances.  Class C Beneficiaries (which include siblings of the decedent and spouses/civil union partners of a child of the decedent)  receive $25,000 free from inheritance tax, are taxed at a rate of 11 percent on the next $1,075,000 of inherited assets and the rate increases as the amount inherited increases – up to 16 percent.  While bequests to charities are not taxed, inheritances received by all other non-charitable beneficiaries not included in Class A or C are Class D beneficiaries and their inheritances are taxed at a rate of 16 percent for the first $700,000 and 17 percent for the remaining balance of the inheritance.

Many people list another person as a joint owner on an account or an asset because they believe it simplifies the estate administration and probate of the estate.  But, it actually can result in a significant tax burden which might not have been due or would have been significantly lower if assets were not jointly held.  Moreover, in New Jersey probate and estate administration are not difficult or expensive so it is not usually necessary to attempt to avoid it.

This should be a significant concern for couples who live together but have not formalized their relationship.  Many people consider themselves as common law spouses, not realizing that New Jersey does not recognize “common law” marriages.  Under New Jersey law, if you are not legally married to your significant other or in a registered civil union or domestic partnership, even if you have resided together, maintained a household together, and raised children together, you are considered a Class D Beneficiary and the value of the entire asset which is jointly held will be subject to Inheritance tax at the 16-17 percent rate.   This is often quite shocking and distressing to the surviving partner who considered themselves a common law spouse.  Estate planning is always important, but it is essential for couples who are not legally married, and reviewing the way assets are held and the beneficiary designations on accounts which have same must be a part of the estate planning process.  Furthermore, if a couple is not legally married or in a domestic partnership or civil union, if assets are not held jointly,  they will not inherit any assets from each other unless an estate plan in put in place.

McLaughlin & Nardi’s New Jersey estate planning attorneys are experienced in estate planning and estate administration.  We are available to review account and asset titling and beneficiary designations, review your existing estate plan, and/or create a new estate plan to effectuate your wishes.  For more information call one of our attorneys at 973-890-0004 or fill out the contact form on this page.  We can help.