New Jersey Inheritance Tax

On February 27, 2005, the New Jersey Probate Code—the series of laws governing the administration of estates, trusts, and guardianships, among other subjects—was substantially modified. Some of those modifications, two of which I will write about in this column, could have a profound impact on the manner in which a person’s estate passes after her death. One of those modifications concerns stepchildren and the other concerns domestic partners.

Stepchildren are the children of a spouse who are not the individual’s biological children. For example, Mr. Smith marries Ms. Jones. For Ms. Jones, this is her second marriage and she has a child, Johnny, from her first marriage. Johnny would be Mr. Smith’s stepchild.

A domestic partner is a concept that is fairly new to New Jersey. To be a “domestic partner,” he must be engaged in a relationship that meets certain criteria. The couple must be of the same gender or of the opposite gender if both members of the couple are over the age of 62. The couple must share a common residence. Each member of the couple must be financially responsible for the other member of the couple, as evidenced by joint financial arrangements, for instance, joint bank accounts. Neither member of the couple can be presently married to an individual other than the domestic partner.

Being a domestic partner can be quite helpful. For instance, a domestic partner is a “class A” beneficiary for purposes of New Jersey Inheritance Tax. Without the Domestic Partnership Act, a domestic partner would be a non-relative of his deceased domestic partner and would pay New Jersey Inheritance Tax at the rate of 15% on any inheritance he received from the deceased domestic partner.

The revised Probate Code has made some significant changes in the intestate succession law. First of all, domestic partners and stepchildren are included in the line of succession for individuals dying without a last will and testament.

Domestic partners are treated as the equivalent to a spouse. So, for example, if Mr. Smith lived with Ms. Jones without the benefit of marriage and if Mr. Smith and Ms. Jones were over the age of 62, shared their finances, and registered as domestic partners with the local registrar of vital statistics in the municipality of their residence, then Ms. Jones might be entitled to a portion of Mr. Smith’s estate in the event of his death.

Under the new Probate Code, if Mr. Smith failed to revise his Will after the formation of his domestic partnership with Ms. Jones, Ms. Jones would be treated as an “omitted domestic partner” and would be entitled to the share of Mr. Smith’s estate that she would have received had Mr. Smith died without a Will, or the “intestate share.” For instance, if Mr. Smith had no children, Ms. Jones would be entitled to the entirety of Mr. Smith’s estate.

In another dramatic departure from existing law, stepchildren are given a place in the intestate succession scheme. If an individual dies without a Will, his estate will pass according to a statute, the intestate succession statute. In essence, the intestate succession statute is a state-sponsored Will for individuals who did not take the time to have their own Will drafted. Under the prior intestate succession statute, stepchildren never received a portion of a decedent’s estate. Under the revised law, if there are no blood relatives, then the stepchildren of the decedent will take of his estate.

These changes require additional thought. The changes could bring about unintended consequences for the unaware that should be addressed in the individual’s will.

For more information, contact the New Jersey Division of Taxation at (609) 292-6400 or at the Web site.