Five different taxes hide under the label 'death tax.'

There Is No Such Thing as a "Death Tax"

The phrase "death tax" appears in headlines, political debates, and casual conversation — but it is not a legal term. No tax code in the United States contains a "death tax." What people mean when they say "death tax" is one or more of five distinct taxes, each with different rules, different rates, and different planning strategies. For New Jersey residents, getting the terminology right is not pedantic — it is the difference between a plan that works and a plan that costs your family tens of thousands of dollars.

Here is what actually exists:

1. New Jersey Inheritance Tax (N.J.S.A. 54:34-11 et seq.) — a state tax paid by the beneficiary, based on their relationship to the deceased
2. New Jersey Estate Tax — REPEALED effective January 1, 2018 (P.L. 2016, c.57)
3. Federal Estate Tax (IRC § 20012 et seq.) — a federal tax paid by the estate, on the total value of assets above the exemption
4. Federal Gift Tax (IRC § 25013 et seq.) — a federal tax on lifetime transfers exceeding the annual exclusion and lifetime exemption
5. Generation-Skipping Transfer Tax (IRC § 26014 et seq.) — a federal tax on transfers to grandchildren or more remote descendants

Each tax serves a different purpose, is calculated differently, and requires different planning. A family that confuses the NJ inheritance tax with the federal estate tax, or assumes "the death tax was repealed," is likely making planning decisions based on incorrect assumptions. The differences matter before documents are signed or assets are transferred.

Tax 1: New Jersey Inheritance Tax — Still in Effect

New Jersey is one of only five states that imposes an inheritance tax (along with Kentucky, Maryland, Nebraska, and Pennsylvania). The NJ inheritance tax is governed by N.J.S.A. 54:34-1 et seq.1 and administered by the New Jersey Division of Taxation.

Unlike an estate tax (which taxes the estate as a whole), the inheritance tax is paid by each individual beneficiary based on their relationship to the deceased person. The closer the relationship, the lower the tax — or no tax at all:

Note: There is no Class B under current NJ law. Class B was eliminated when the statute was amended.

Who Gets Hurt Most: Class D Beneficiaries

The NJ inheritance tax hits hardest when assets pass to Class D beneficiaries — and the list of Class D beneficiaries surprises most people:

• Unmarried partners: Regardless of how long you have lived together, your partner is Class D. A $500,000 inheritance generates approximately $75,000 in NJ inheritance tax. A $1 million inheritance generates approximately $153,000 (15% on the first $700,000, 16% on the remaining $300,000).
• Nieces and nephews: Many assume close family members are exempt. They are not. Nieces and nephews are Class D.
• Stepchildren are not Class D: This is an exception to the Class D categories in this list. A stepchild of the decedent is Class A and is exempt from New Jersey inheritance tax. The Division's Class A definition does not include a step-grandchild or great-step-grandchild.2 Classification should be checked against the precise relationship rather than inferred.
• Close friends: A bequest to a lifelong friend is taxed at 15-16% with no exemption.
• Godchildren, mentees, caregivers: All Class D unless they fall into another category by blood or legal relationship.

Common NJ Inheritance Tax Issues

• Life insurance: Proceeds payable to a named beneficiary are generally exempt from NJ inheritance tax. However, life insurance payable to the estate — or to a trust that benefits non-exempt beneficiaries — may be subject to tax depending on the circumstances.
• Joint accounts: Assets held in joint tenancy pass to the surviving joint tenant and may be subject to inheritance tax based on the survivor's class. Joint accounts with non-Class A individuals can trigger unexpected tax.
• Retirement accounts: IRAs and 401(k)s pass to the named beneficiary. If the beneficiary is Class C or D, the inheritance is subject to NJ inheritance tax on top of any income tax due on distributions.
• NJ inheritance tax return: The executor must file NJ Form IT-R (resident decedent) or IT-NR (non-resident) and pay the inheritance tax within eight months of the date of death. Interest accrues from the date of death on unpaid tax.

Tax 2: New Jersey Estate Tax — Repealed in 2018

Prior to January 1, 2018, New Jersey imposed a state-level estate tax on estates exceeding $675,000 — one of the lowest thresholds in the nation. This meant that many middle-class New Jersey homeowners were subject to state estate tax simply because of real estate values. In a state where the median home value exceeds $400,000, even a modest estate could trigger the tax.

In 2016, Governor Christie signed P.L. 2016, c.57, which phased out the NJ estate tax:

• 2017: Exemption raised to $2 million
• January 1, 2018: Estate tax eliminated entirely

Important for existing estate plans: Estate plans drafted before 2018 may contain provisions specifically designed to minimize the old NJ estate tax — particularly credit shelter trusts (also called "bypass trusts" or "B trusts") funded at the NJ exemption amount. These provisions may no longer serve their intended purpose and could create unintended complications, such as unnecessarily diverting assets away from a surviving spouse into a trust. If your estate plan was drafted before 2018, a review is strongly recommended.

Tax 3: Federal Estate Tax — $15 Million Basic Exclusion Amount in 2026

The federal estate tax is imposed on estates that exceed the lifetime exemption amount under IRC § 20011 et seq. The estate — not the individual beneficiary — pays this tax before assets are distributed.

The One Big Beautiful Bill Act (OBBBA) — July 4, 2025

IRS Revenue Procedure 2025-32 states that OBBBA amended IRC § 2010(c)(3)2 by increasing the federal estate and gift tax basic exclusion amount to $15 million per individual for calendar year 20263 ($30 million for married couples using portability). This legislation eliminated the TCJA sunset that would have reverted the exemption to a lower inflation-adjusted amount on January 1, 2026. The exemption is scheduled to be indexed for inflation starting in 2027 under current federal law.

Key provisions of the federal estate tax:

• Exemption: $15 million per individual for 2026 and scheduled for inflation indexing after 2026 under current federal law
• Top tax rate: 40% on the taxable estate above the exemption (IRC § 2001(c)1)
• Unified credit: The estate tax and gift tax share a single lifetime exemption under IRC § 20102 — every dollar used against gift tax reduces the amount available at death
• Portability: Under IRC § 2010(c)(4)2, a surviving spouse can claim the deceased spouse's unused exemption (DSUE) by filing IRS Form 706 within nine months of death
• Step-up in basis: Under IRC § 10144, assets included in the taxable estate receive a stepped-up basis to fair market value at death, which can reduce unrealized capital gains for beneficiaries
• Marital deduction: Under IRC § 20565, assets passing to a surviving spouse (who is a U.S. citizen) are generally deductible for federal estate tax purposes
• Charitable deduction: Under IRC § 20556, assets passing to qualified charities are deductible

Who Owes Federal Estate Tax?

With a $15 million exemption, a small share of estates owe federal estate tax. For the vast majority of New Jersey families, the federal estate tax is not a concern. The NJ inheritance tax — which has no minimum threshold for Class D beneficiaries — affects far more families.

However, for estates approaching or exceeding $15 million (or $30 million for married couples), federal estate tax planning remains critical. A $20 million estate with no planning could owe $2 million in federal estate tax (40% of the $5 million above the exemption).

Tax 4: Federal Gift Tax — Unified with the Estate Tax

The federal gift tax (IRC § 25011 et seq.) prevents individuals from avoiding estate tax by simply giving away their assets during their lifetime. The gift tax and estate tax share a single unified exemption — the same $15 million.

• Annual exclusion: You can give up to $19,000 per recipient per year in 20262 (indexed for inflation under IRC § 2503(b)3) without using any of your lifetime exemption and without filing a gift tax return.
• Lifetime exemption: Gifts above the annual exclusion count against your $15 million lifetime exemption. Every dollar used during life reduces the amount available at death.
• Gift tax rate: 40% — same as the estate tax rate.
• Exclusions: Unlimited gifts for tuition paid directly to an educational institution and medical expenses paid directly to a provider are exempt from gift tax under IRC § 2503(e)3 — they do not count against the annual exclusion or lifetime exemption.
• Gift splitting: Married couples can elect to "split" gifts, allowing one spouse to use the other's annual exclusion — effectively doubling the annual exclusion to $38,000 per recipient.

Tax 5: Generation-Skipping Transfer Tax (GST)

The GST tax (IRC § 26011 et seq.) is a federal tax imposed on transfers to "skip persons" — beneficiaries who are two or more generations below the transferor, typically grandchildren. Without the GST tax, a wealthy family could avoid one entire layer of estate tax by skipping the middle generation.

• GST exemption: $15 million per individual for 2026, same as the estate tax basic exclusion amount
• GST tax rate: 40% — flat rate, applied in addition to any estate or gift tax
• No portability: Unlike the estate tax exemption, the GST exemption cannot be transferred to a surviving spouse. Each person must use their own GST exemption. This is one of the key reasons credit shelter trusts remain important for families with generation-skipping goals.
• Allocation: GST exemption must be affirmatively allocated to trusts or transfers. Failure to allocate properly can result in a 40% GST tax on top of any other transfer tax.

Putting It All Together: How NJ Families Are Actually Affected

For most New Jersey families, the tax that actually matters is the NJ inheritance tax — not the federal estate tax. Here is how the five taxes interact for a typical New Jersey estate:

Example: A $1.2 Million NJ Estate

Consider a common New Jersey scenario: a widower with a $1.2 million estate (home, retirement accounts, life insurance) who wants to leave assets to his two adult children, his sister, and his longtime partner.

• Children (Class A): $400,000 each — $0 NJ inheritance tax, $0 federal estate tax
• Sister (Class C): $200,000 — approximately $19,250 NJ inheritance tax (11% on $175,000 after $25,000 exemption)
• Unmarried partner (Class D): $200,000 — approximately $30,000 NJ inheritance tax (15% with no exemption)
• Federal estate tax: $0 — estate is far below $15M exemption

Total NJ inheritance tax: approximately $49,250. This could be significantly reduced with proper planning — redirecting some of the sister's and partner's shares through trust structures, life insurance, or charitable giving strategies.

Planning Strategies for NJ Inheritance Tax

• Maximize Class A distributions: Structure your estate plan so the largest portions pass to exempt Class A beneficiaries (spouse, children, grandchildren, parents).
• Life insurance with named beneficiaries: Make sure life insurance is payable to named Class A beneficiaries rather than the estate where that fits the plan. Life insurance proceeds to a named beneficiary are generally exempt from NJ inheritance tax.
• Trust planning for Class C/D beneficiaries: Irrevocable trust structures can help manage inheritance tax exposure for non-exempt beneficiaries.
• Charitable bequests (Class E): Gifts to qualified charities are fully exempt. Redirecting a portion of a Class D bequest to charity reduces total tax while supporting causes you care about.
• Lifetime gifting: New Jersey has no separate gift tax. A lifetime transfer does not automatically escape New Jersey inheritance tax. Property transferred within three years before death for less than full actual fair-market value, or property transferred while the decedent retained a lifetime right, can remain relevant to the inheritance-tax analysis.1 The result depends on timing, consideration, retained rights, and the beneficiary's classification.
• Relationship classification: A stepchild of the decedent is Class A, but the Division's Class A definition does not include a step-grandchild or great-step-grandchild.2 Check the precise relationship against the official beneficiary classes rather than inferring classification from a similar relationship.

Planning Strategies for Federal Estate Tax

• Portability election: File Form 706 to claim the deceased spouse's unused exemption (DSUE). This preserves up to $15 million of additional exemption for the surviving spouse.
• Irrevocable life insurance trust (ILIT): Can remove life insurance proceeds from the taxable estate under IRC § 20421 when properly structured and administered.
• Grantor retained annuity trust (GRAT): Transfers appreciation to beneficiaries with gift-tax treatment governed by IRC § 27022.
• Annual exclusion gifting: $19,000/year per recipient in 2026 reduces the taxable estate without using the lifetime exemption.
• Charitable remainder trust (CRT): Provides income during lifetime and may support charitable-deduction planning under IRC § 1703.
• Credit shelter trust: Despite portability, a credit shelter trust still captures appreciation outside the surviving spouse's estate, protects assets from creditors, and preserves the GST exemption (which cannot be ported).

The "Death Tax" Confusion — Why Terminology Matters

The term "death tax" entered popular usage through political campaigns in the 1990s and 2000s, when opponents of the federal estate tax adopted the label to generate public opposition. The strategy was effective — polls consistently show that Americans oppose "the death tax" at far higher rates than they oppose "the estate tax," even though they are the same thing.

For estate planning purposes, precision matters:

• "The death tax was repealed" — Only the NJ estate tax was repealed. The NJ inheritance tax remains. The federal estate tax remains. Clients who believe "the death tax was repealed" may skip planning entirely, leaving their families exposed.
• "I don't have enough to worry about the death tax" — With a $15 million federal exemption, the federal estate tax is indeed irrelevant for most families. But the NJ inheritance tax has no minimum threshold for Class D beneficiaries. A $100,000 bequest to a friend generates $15,000 in tax.
• "Transfer tax" — Tax professionals often use "transfer tax" as a catch-all for estate tax, gift tax, and GST tax. This is technically accurate but can be confusing for clients who are not tax practitioners.

In short: when someone mentions "the death tax," ask which one. The answer determines whether planning is needed and what strategies apply.

Classify the beneficiary and transfer before choosing a tax strategy

The same asset can produce a different result depending on who receives it, how ownership is titled, whether a beneficiary form controls, and the size of the taxable estate. Counsel can map each intended transfer to the New Jersey beneficiary class, federal estate and gift framework, generation-skipping issues, and any charitable or marital deduction before recommending a trust, lifetime gift, beneficiary change, or no tax-driven change at all. Bring a current asset and ownership list, beneficiary designations, prior taxable gifts, existing estate documents, and the relationship of each intended recipient.

Call (800) 709-1131 or use the intake form to request that transfer-tax review.