In the Q&A article, a New Jersey resident posed the following question: “My will and my husband’s will leave our estate valued at a minimum of $500,000 to each other. If both of us are deceased, it goes to a young man who is not a relative. I understand he is a Class D inheritor. What percentage of inheritance tax will he owe, and what would happen if he sold or gifted the house while we’re living?”

Kristen advised the reader, “New Jersey imposes an inheritance tax on the transfer of property to certain classes of individuals at death, and as you said, this unrelated beneficiary is a Class "D" beneficiary. New Jersey imposes an inheritance tax of 15 percent on the transfer of property on any amount up to $700,000 and 16 percent on any amount in excess of $700,000.”

She continued, “For example, if you pass assets worth $500,000 to a Class ‘D’ beneficiary, New Jersey would impose a 15 percent inheritance tax on this amount, resulting in a tax liability of $75,000.”

“Assuming that you live for three years after the transfer, gifting your home while you are alive would not result in any federal gift tax because you have a $5.34 million federal gift tax exemption amount,” she said.

“While New Jersey does not have a gift tax, there is a three-year look back provision for the inheritance tax. So if you died within three years of making this gift, the value of the gift would be subject to inheritance tax. Therefore, the effectiveness of the gift in reducing the inheritance tax will depend on you outliving that three-year period,” Kristen said.

Kristen concluded, “If this is your primary residence, you should consider the likelihood that you may live far longer than the next three years and you would then not have ownership of your home.”

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