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Can Inheritance Taxes For A Step-Grandchild be Avoided?

MP900385209Inheritance taxes are another good reason to have a comprehensive estate plan . A strategic plan, created with the help of an experienced estate planning attorney, can create a way to protect wealth, minimize tax burdens and ensure that assets are distributed the way you want.

New Jersey is one of several states that still have an inheritance tax, reports an article from, “How can I avoid the inheritance tax for step-grandchildren?” Whether or not an inheritance tax is levied, depends upon the level of kinship between the decedent and their beneficiaries. There are four categories of kinship.

Most inheritors fall into Class A. This category includes a spouse, child, parent, grandparent, stepchild, and grandchild. The next most common category is Class C—siblings and daughters-in-law or sons-in-law, and the surviving spouse of a deceased child are included here. Class E beneficiaries include charities, religious institutions and other exempt organizations. Finally, there’s Class D. These beneficiaries includes anyone who’s not a member of another class. In case you’re wondering, there’s no longer a Class B.

Class A beneficiaries will not see any inheritance tax. For Class C, the first $25,000 is exempt and the rate on amounts in excess of that begins at 11% and goes up to 16%. Class D rates range from 15 to 16%. There’s no inheritance tax for Class E.

Step-grandchildren are considered Class D beneficiaries, despite the fact that grandchildren and stepchildren are Class A beneficiaries. You can avoid the tax, by leaving life insurance death benefits to a step-grandchild, because these benefits aren’t subject to New Jersey’s inheritance tax. If the step-grandchild is the stepchild of your child or the child of your stepchild, leave the bequest to your child or your stepchild and make an unenforceable request that she use the bequest for that step-grandchild.

Another option is to make a gift to the step-grandchild, while you’re living. If the gift is made more than three years before your death, then it won’t be subject to the inheritance tax. However, if it’s within that three-year period, there’s a presumption that the gift was made in contemplation of death, so it will be subject to inheritance tax.

You could avoid this, by making a lifetime gift to your child or stepchild, even within the three-year period preceding death, and request that they use it for the benefit of the step-grandchild. The only issue here is that it's not an enforceable obligation. Otherwise, the gift will be deemed to have been made to the step-grandchild and subject to the three-year gift in contemplation of death rule.

Real estate property located outside of New Jersey that is owned by a New Jersey resident might be a good asset to leave to a step-grandchild. New Jersey’s inheritance tax is not applied to out-of-state real estate.

Reference: (October 31, 2019) “How can I avoid the inheritance tax for step-grandchildren?”