Navigating New Jersey, New York and Federal Estate Tax Considerations in 2025 - Trusts & Estates and Elder Law Newsletter
By: Monica Babula
With tax season just behind us, it is important to remember that income taxes are only one piece of the puzzle. Estate and inheritance tax planning is a critical component of financial management, ensuring that assets are distributed according to one's wishes while minimizing tax liabilities to the extent possible within the confines of our existing estate and inheritance tax regime. Individuals in New Jersey and New York must be cognizant of both state and federal tax regulations to effectively plan their estates.
Federal Estate Tax Considerations
For the year 2025, the federal estate tax exemption is set at $13.99 million per individual. This means that an individual can leave up to $13.99 million to heirs without incurring federal estate tax, and a married couple can shield up to $27.98 million collectively. Assets exceeding this exemption amount are subject to a federal estate tax rate of 40%.
However, significant changes are on the horizon. The current exemption levels are a result of the Tax Cuts and Jobs Act of 2017, which temporarily doubled the exemption amounts. This provision is set to expire (or "sunset") at the end of 2025. Unless Congress enacts new legislation, the federal estate tax exemption will revert to pre-2018 levels, adjusted for inflation, estimated to be approximately $7 million per individual in 2026.
New Jersey Estate and Inheritance Taxes
As of January 1, 2018, New Jersey repealed its estate tax, meaning estates of decedents who pass away on or after this date are not subject to state-level estate taxation based on the value of the estate. However, New Jersey continues to impose an inheritance tax, which is distinct from the estate tax. The inheritance tax is levied based on the relationship between the decedent and the beneficiary:
- Class A Beneficiaries: This class includes spouses, domestic partners, civil union partners, parents, grandparents, and direct descendants (children, grandchildren). While it also includes stepchildren, it does not include more remote step-descendants (e.g. step-grandchildren, step-great grandchildren, etc.). Transfers to Class A beneficiaries are exempt from inheritance tax.
- Class C Beneficiaries: This category encompasses siblings and the spouses of children. Transfers to Class C beneficiaries are subject to an inheritance tax rate ranging from 11% to 16%, with the first $25,000 exempt from taxation.
- Class D Beneficiaries: All other beneficiaries, such as friends or distant relatives, fall into this class. Transfers to Class D beneficiaries are taxed at rates between 15% and 16%, with no exemption amount.
- Class E Beneficiaries: Charitable organizations, religious institutions, and certain non-profit entities are exempt from inheritance tax, but you still have to file an inheritance tax return!
It's important to note that life insurance proceeds payable to a named beneficiary are generally exempt from New Jersey inheritance tax, regardless of the beneficiary's class, highlighting the importance of reviewing and coordinating your beneficiary designations on all assets to ensure your wishes are achieved as tax efficiently as possible.
New York Estate Tax Considerations
Unlike the federal estate tax, which only applies to estates exceeding $13.99 million in 2025, New York imposes its own estate tax with a significantly lower exemption threshold. As of January 1, 2025, the New York estate tax exclusion amount is $7.16 million per person, adjusted annually for inflation. Estates exceeding this threshold may be subject to state estate tax, with rates ranging from 3.06% to 16%.
One of the most notable aspects of New York’s estate tax system is the so-called "estate tax cliff." Unlike the federal system, which taxes only the amount over the exemption, New York's tax will apply to the entire estate value if it exceeds 105% of the exemption amount (approximately $7.52 million in 2025).
Planning Strategies
Given the impending reduction in the federal estate tax exemption, individuals with substantial estates should consider proactive planning strategies, including by way of example and not limitation:
- Lifetime Gifting: Utilizing the current high exemption amount by making substantial gifts during one's lifetime can be advantageous. The annual gift tax exclusion allows individuals to give up to $19,000 per recipient in 2025 without affecting their lifetime exemption. If the historically high exemption does sunset at the end of this year, gifts made before 2026 above the lower estate exemption generally will not face additional estate tax. One should be mindful, however, that if your estate is not subject to the federal estate tax and you gift assets to avoid New York estate tax, you should avoid gifting appreciated assets since they will have a carryover basis instead of a stepped-up basis and the capital gains tax rate is higher than the New York estate tax rate.
- Irrevocable Trusts: Establishing and strategically funding irrevocable trusts can remove assets from the taxable estate, potentially reducing estate tax liability.
- Spousal Portability: On the death of the first spouse, married couples can take advantage of portability, allowing the surviving spouse to utilize any unused portion of the deceased spouse's exemption, effectively doubling the exemption amount. However, New York does not recognize portability of a deceased spouse’s New York estate tax exemption. Planning becomes especially important here as there are effective strategies that can achieve the same result as portability.
- Charitable Giving: Donating to charitable organizations during your lifetime or upon your death can reduce the taxable estate while supporting philanthropic endeavors. There are certain charitable trusts that allow a donor to support charities while also benefiting from estate and tax law advantages.
- Residency Planning: Because New York estate tax applies to all property of New York domiciliaries, some individuals consider changing domicile to a more tax-friendly state. However, residency planning must be handled carefully to avoid challenges from the state’s tax authorities.
Conclusion
Estate planning requires a thorough understanding of both state inheritance and estate tax laws and federal estate tax regulations. With the anticipated reduction in the federal estate tax exemption in 2026, individuals should consult with estate planning professionals to develop strategies that align with their financial goals and ensure the efficient transfer of assets to their heirs. Our Trusts & Estates attorneys at Pashman Stein Walder Hayden P.C. are available to assist you with such needs.
Learn more about our Trust & Estates and Elder Law & Special Needs Planning Practices.