Recently, I inadvertently overheard a conversation between two elderly gentlemen at a local café. "Since I don't have children, I'm planning to pass my house to my niece, but I heard the taxes are really high?" My ears perked up while sipping my coffee.

So, I went home and did some research. To cut to the chase, in New Jersey, the tax can be $0 or exceed 15% depending on who you pass it to.

First, let's clarify what can be confusing. New Jersey originally had both an estate tax and an inheritance tax.

The estate tax was abolished for those who died on or after January 1, 2018. That's why there's been talk about "New Jersey no longer having inheritance-related taxes."

However, the inheritance tax is still in effect as of 2026. This is the catch. Many people mistakenly believe that all taxes have been eliminated when only half of them have been.

The New Jersey inheritance tax rate is determined not by the size of the estate but by the relationship to the recipient. According to the state treasury's tax guide, beneficiaries are classified into classes A, C, D, and E.

Where's class B, you ask? It was eliminated by law as of July 1, 1963. So, it has been missing an alphabet for decades.

Class A includes spouses, children, adopted children, grandchildren, parents, grandparents, and stepchildren. They are fully exempt from taxes.

Up to this point, it's comforting. The problem starts after this.

Class C includes siblings (including half-siblings), as well as daughters-in-law and sons-in-law. There is no tax on the first $25,000.

Above that, up to $1.1 million, an 11% tax applies. The next $300,000 is taxed at 13%, the following $300,000 at 14%, and any amount over $1.7 million is taxed at 16%.

For example, if you leave $200,000 to a sibling, after subtracting the exempt amount of $25,000, the remaining $175,000 is taxed at 11%. The tax would be $19,250. That's quite a bit, equivalent to the price of a used car going to the state government.

Class D includes everyone who does not fall into classes A, C, or E. This includes nieces, cousins, friends, and cohabitants who are not legally married or registered partners.

Class D is taxed at 15% up to $700,000, and any amount over that is taxed at 16%. There is no exemption like the $25,000 in class C.

If the amount is less than $500, there is no tax, but if it's over $500, it is taxed from the first dollar without any exemption. Essentially, there is no exemption.

So, if you leave $200,000 to a niece, 15% would go to taxes, which is $30,000. If you give the same amount to your child, it would be $0. Seeing these numbers made me put my coffee cup down for a moment.

There's also an unexpected point. Stepchildren are classified as A, but the children of stepchildren are classified as D.

Step-siblings are also classified as D, not C. Even if you've lived like family, the legal relationship is the standard, which can be disappointing. Even if you've shared rice cake soup together during holidays, the law doesn't recognize that.

Class E includes the New Jersey state government, local municipalities, and certain qualified churches, schools, hospitals, and charities. These are tax-exempt.

However, the tax department has noted that just because the IRS recognizes an organization as non-profit doesn't automatically make it class E. If you have donation plans, you need to check this part as well.

There are also several ways to reduce taxes. One of the most common is life insurance.

Life insurance proceeds paid to a designated beneficiary are exempt from New Jersey inheritance tax. However, if the beneficiary is listed as the estate, this benefit does not apply.

Real estate held in joint names (tenants by the entirety) that passes to a spouse is also not subject to tax. The spouse is already classified as A, so there's not much difference.

It's also important to remember the deadlines. Inheritance tax returns must be filed within 8 months of the date of death.

Taxes not paid within 8 months incur an annual interest of 10%. After handling the funeral and paperwork, 8 months can pass by very quickly.

If only class A beneficiaries are involved, there are simplified forms like L-8 and L-9 available. However, if there's even one person from class C or D, you'll need to prepare a formal return, so it's good to know this in advance to avoid panic.

What I realized while summarizing is that those without children or who cherish their nieces like children have a greater reason to prepare in advance. Even if the feelings are the same, taxes only see the relationship on paper.

If it were me, I would first check the designated beneficiaries of my current insurance, and then list my assets like my house, bank accounts, and retirement accounts on a single sheet of paper. Then, I would write down who belongs to which class next to each, and the picture will become clear quickly.

However, there are many variables like trusts, timing of gifts, and out-of-state properties, so you shouldn't make decisions based solely on this article. It varies by personal circumstances, so be sure to consult an estate attorney or accountant.

Thanks to the conversation I overheard at the café, I've learned a lot. It might be nice to have a chat with family about these topics over a warm cup of coffee.