Inheritance Tax Issues For NonMarried Individuals

By: Marc S. Galella, Esq. of R.C. Shea & Associates

Quite often I am asked to prepare an estate plan for an unmarried couple. In many cases they have been together a number of years and have lived their lives as if they were married, but for various reasons the couple cannot marry.

In some cases, they want to leave a significant portion of their estate to the other partner but at the same time they have surviving children. An issue that arises is that New Jersey still has an inheritance tax. The inheritance tax exempts spouses, parents, children and lineal descendants. In the case of an unmarried couple, the surviving partner is treated by New Jersey as a stranger and will be subject to the inheritance tax at the rate of 15% of what the surviving partner inherits.

So, if one of the partners dies and that persons will leaves all of their assets to the surviving partner the surviving partner would pay a 15% inheritance tax. However, what happens when the Will of the deceased partner divides the assets equally between the surviving partner and the children of the deceased partner? In that case, that portion of the estate passing to the surviving partner will be subject to the inheritance tax at the rate of 15%, but that portion of the estate passing to the children would be exempt from the tax. If the Will directs that the inheritance tax be paid by the estate, then the share passing to the children would be reduced by the amount of the inheritance tax to be paid for the surviving partner. For example, if the decedent leaves an estate of $1,000,000 and divides it equally between the surviving partner and a child intending that each receive $500,000.00, the $75,000 inheritance tax would be taken off the top of the estate thus reducing the share going to the child. In the alternative, the Will could direct that each beneficiary pays their own share of the inheritance tax. Thus, in this situation the child would inherit the $500,000 which would not be subject to inheritance tax while the surviving partner would receive $425,000 after the payment of the $75,000 inheritance tax from the surviving partner’s share.

As you can see, it is critical in these situations to allocate the payment of the inheritance tax between the surviving partner and the children. The person making the Will has to determine how the inheritance tax should be paid and the Will needs to be specific as to payment. If you are in this situation, you should discuss with your estate planning attorney how you want the inheritance tax paid.