Most people understand federal estate taxes, but state-level tax traps can catch you completely off guard and cost your family significantly more.
If you live near the New York-New Jersey border, you are navigating two dramatically different estate tax landscapes. Understanding these differences is not just academic, it could save your heirs hundreds of thousands of dollars.
New York’s brutal tax cliff
As of 2024, New York maintains an estate tax exemption of approximately $6.94 million. However, there’s a critical threshold you need to understand: if your estate exceeds the exemption by more than 5%, you lose the entire exemption and face taxation on your full estate value.
Here’s how this works in practice. If your estate is valued at $6.94 million, you pay zero in New York estate tax. If your estate grows to $7.2 million, you pay tax only on the $260,000 excess. However, once your estate reaches approximately $7.29 million—which is 105% of the exemption threshold—you lose the entire exemption. At that point, your estate owes tax on the complete $7.29 million, not just the amount over the threshold. This could result in over $700,000 in taxes triggered by crossing that 5% margin.
This cliff provision presents challenges because estate valuations fluctuate. Appreciation in real estate values or favorable market performance could unexpectedly push your estate beyond the critical 105% threshold. You may believe your estate comfortably falls within safe territory when it approaches substantial tax exposure.
New Jersey’s inheritance tax twist
New Jersey eliminated its estate tax in 2018, which sounds like good news. However, the state maintains a separate inheritance tax that catches many people by surprise.
Here is what makes it unusual: New Jersey doesn’t tax inheritances to spouses, children, grandchildren or parents. But if you leave assets to siblings, they will pay tax rates of 11% to 16% on amounts exceeding $25,000. For nieces, nephews or friends, the rates are 15% to 16% with no exemption at all.
This creates planning challenges if you are single, widowed or don’t have children. That brother who helped you through tough times? He will face a significant tax bill on whatever you leave him. Understanding how the calculation and payment of these inheritance taxes during estate administration can help your beneficiaries prepare for these obligations.
Planning across state lines
If you own property in both states or you are considering relocating, these differences matter enormously. You might want to explore strategies like lifetime gifting, trusts or even changing your domicile.
State borders create dramatically different tax consequences. Consider consulting with an estate planning professional who understands both jurisdictions before making major decisions about where to live or how to structure your estate.