How Does an Inheritance Tax Work?

The inheritance tax rate usually graduates depending upon the degree of kinship between the deceased and their beneficiary. Children of the deceased typically pay the lowest rate in states that don’t exempt them.2┬áCharitable organizations┬áthat inherit are usually exempt.

Some states, like New Jersey, group beneficiaries into classes that determine the inheritance tax rate they’ll have to pay. For example, siblings fall into “Class C” in New Jersey.3´╗┐

Small inheritances can often avoid the tax because taxation doesn’t kick in until the gift’s value passes a certain exemption thresholds. For example, New Jersey’s inheritance tax ranges from 0% to 16%, but the 16% rate applies only to bequests valued at $700,000 or more for Class D beneficiaries, and to bequests valued at $1.75 million for Class C beneficiaries.

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