Generally, when a person dies, New Jersey death taxes apply. We have two levels of taxes:
1. NJ Estate Taxes. These are only owed if the decedent has more than $675,000 in total assets, including life insurance.
2. NJ Transfer Inheritance Taxes. The rate depends on a person’s relationship to the decedent. Depending on the closeness of the relationship, the beneficiary will be either Class “A,” “B,” “D,” or “E.”
Husbands, wives, civil union members, and domestic partners are all considered “Class A Beneficiaries” under New Jersey law, which means that there are no Transfer Inheritance Taxes due on the inheritance received.
Keep in mind that there is no such thing as common-law marriage in New Jersey. No matter how long you and your partner have lived together, you will never automatically become spouses, civil union members, or domestic partners from a legal standpoint. Likewise, a religious ceremony alone is inadequate. In order for your marriage, civil union, or domestic partnership to be recognized by the State, you must file the requisite paperwork with your local registrar.
Not properly filing can have many other implications, such as owing back taxes for filing joint tax returns when you are not, in fact, married, civil union members, or domestic partners.
A judgment handed down on May 28 in Lugano v. Director, Division of Taxation illustrates how important it is to ensure that you obtain a marriage or civil union license, or register your domestic partnership officially.
Claudette Lugano and Armin Lovi lived together from 2003 until Lovi’s death. They signed a Federal Reserve Bank Declaration of Domestic Partnership and filed it with the Federal Reserve Bank of New York, where Lovi worked. However, they never filed an Affidavit of Domestic Partnership with their local registrar.
When Lovi died, Lugano became entitled to death benefits under Lovi’s Federal Reserve System retirement plan. Essentially, Lugano inherited money from Lovi, so transfer inheritance taxes were assessed against those benefits. Lugano disputed this in court, but the court concluded that because she and Lovi never filed an Affidavit of Domestic Partnership with their local registrar, they were not Domestic Partners. This means that, rather than being a Class A Beneficiary and owing zero inheritance taxes, Lugano was instead a Class D Beneficiary, and any inheritance she received would be subject to a tax of 15%-16%.
Don’t get caught by surprise like Claudette Lugano. You can apply for a marriage or civil union license or obtain an Affidavit of Domestic Partnership from the Registrar of Vital Statistics of the New Jersey municipality in which either you or your future spouse or partner live. The process is straightforward, inexpensive, and more than worth the time it takes for the benefits it provides.