A Comparison of NJ vs. PA Inheritance Tax Laws – Where is it Cheaper to Die?

When advising high‑net‑worth clients in New Jersey and Pennsylvania, the taxes upon death can significantly influence the type of estate planning documents we prepare, how to title assets, where people own property, and even where people live. While both states impose inheritance taxes, the rules for exemptions, beneficiary classes, and tax rates diverge considerably. Accordingly, we have take the time to create this comprehensive comparison of NJ vs. PA inheritance taxes.

In this post, we will examine:

1. What are the key similarities and differences when comparing the NJ vs. PA Inheritance Tax rules by beneficiary?
2. What are the key similarities and differences when comparing the NJ vs. PA Inheritance Tax rules by tax rate?
3. Which assets are exempt from the inheritance tax and how do asset types (life insurance, retirement accounts, real estate, etc.) affect your inheritance tax liability?
4. How does the titling of assets affect the inheritance taxes?
5. Are the inheritance taxes less if you die in PA or NJ?
6. Tax planning opportunities.

NJ vs. PA Inheritance Taxes: Exemption by Beneficiary and Tax Rates

Pennsylvania Inheritance Tax: Straightforward Relational Tax Rates

• Spouse: 0% tax rate on inheritance
• Descendants, parent, grandparents, step‑descendants, spouse of a child, and spouse of a deceased child: 4.5% tax rate*
• Siblings: 12% tax rate
• Others (friends, nieces/nephews, aunts/uncles, strangers): 15% tax rate
• Charities: Full exemption

*Note that there is an exception for transfers from a child under 21 to a parent (or step-parent) and transfers from a parent (or step-parent) to a child under 21. In those cases, the PA inheritance tax rate is 0%.

See Pennsylvania Statute: Section 2116, Article XXI of the Tax Reform Code of 1971 as amended in 2020.

New Jersey Inheritance Tax: Tiered Class Structure

NJ has an inheritance tax structure which divides individuals into different classes based upon their relationship to the decedent. The classes are based upon whether New Jersey considers the beneficiary to be closer or more distant classes, and then some of these classes also have different tax brackets depending upon the amount involved:

• Class A (spouse, domestic partner, children, stepchildren, parents, grandparents): 0% tax rate on inheritance
• Class C (siblings, spouse of a child, and spouse of a deceased child): First $25,000 is exempt; then the inheritance is taxed at 11%–16% depending on the amount:
  • 11%: $25k–$1.1M
  • 13%: $1.1M–$1.4M
  • 14%: $1.4M–$1.7M
  • 16%: Above $1.7M
• Class D (friends, nieces/nephews, aunts/uncles, cousins, step-grandchildren, unrelated individuals):
  • 15% on first $700k
  • 16% thereafter
• Class E (charities/government): 0%

See: N.J.S.A. 54:34-2 et seq. (New Jersey Statutes Annotated, Title 54, Chapter 34)

Similarities when comparing the NJ vs. PA Inheritance tax rates

When comparing the NJ vs. PA Inheritance tax rates above, you will see that some of the major similarities are that:

Differences above when comparing the NJ vs. PA Inheritance tax rates

When comparing the NJ vs. PA Inheritance tax rates above, you will see that some of the major differences are that:

• Pennsylvania has an inheritance tax on most assets that pass to your descendants while New Jersey does not.
• New Jersey does not have an inheritance tax on transfers to stepchildren, but there is a NJ inheritance tax on transfers to step-grandchildren. Pennsylvania has an inheritance tax on all transfers to step-children* and grandchildren, but there is no difference in the rate as a result of the way Pennsylvania defines lineal descendants.
  • See PA Statute Section 2102: “Lineal descendants.” All children of the natural parents and their descendants, whether or not they have been adopted by others, adopted descendants and their descendants and stepdescendants.
  • *Except for special exemption to/from step-children under 21.
• In Pennsylvania, transfers to spouses of children (or the surviving spouse of a deceased child) are the same rate as if it was transferred to the child, whereas in NJ there is a major difference as a child is a Class A beneficiary whereas spouses of children (or the surviving spouse of a deceased child) are treated as Class C Beneficiaries.
• NJ’s inheritance tax is graduated depending upon the amount, whereas PA’s inheritance tax rate stays the same regardless of the amount.
• There is also one interesting difference for when property is left to a husband and wife. In New Jersey, you would need to make two separate calculations (one for each person based upon their relation to the decedent) to calculate the NJ Inheritance Tax; whereas in Pennsylvania, the PA Inheritance Tax would be taxed at the lower rate.
  • See PA Statute Section 2116(3): When property passes to or for the use of a husband and wife with right of survivorship, one of whom is taxable at a rate lower than the other, the lower rate of tax shall be applied to the entire interest.
• NJ does not have an inheritance tax on transfers to a surviving domestic partner. PA does not have the concept of a domestic partner.

NJ vs. PA Inheritance Taxes: Exemptions By Asset Type

In this section when comparing the NJ vs. PA inheritance taxes, we will be focused on whether an asset class is subject to the tax rules above or if it is completely or partially exempt from the inheritance tax.

Life Insurance Proceeds

• Pennsylvania: Proceeds from the death benefit of life insurance is exempt from the PA inheritance tax.
• New Jersey: Proceeds from the death benefit of life insurance is exempt from the NJ inheritance tax as long as it is paid to a beneficiary named under the policy.

Notice the extremely important, but subtle, difference when comparing the NJ vs. PA Inheritance Tax exemption rules with respect to life insurance. In New Jersey, the life insurance must name a beneficiary to be exempt – if it passes through the estate, then you must follow the rules above with respect to who benefits from the estate. Accordingly, in New Jersey, it can be extremely costly to forget to name a beneficiary of a life insurance policy if you wish for the funds to go to anyone other than a Class A beneficiary or a charity. It is also worthwhile noting that a trust can be a named beneficiary.

Retirement Accounts (IRA, 401k, ROTH, 403(b), etc.)

• Pennsylvania: There is a PA inheritance tax on retirement accounts if the decedent was over age-59½ at the time of death. However, retirement accounts from decedents under age-59½ payable to beneficiary are exempt from the PA inheritance tax.^
  • Technically, Pennsylvania has an exemption for Payments under pension, stock bonus, profit-sharing and other retirement plans, including H.R.10 plans, individual retirement accounts, individual retirement annuities and individual retirement bonds to distributees designated by the decedent or designated in accordance with the terms of the plan, are exempt from inheritance tax to the extent that the decedent before his death did not otherwise have the right to possess (including proprietary rights at termination of employment), enjoy, assign or anticipate the payment made.
    • See Section 2111(r). Since individuals can always take out their retirement funds but with a penalty, Pennsylvania has interpreted this to mean that the PA inheritance tax will not apply as long as the 10% penalty for withdrawing early applies. Note that this has the effect of subjecting the retirement account of a disabled decedent under age 59½ to the PA inheritance tax as they are not subject to the 10% early withdrawal penalty. See: Evans Legal.
• New Jersey: Treated like other intangible property; included in inheritance computation (unless spouse, Class A, or charity).

Except in the case of an individual who dies before age 59½, there is little difference when comparing the NJ vs. PA Inheritance Tax exemption rules with respect to retirement assets.

Stocks, Bonds, Mutual Funds, and ETFs

Stocks, Bonds, Mutual Funds, and ETFs (outside of retirement accounts) are considered intangible property. Accordingly, when comparing the NJ vs. PA inheritance tax exemption rules that apply:

• Pennsylvania: There is no exemption from the PA inheritance tax.
• New Jersey: There is no exemption from the NJ inheritance tax.

Note that because both New Jersey and Pennsylvania treat stock as an intangible asset, the stock will generally be subject to an inheritance tax in the location where the decedent was domiciled even if the stock is for a company located in another jurisdiction.

Real Estate

Real estate is a unique asset class with respect to the PA Inheritance Tax and the NJ Inheritance Tax. Whereas other assets are taxed based upon the domicile of the decedent at the time of death, real estate is based upon the location of such real estate. Accordingly:

• PA‑situated real estate will be subject to the PA Inheritance Tax rules regardless of where the decedent lived; and
• NJ‑situated real estate will be subject to the NJ Inheritance Tax rules regardless of where the decedent lived.

Again, just because real estate is subject to the inheritance tax rules, it could be taxed at a zero rate. The rate is determined by who benefits from the decedent’s passing (whether by Will, trust, joint ownership, or intestacy).

In New Jersey, co-ops are a different story as it is technically an ownership in stock, therefore, it is intangible asset. Accordingly, taxation of that will be based upon the domicile of the decedent, and not the location of the coop. See: https://www.nj.gov/treasury/taxation/pdf/other_forms/inheritance/itnrfaq.pdf. The Pennsylvania rules are slightly harder to determine as I am not aware of clear guidance on this issue.

Joint Property – There’s a Big Difference When Comparing NJ vs. PA Inheritance Taxes

One of the biggest differences between New Jersey and Pennsylvania is the way in which the two states tax the jointly owned property. Specifically, when comparing NJ vs. PA Inheritance taxes, there is a big difference in the exemption from the inheritance tax for jointly owned property.

• Pennsylvania: When a decedent owns an account jointly with another party, only the decedent’s share is potentially subject to the PA inheritance tax (unless the account was opened within one year of death, then full value included).
• New Jersey: When a decedent owns an account jointly with another party, it is presumed that the decedent contributed the entirety of the account unless you can prove otherwise. Accordingly, to the extent that you can’t show another party contributed to the account, the entire account is potentially subject to the NJ inheritance tax rules.

As you can see, the Pennsylvania exemption rule on joint property opens up substantial planning opportunities for minimizing the PA inheritance tax. It should also be noted that Pennsylvania inheritance tax law differs from federal estate tax law. This is important when considering the basis of the asset received by the surviving owner. Federal estate tax law and the New Jersey law are identical. Accordingly, an asset in Pennsylvania could potentially receive a 100% step-up in basis while only being subject to a partial PA inheritance tax.

Convenience Accounts

A convenience account is a type of bank account where one person (the principal) adds another person as a co-owner, but the co-owner is only supposed to use the account for the principal’s benefit, not their own. It’s essentially a way for the principal to grant someone access to their funds for managing finances, paying bills, etc., without using a Financial Power of Attorney. 

• Pennsylvania does not recognize convenience accounts. Accordingly, the PA inheritance tax on a Pennsylvania decedent’s interest in a convenience account is based upon the normal joint property rules.
• New Jersey does recognize convenience accounts, which also means that the entirety of the account is included in a decedent’s estate for NJ inheritance tax purposes.

NJ vs. PA Inheritance Taxes: Exemptions By Size of Bequest

One important item to consider when comparing the NJ vs. PA inheritance taxes is whether there is a minimum amount that can be passed to a beneficiary before the inheritance tax applies.

• Pennsylvania: Pennsylvania’s inheritance tax has no bottom threshold, meaning beneficiaries may be required to pay inheritance tax regardless of the size of the estate, although exemptions apply (see above).
• New Jersey: For all transfers in which the NJ tax rate is in excess of 0%, there is a nominal exemption amount that applies:
  • For transfers to Class C beneficiaries, the first $25,000 is exempt. This exemption is per recipient, so if you left $25,000 to each of your 5 siblings, there would be no tax to any of them.
  • For all other transfers, the exemption is $500.

NJ vs. PA Inheritance Taxes: Lookback Rules

When comparing the NJ vs. PA inheritance taxes, it is important to consider that the two states have different lookback rules. Specifically, if you make a gift prior to death, is it still subject to the inheritance tax?

• Pennsylvania: Gifts within one (1) year of death are subject to the PA inheritance tax. Pennsylvania also exempts the first $3,000 of gifts made within one year of death.
• New Jersey: Gifts “in contemplation of death” are subject to the NJ inheritance tax. New Jersey presumes that gifts made within three (3) years of death to be in contemplation of death, but this is a rebuttable presumption.

As a reminder, it may not be wise to gift appreciated property prior to death as it may not be tax efficient from a capital gains tax perspective. For more information, I suggest reading this post about the Step-up in Basis Rules.

NJ vs. PA Inheritance Taxes: Which State is it “Cheaper to Die In”?

Now for the $64,000 question – when comparing NJ vs. PA inheritance taxes, is it cheaper if you die in one state versus the other? As a result of New Jersey repealing its estate tax a few years ago, the answer is that it is now usually cheaper to die as a domiciliary of New Jersey than Pennsylvania. Let’s give a few examples:

• Transfers Between Spouses or to Charity: Here there is no difference as both NJ and Pennsylvania tax transfers between spouses at 0%.
• Transfers to Children and Other Descendants: Because of the 4.5% PA inheritance tax on transfers to descendants, and the fact the there is no similar NJ inheritance tax on transfers to descendants, it is definitely cheaper to die as a domiciliary of NJ rather than PA if you are leaving your assets downstream.
• Transfers to Siblings and Spouses of Children: Although Pennsylvania’s top inheritance tax rate is only 12% for this category compared to NJ’s top inheritance tax rate of 16%, NJ exempts the first $25,000 and has a graduated tax rate. Accordingly, the break even point is about $1.8M. If you leave less than that to this category of individuals, it is cheaper to die in NJ than in PA.
• Transfers to Most other Beneficiaries: For this class, there is no difference for the first $700,000 as when you compare the NJ vs. PA inheritance tax rates, they are both 15%. However, once you get above that amount, it is cheaper to die in Pennsylvania. (Note the exception above for transfers to step-grandchildren, which NJ taxes at the 15/16% rate whereas PA taxes those transfers at 4.5%.)

Which States Have an Inheritance Tax

While our focus is to compare the NJ vs. PA Inheritance tax rules (as attorneys at our firm are licensed in New Jersey, Pennsylvania, Florida, and New York), it should be noted that three other states have an inheritance tax (Kentucky, Nebraska, and Maryland).

As reminder, do not confuse an inheritance tax with an estate tax. An inheritance tax is based upon who a decedent leaves their assets to, while an estate tax is based upon the wealth of a decedent. Twelve states plus the District of Columbia have an estate tax. New Jersey used to have both an estate and inheritance tax, but now Maryland is the only state that has both. The Tax Foundation has a helpful guide to which states currently have an estate and/or inheritance tax, although at last glance, it does need to be updated to reflect the repeal of the Iowa inheritance tax.

NJ vs. PA Inheritance Taxes: Planning Opportunities

If you are considering whether you should live in New Jersey or Pennsylvania, I would strongly encourage you to consider the tax planning opportunities. Most people only consider the income tax issue, but I would strongly urge you to consider the NJ vs. PA Inheritance tax issues as well. Specifically, I would encourage you to consider:

• Leveraging Exemptions: For example, if you wish to leave funds to a sibling, consider that NJ has a $25,000 exemption on such transfers.
• Titling of Assets: Proper titling of assets, particularly in Pennsylvania, can save significant inheritance taxes as PA only taxes the portion considered owned by the decedent.
• Using the Proper Asset to Accomplish a Particular Goal
  • Life insurance is the most tax efficient asset class (no income tax or inheritance tax upon death). Accordingly, consider using these to provide for the beneficiaries who give rise to the greatest level of tax.
  • Conversely, retirement accounts are the least tax efficient asset class, so consider using this as the first asset that goes to charity.
• Gifting & Lifetime Transfers: Providing for loved ones before death can avoid or minimize the inheritance tax completely
• Trusts Planning: There are many ways in which trusts can minimize taxes, including inheritance taxes.
• Other issues: Proper understanding and use of powers of appointment and disclaimers can also help to minimize taxes. For example, PA doesn’t tax Powers of Appointment (See Section 2116: (f)  Property subject to a power of appointment, whether or not the power is exercised and notwithstanding any blending of the property with the property of the donee, shall be taxed only as part of the estate of the donor.)

Also see our blog post here about 7 Simple Ways to Minimize the PA Inheritance Tax.

Key Takeaway and Real Life Example of Guidance That We Can Provide

Imagine that you are someone that has a shore property in NJ (worth $2M) and another property in Bucks County, Pennsylvania (worth $1M), and that the PA property is your current domicile. Let’s also imagine that you are over age 65, that you are married with two children, and have other assets of about $7M (including life insurance of $1M, an IRA of $3M, and cash/stocks/bonds worth about $3M). Your goal is, upon the death of you and your spouse, to leave $100,000 to each of your 4 nieces and nephews, $200,000 to charity, and the rest to your children in trust.

If you came to us to help you compare the NJ vs. PA Inheritance tax regimes, we might ask you to consider if you are willing to move to NJ as you would be able to pass on considerably more to your children without tax. We may also advise you to consider using your life insurance to name your nieces and nephews as contingent beneficiaries (because you could avoid the 15% tax by using life insurance). Finally we may ask you to consider using a portion of your retirement account to benefit the charities as they don’t pay income tax on retirement assets.

Suggestions like these could save your loved ones hundreds of thousands of dollars if you take the time to compare the NJ vs. PA Inheritance tax regimes with an experience estate and inheritance tax attorney.

NJ vs. PA Inheritance Taxes: Frequently Asked Questions

Q: If I’m a PA resident with NJ real estate, which tax applies?

The PA inheritance tax rules will apply to all your assets except for the NJ property. The NJ inheritance tax rules will apply to the NJ situs assets.

Q: Does a trust avoid the inheritance tax?

Maybe. Revocable trusts are ignored for purposes of the inheritance tax rules. However, an irrevocable trust which is properly funded could avoid the inheritance tax as long as it was not funded just prior to death.

Q: Can I avoid the inheritance tax using a TOD account?

No. Transfer on Death (TOD) accounts avoid probate, but they are still subject to the inheritance tax rules.

Conclusion

Hopefully you found this analysis of the NJ vs. PA Inheritance tax regimes helpful. Understanding the differences can help you save your loved ones from paying any unnecessary taxes. We aim to help clients with assets in multiple states and jurisdictions navigate the complex tax and probate rules while preserving your family values. For a bespoke analysis, please connect with our attorneys at The Pollock Firm LLC.