In New Jersey, your children typically do not pay inheritance tax because the state treats them as exempt beneficiaries, but that does not mean taxes are completely off the table. Other taxes can still apply depending on what you leave behind and how those assets are structured.
Here is how it breaks down.
Federal estate tax
Federal estate tax only applies if your estate exceeds a high threshold, so most families will not encounter it. That threshold sits around $15 million in 2026 under current rules. If your estate falls below that amount, no federal estate tax applies. If it exceeds that level, the estate pays the tax before distribution, which can reduce what your children ultimately receive.
Income tax on inherited assets
Your children may still pay income tax depending on what they inherit.
Retirement accounts like IRAs create taxable income when your children withdraw funds. Investment accounts and real estate often receive a step-up in basis, which can reduce future capital gains if they sell. If an asset produces income, such as rent, your children must report that income going forward. So even without an upfront tax, the type of asset you leave can shape the taxes your children deal with later.
Capital gains after inheritance
Capital gains tax usually applies only if your children sell what they inherit.
Because of the step-up in basis, they pay tax only on increases in value after the date of death, not on the asset’s full lifetime growth. This can significantly reduce the tax burden, especially for real estate. If the asset continues to increase in value and they sell later, that additional gain can still be taxed.
The part people miss
Even when no inheritance tax applies, the structure of your assets still affects what your children receive and how easily they can access it. Some assets create taxes later, others cause delays and some do not transfer as cleanly as expected without proper planning.
A conversation with an estate planning attorney can help you organize things in a way that avoids unnecessary tax issues and keeps the process straightforward for your family.
