Estate Planning and Taxes: What Middle-Class Families Should Really Be Thinking About

When most people hear "estate planning," the first thing that comes to mind is taxes—especially the federal estate tax. There's a widespread belief that estate taxes are something to fear, but the truth is that most middle-class families won't ever owe a dime in federal estate taxes. That doesn't mean estate planning isn’t important—it just means we need to shift our focus to the tax issues that do matter for most families, especially here in New Jersey.

The Federal Estate Tax: Not Your Biggest Worry

Thanks to the 2017 Tax Cuts and Jobs Act (TCJA), Public Law No: 115-97, the federal estate tax exemption is currently $13.61 million per person ($27.22 million for married couples in 2024). That means unless your estate exceeds those amounts, you won’t owe federal estate tax under 26 U.S. Code §2031.

However, the current exemption is set to sunset on December 31, 2025. If Congress does not act, the exemption will revert to approximately $7 million per person (adjusted for inflation). Various legislative proposals have been introduced in Congress to either make the higher exemption permanent or raise it further, but no final law has been enacted yet. Most experts predict that, absent new legislation, the exemption will revert as scheduled.

So while it’s wise to stay informed, most middle-class families won’t be impacted by this shift. The real issues to focus on are other types of taxes that often get overlooked.

The Real Tax Concerns for Middle-Class Families in New Jersey

1. Capital Gains Tax

One of the most common and potentially expensive taxes your family could face is the capital gains tax. If you leave your home, stocks, or other appreciated assets to your children or heirs, they usually receive a “step-up in basis” at death. That means the value of the asset is reset to its market value at the time of your death, significantly reducing (or eliminating) the capital gains taxes if they sell it shortly after.

But this only applies if you own the asset outright. If you try to "save money" by putting your kids on the deed or gifting appreciated assets during your lifetime, you could unintentionally trigger thousands of dollars in capital gains taxes.

Example: Step-Up in Basis and Using a Revocable Living Trust

Let’s say you purchased your home 30 years ago for $100,000, and it’s now worth $500,000. If you gift the home to your child during your lifetime or add them to the deed, they inherit your original cost basis of $100,000. If they later sell the home for $500,000, they could owe capital gains tax on $400,000 of gain.

However, if the home passes to your child at death—either through your will or, more efficiently, through a Revocable Living Trust (RLT)—the cost basis steps up to the fair market value on the date of your death. In this case, $500,000. If your child then sells the property shortly after, there may be little to no capital gains tax.

Placing your home into an RLT during your lifetime allows you to maintain full control and ownership, avoid probate, and still provide the step-up in basis to your heirs. It’s a smart, tax-efficient way to pass on a valuable asset while simplifying the legal process for your loved ones.

2. Inherited Retirement Accounts: The SECURE Act’s 10-Year Rule

Many middle-class families have significant savings in IRAs or 401(k)s. The SECURE Act of 2019 (Setting Every Community Up for Retirement Enhancement), codified in 26 U.S. Code §401(a)(9)(H), changed the rules around inheriting these accounts. Most non-spouse beneficiaries (like adult children) now have to withdraw the full amount within 10 years of your death.

This can create a substantial tax bill, especially if the inheritance pushes your child into a higher tax bracket. One planning strategy is to consider using a trust to hold the IRA, but keep in mind that the trust must allow for distributions that meet the 10-year depletion rule, which usually means distributions must occur regularly—potentially every year.

Example: Inherited IRA – Lump Sum vs. Trust Distribution Strategy

Let’s say your child is the beneficiary of a $300,000 IRA.

If they receive the IRA outright and decide to take a lump-sum distribution, the entire $300,000 is taxed as ordinary income in that year. If they already earn $100,000 in salary, this could push them into a higher tax bracket—resulting in a federal tax bill of $90,000 or more, depending on their total income and state tax.

Now, let’s say instead that you name a properly drafted Revocable Living Trust (RLT) as the beneficiary. If the trust qualifies as a “see-through trust” under IRS rules, the trustee can manage the account and spread distributions out over 10 years, as allowed by the SECURE Act (26 U.S. Code § 401(a)(9)(H)). For example, the trust might distribute $30,000 per year to the beneficiary. This strategy doesn’t avoid taxes, but it:

• Spreads out the tax burden over time, potentially keeping the beneficiary in a lower tax bracket each year.

• Protects the funds from divorce, creditors, or financial mismanagement.

• Maintains control, especially helpful if the beneficiary is young or financially inexperienced.

💡 Special Rules for Certain Beneficiaries: The 10-year rule applies to most non-spouse beneficiaries. But spouses, minor children (until age 21), disabled individuals, and chronically ill beneficiaries may qualify for more flexible options—like stretching withdrawals over their life expectancy. Once minors reach age 21, however, the 10-year clock begins.

In short: a trust can be a powerful tool to help distribute large IRA assets over time while also protecting beneficiaries from themselves or outside threats. But it has to be done right.

3. New Jersey Inheritance Tax

New Jersey does not have a state estate tax anymore (it was repealed in 2018), but it still imposes an inheritance tax depending on who inherits your assets.

The tax rate and exemptions are based on your relationship to the deceased:

• Class A beneficiaries (spouse, parent, grandparent, child, grandchild) – Exempt from inheritance tax.

• Class C beneficiaries (siblings, daughters-in-law, sons-in-law) – Exempt up to $25,000, then taxed from 11% to 16%.

• Class D beneficiaries (friends, cousins, etc.) – No exemption, taxed from 15% to 16% on the full amount.

This tax applies regardless of where the beneficiary lives, as long as the deceased was a New Jersey resident.

🔍 Example: How a Trust Can Help with New Jersey Inheritance Tax

Suppose you leave $500,000 to your niece, a Class D beneficiary under NJ law. If given outright, she could owe up to $75,000 in inheritance tax (15% on the full amount), receiving only $425,000.

💡 Instead, placing the funds in a Revocable Living Trust allows you to:

• Spread distributions over time (e.g., 5–10 years)

• Delay or reduce the immediate tax impact

• Use tools like life insurance inside the trust to help cover taxes

While a trust won’t eliminate NJ inheritance tax for non-exempt beneficiaries, it offers more control, flexibility, and potential tax efficiency.

Final Thoughts

Estate planning isn’t about being rich—it’s about being prepared. For most middle-class families in New Jersey, the fear of estate tax is often misplaced. But failing to plan for capital gains tax, retirement account distributions, or state inheritance taxes can result in costly surprises.

At The Law Office of Jeffrey Blair, we take pride in helping families understand their options, educate themselves on the real tax risks, and create plans that protect both their loved ones and their legacy.

If you're ready to take the next step, schedule your Peace of Mind Planning Session (PMPS). We'll take a close look at your unique situation and help you build a plan that works for your family, now and into the future.

Let’s plan wisely, not fearfully.