For many years, the New Jersey Division of Taxation has generally applied the Internal Revenue Code to the treatment of New Jersey estates, including the general rule of Section 529 of the Code, which states in part that, with two exceptions, no amount is includible in a decedent’s gross estate “by reason of an interest in a qualified tuition program.” Most practitioners have interpreted this to mean that qualified tuition programs (more commonly referred to as “529 accounts”) are not included in a decedent’s gross estate for New Jersey estate or inheritance tax purposes; however, it turns out that this understanding may not be true, especially with respect to the latter.
Background
Since their inception, 529 accounts have been used by families as vehicles to save tax-free money for education expenses. Although often owned by a parent or grandparent for the benefit of a child or grandchild who might later require use of the funds toward the cost of education, in certain instances the account owner and beneficiary may be of a non-lineal relationship. For example, it is not uncommon for the owner of a 529 account to be the aunt, uncle or even step-grandparent of a named beneficiary; however none of these relationships is considered by the State of New Jersey as lineal for New Jersey transfer inheritance tax purposes (or “Class A” as labeled by New Jersey) which relationships pass free of transfer inheritance tax. Rather, they are labeled as “Class D” relationships which are subject to the tax.
