“Using gifts during your lifetime to avoid the inheritance tax may be a smart idea, but it's not without possible risks.”
New Jersey is one of the few states that still imposes an inheritance tax, says NJ.com in the article titled “How to avoid the inheritance tax.” The inheritance tax isn’t based on the size of the estate—but rather on who receives the proceeds.
New Jersey doesn’t impose an inheritance tax on transfers to a parent, grandparent, spouse, domestic partner, child, step-child or grandchild. These are all Class "A" beneficiaries. However, an inheritance tax is imposed on transfers to a niece or nephew, who are considered Class "D" beneficiaries. The tax rate is about 15 or 16%, depending on the amount transferred.
An important point to remember is that all transfers made within three years of death, are presumed to be “in contemplation of death.” These transfers may also be subject to inheritance tax. In addition, transfers designed to take effect at or after death are included in a person's estate for inheritance tax purposes.
One way to get around some inheritance taxes is to gift funds to your relatives during your lifetime. You can make outright gifts or pay for a family member’s medical costs or educational expenses. Inheritance taxes can also be avoided with an irrevocable trust in some situations. With this type of trust, you must give up control and use of the assets placed in a trust.
An individual can make annual gifts of $14,000 per person without any gift taxes. If the annual gift exceeds $14,000, the excess amount will utilize a portion of the individual's estate and gift tax exemption of $5.49 million.
There is no limit on gifts used to pay for someone's medical or educational expenses, if payment goes directly to the medical provider or school.
Reference: NJ.com (July 14, 2017) “How to avoid the inheritance tax”