Picture this: Your great Aunt Joanie passed away earlier this year at 102. She lived a long and wonderful life and wanted to share the fruits of her life’s work and bequeathed you a sizable amount of money. Before you earmark these funds for a summer home or the vacation of a lifetime, you should consider whether the monies will have tax implications.
The good news
Inheritance tax is taxed only at the state level. The IRS does not consider inheritance as income unless the inherited assets produce income such as rent, dividends or interest. The person who receives the assets (the beneficiary) will be responsible for paying the taxes. Keep in mind not all states have inheritance tax. Only New Jersey, Pennsylvania, Maryland, Iowa, Kentucky and Nebraska do and the rules depend on from which state you receive the assets.
In New Jersey, beneficiaries fall into different classes and these depend on the relationship to the decedent. The amount of taxes owed to the state depends on a number of factors including:
- Who the beneficiaries are and how they are related to the decedent
- The date of death value of the assets (and debts) that the decedent owned
- What kind of assets the decedent owned
- Whether the decedent lived in New Jersey or another state.
Pay Your Dues
If you fall into Class A, which includes spouses, civil union partners (after February 19, 2007), domestic partners (after July 10, 2004) children, legally adopted children, mutually acknowledged children, grandchildren, great-grandchildren, parents, grandparents or stepchildren, the monies are exempt from the inheritance tax.
If you are a sibling, son-in-law, daughter-in-law, civil union partner or surviving civil union partner of a child of a decedent (after Feb. 19, 2007), you fall into Class C. Inheritance tax will be imposed after the first $25,000 and then the tax rate starts at 11 percent and increases in increments. Anything over $1.7 million is taxed at a 16 percent rate.
If none of the above categories fit your relationship to the decedent, you likely fall into Class D (nieces, nephews and friends). The first $700,000 of the inheritance is taxed at 15 percent tax and the amount over that is taxed at a 16 percent rate.
What if Aunt Joanie didn’t leave the monies to a person but rather left it to an organization? Well, qualified charities, religious institutions, educational and medical institutions, nonprofit benevolent or scientific institutions, and the State of New Jersey as well as any of its political subdivisions all fall into Class E. And, yes, these are all exempt from inheritance tax.
Plan ahead
It may be too late for Joanie’s beneficiaries, but the takeaway from this taxing experience is to plan ahead. There are a few options to minimize inheritance tax for your beneficiaries:
- Give away your assets to your beneficiaries before passing away
- Move to a state that does not have the inheritance tax. (Remember: Inheritance taxes are only imposed where the decedent lived and not where the beneficiary currently resides.)
If you or anyone you know have become a beneficiary of an estate and are unsure if an Inheritance Tax has to be filed, Eiger, Lang & Company, CPA LLC can help!