Q. I am power of attorney and sole beneficiary for my uncle who has advanced dementia. He lives in a New Jersey state run veteran’s nursing home but still owns his home. Is it better to sell the home prior to his passing? And although I am sole beneficiary, I want to distribute monies to other family members and charities after his passing. What are the tax consequences? His estate is worth around $210,000.
A. Let’s first talk about the proper terms for your situation.
You say you are “power of attorney” for your uncle. Your uncle is the “principal” and you are his “agent.”
“When your uncle signed the power-of-attorney document you became his `attorney in fact,'” said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
Kiely said an “attorney in fact” has the legal authority to make decisions for the “principal.”
These decisions may include the power to make financial decisions, gift money, make health care decisions and recommend a guardian.
You asked if it is better to sell his home prior to his passing.
“The immediate consideration should be whether there would be any adverse income or estate taxes if you sold his house now,” Kiely said. “The answer is no.”
Your uncle, being a single person, is eligible for up to $250,000 in tax forgiveness when he sells his principal residence, Kiely said. If you sold his house on his behalf, the $250,000 would kick in and no tax would be due.
Instead, if you sold his home after he passed you would receive a “step up in basis.” This means your cost would be increased to the date of death value, again with no income taxes if you sell soon after, Kiely said.
You say you are the sole beneficiary, so we assume you mean you’re the sole beneficiary under your uncle’s will.
As such, there will be no federal estate taxes due because of how small your uncle’s estate will be. There will also be no New Jersey estate tax issues because New Jersey’s estate tax exemption is $2 million in 2017 and it will be repealed next year.
But that brings us to the pesky New Jersey inheritance tax.
“The estate tax will be gone, but the inheritance tax is still alive,” Kiely said. “New Jersey’s inheritance tax is a tax on the right to receive an inheritance. The amount of the inheritance tax depends on the relationship between the deceased and the beneficiary.”
Class A beneficiaries consist of grandparents, parents, spouses, children and grandchildren, Kiely said. The tax rate for class A beneficiaries is zero.
There is no Class B.
Class C beneficiaries include brothers, sisters, spouses or surviving spouses of a child of the decedent, Kiely said. The tax rates for Class C beneficiaries range from zero on the first $25,000 up to 16 percent for larger amounts. Class D beneficiaries are anyone who are not in Class A or Class C, he said.
“Since you are your uncle’s niece or nephew you are a Class `D’ beneficiary,” Kiely said. “The inheritance tax for a Class `D’ beneficiary is 15 percent on the first $700,000. So no matter how the inheritance is parceled out, you will be responsible for $31,500 ($210,000 X 15%).”
Email your questions to moc.p1505820841leHye1505820841noMJN1505820841@ksA1505820841.