Inheritance tax slows down estate closure

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Q. I’m the executrix of my aunt’s estate. I’ve been told I need to file an L-8 but she never had any children and her husband died before her. My aunt did not have anything of value except her home, which was foreclosed for $180,000 because she owed $304,000 on it with a reverse mortgage. The only thing left is a $5,500 bank account. Half was released for me for her funeral and the other half remains in the bank pending an “L-8,” so what do I need to do?
— Need help

A. Finalizing someone’s estate, as you’re learning, can be complicated, frustrating and time-consuming.

Based on what you have told us, the L-8 could be appropriate.

Although New Jersey’s estate tax is supposed to disappear after Jan. 1, 2018, the New Jersey inheritance transfer tax will remain in place, said Nancy Heslin Reading, an estate planning attorney with Reading Law Firm in Newton.

She said beneficiaries who are spouses and bloodline relations, such as parents, grandparents, children and grandchildren, are exempt from the tax, as are non-profit organizations.

For all other beneficiaries, a tax must be paid, which, speaking in generalities, ranges from 11 to 15 percent of the inheritance.

As you might guess, the State of New Jersey takes a dim view of not getting paid, Reading said. Therefore, at your aunt’s death, under state law, New Jersey immediately had a lien — think “freeze” — on half of every asset in your aunt’s estate, Reading said.

“The lien cannot be released until the state is satisfied that any inheritance tax due on the estate has been paid,” Reading said. “Banks and other financial institutions in New Jersey know that they can only release half of any account in their control until the administrator or executor of the estate produces either a `tax waiver’ from the state or an `L-8.’”

There is a difference between a tax waiver and an L-8, she said.

If the estate is passing to taxable beneficiaries, the executor or administrator must file an inheritance transfer tax return within eight months of the decedent’s date of death, Reading said.

“Once the state has reviewed the return, if everything is in order they release a tax waiver to the executor or administrator, who then can provide that tax waiver to each institution that is holding half of an asset as required by law,” she said.

The entire process can take from three months to a year before the waivers are released, much to the exasperation of the executors, administrators and the estate beneficiaries, she said.

But what if no inheritance tax is due?

In that case, Reading said, then 100 percent of the asset can be released once a Self-Executing Waiver Affidavit, better known as an “L-8,” is provided to the institution holding the asset. The form is readily available on the internet (search under “NJ” and “L-8”) and it has instructions on who can use the form and how to use it. In the affidavit, the affiant is swearing that no tax is due, she said.

Just as an aside, for estates that include a home that must be sold, a tax waiver is also required before the home can be sold, Reading said. But houses regularly sell before the tax waiver from the state is available.

“If an inheritance tax return has been filed with the state and the executor or administrator is waiting for the state to audit the return and provide the tax waiver, the closing can take place but the title companies will generally require that money be escrowed in case the state’s audit of the inheritance tax return shows that additional tax is due,” she said.

If no return was filed and no tax was due, the house can be transferred with a similar Self-Executing Waiver Affidavit, in this case know as an “L-9.”

So in the case of your aunt’s estate, if you are certain no inheritance tax is due, download and complete the L-8 and provide it to the institution. Many institutions make the forms available for their customers as a convenience, she said.

Email your questions to moc.p1544756251leHye1544756251noMJN1544756251@ksA1544756251.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.