Q. I inherited a qualified annuity and I’m a Class D beneficiary. How does the inheritance tax get paid? Do I give a check to the executor?
A. The inheritance tax will be based on the value of the annuity and your relationship to the deceased.
Transfers for less than $500, life insurance proceeds, and certain New Jersey and federal pension payments are exempt. Otherwise, all items are subject to the inheritance tax. This includes items controlled by beneficiary designation rather than a will, such as an IRA, 401(k) or annuity.
You are correct that the date of death valuation your annuity needs to be listed on line 13 of the NJ Inheritance Tax form (IT-R), which is for assets left to Class D beneficiaries, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.
He said the personal representative — executor or administrator — of the estate has a fiduciary duty to file the inheritance tax return (Form IT-R). The tax return along with payment for any tax due is eight months from the date of death.
Who is responsible for paying the tax depends on the deceased’s will.
For instance, Novick said, the will could state that all estate or inheritance taxes are paid out of the deceased’s residuary estate, which is the portion of a deceased’s estate that remains after all debts were satisfied and specific bequests have been made.
“Assuming the estate has enough funds to cover the tax, you won’t owe anything,” Novick said. “However, the will could state that all estate/inheritance taxes are paid proportionately by the recipient even for assets not controlled by the will.”
In fact, Novick said, this is the default when the will makes no mention of how death taxes get apportioned or the deceased died intestate, meaning there was no will.
Dealing with financial institutions upon the death of an account holder can be frustrating because the state of New Jersey requires half of every account to be frozen pending receipt of a tax waiver, Novick said.
“Once all death taxes have been paid, the state of New Jersey will issue a tax waiver to the executor,” he said. “This exercise is intended to ensure that any death taxes are paid before all funds can be paid out of the estate and to the beneficiaries.”
When no taxes are due, Novick said, a Class A beneficiary or the executor can sign a self-executing tax waiver, known as NJ Form L-8.
“My understanding is that retirement accounts and annuities are not subject to the partial freeze, but some colleagues and a representative at the New Jersey Division of Taxation suggest otherwise,” Novick said. “Either way, the executor will ask the beneficiary to pay his/her share of the inheritance tax.”
Problems can arise when the beneficiary refuses to pay his or her share.
Then, the executor is still obligated to pay the tax with other estate funds, if any, which will negatively affect the inheritance of other beneficiaries under the will.
“In this case, the executor can bring a legal action to recover the funds from non-paying beneficiary,” he said. “If the executor can’t pay the tax because there are no other funds in the estate, then the state of New Jersey will bring a delinquency claim against the non-paying beneficiary directly.”
To avoid either scenario, you should pay your share of the tax (if any) as requested by the executor, Novick said.
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