Do spouses owe tax on inherited bank accounts?

Ask NJMoneyHelp

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Q. In New Jersey, if a spouse dies, does the surviving spouse have to pay taxes on a joint checking account? A friend has been sent a form to fill out four years after his wife died in regards to a joint account. Is this right?
– Flummoxed

A. There are specific rules that govern what happens to accounts when a person dies.

When two people establish a joint account, it can be with rights of survivorship (meaning the person who survives inherits the deceased’s share of the account) or without rights of survivorship (meaning the decedent’s share of the account will pass pursuant to a beneficiary designation, intestacy or will and not automatically to the survivor), said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

Absent a contrary designation or clear and convincing evidence of a contrary intent at the time the account was created, the account will be considered a joint account with rights of survivorship such that it passes to the surviving account holder, she said.

“If the account passes to the surviving account holder by rights of survivorship – operation of law – the account will not be in the decedent’s probate estate – that is the property which is governed by the will or law of intestacy,” she said. “However, one-half of the value of the account is still part of the decedent’s taxable estate.”

Romania said the value of one-half the account must be added into the value of the estate to determine how much (if any) estate tax is owed, unless the survivor can demonstrate that all of the money in the account originally belonged to the survivor and never belonged to the decedent.

Where an account is held between spouses, the taxing authorities generally will presume 50/50 ownership for taxation purposes, absent explicit evidence to the contrary, she said.

Commencing Jan. 1, 2018, New Jersey no longer imposes an estate tax on estates of New Jersey decedents.

Moreover, Romania said, even when such a tax was imposed, outright transfers between spouses were subject to a marital deduction which in turn eliminated the tax on such bequests.

“Notwithstanding the elimination of the New Jersey estate tax, New Jersey still has a transfer inheritance tax, which is based upon the relationship of the decedent to the beneficiary. Transfers between spouses are exempt from inheritance tax,” Romania said.

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