01 Mar What taxes apply when someone dies?

Q. My grandmother died without a will. Her husband, children and siblings have died, and my sister and I are the only relatives left. What kind of inheritance tax will we have?
— Grandchild

A. You’ll need to consider not only the inheritance tax, but possibly the estate tax, too.

The amount of tax depends on the transfer amount and who is receiving the transferred amount, said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater.

The transfer amount is known as the “taxable estate” because it is the amount that might be taxable, he said.

“It is basically the fair market value of the deceased’s assets plus any life insurance proceeds,” Novick said. “Note that the fact you are inheriting your grandmother’s estate according to the intestacy laws of New Jersey, which apply when a person dies without a will, is not a factor in determining the amount of estate tax.”

You have to consider both federal and state estate tax laws when evaluating a deceased’s estate, he said. Only the state where the deceased resided at the time of death is important – not where the heirs live.

“I assume that Grandma was a New Jersey resident at the time of her death,” Novick said. “There is no estate tax when assets are left to a surviving spouse under federal or New Jersey law. However, estate taxes could apply when assets are left to anyone else.”

Novick said the federal estate tax rate ranges from 18 to 40 percent depending on size of the taxable estate. The federal estate exemption amount is currently $5.45 million per person and you are only taxed if more than the exemption amount is transferred at death.

But depending on whether any lifetime taxable gifts were made by the deceased, it’s possible the estate could be subject to estate tax even if the transfer amount is less than the exemption amount.

“A taxable gift is a gift in excess of the annual gift tax exclusion amount, which is currently $14,000 per person,” Novick said. “Such gifts are required to be reported to the IRS on a gift tax return.”

Rather than pay gift taxes in the year of the gift, Novick said, it is typical to elect a reduction in the estate tax exemption amount by the amount of the taxable gift.

He offered this example: If your grandmother made a $114,000 gift to you before she died, the first $14,000 would qualify for the annual gift exclusion and the next $100,000 would be a taxable gift. Rather than pay gift taxes, Grandma’s estate tax exemption amount would simply be reduced by $100,000, so she would be able to transfer $5.44 million instead of $5.45 million at her death with no estate taxes, Novick said.

If Grandma’s taxable estate is less than the exemption amount, after adjusting for any lifetime taxable gifts, no federal estate taxes will be due, he said.

Then there’s New Jersey.

The estate tax exemption amount in New Jersey is only $675,000, so many state residents will be subject to state estate taxes.

Novick said the estate tax rates in New Jersey range from 4.8 to 16 percent depending on the transfer amount. The state doesn’t have a gift tax, so lifetime gifts don’t matter for state estate tax purposes. If Grandma’s taxable estate is less than $675,000, no New Jersey estate tax will be due, Novick said.

You will need to pay attention to the state’s inheritance tax, which ranges from 11 to 16 percent depending on the amount and who is inheriting the asset, Novick said.

He said the taxable estate for New Jersey inheritance tax purposes has two important adjustments. First, gifts made within three years of death are generally added back and second, life insurance proceeds are exempt if paid to a named beneficiary (but not paid to the estate of the deceased).

“You only have to pay the greater of the New Jersey estate tax or the inheritance tax – not both,” he said. “Importantly, immediate family members, which include a spouse, grandparent, child, or grandchild, are exempt from the inheritance tax, so the New Jersey inheritance tax won’t apply to you.”

Consider speaking to an estate attorney or tax professional with knowledge of the intestacy and estate/inheritance tax laws in the deceased’s home state.

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This story was first posted in March 2019.