08 Dec Getting around the inheritance tax

Q. I own a home that I want to give to my sister when I die. What’s the best way to leave it to her so she won’t owe taxes?
— Sister

A. Leaving assets to your sister will invoke New Jersey’s dreaded inheritance tax.

While the estate tax is on the way out in the state, the inheritance tax is expected to stay.

New Jersey is one of the few states that imposes an inheritance tax on transfers at death to a sibling, said Mary Scrupski, director of estate planning with Prestige Wealth Management Group in Flemington and Millburn.

The first $25,000 is exempt, she said, and the next $1.075 million is taxed at 11 percent. The rate goes up from there, with the highest rate being 16 percent, she said.

“Your sister would be liable for the tax, but you can change this by adding a provision to your will that all taxes are paid from the `residue’ of your estate,” Scrupski said. “If you do this, then the tax would be paid from your other assets, if any.”

If there are no other assets, then your sister would have to pay the tax, she said, noting the tax is a lien on the property. Once it is paid, the state issues a tax “waiver” which is recorded with the county.

You don’t have many options for avoiding or reducing this tax.

“If you give your home to your sister during your lifetime and survive the transfer by three years, there will be no inheritance tax,” Scrupski said. “However, this means that you are actually giving away your house during your lifetime. Avoiding inheritance tax is generally not a good enough reason to do this.”

Could you put her on the deed during your lifetime?

Scrupski said this will not avoid inheritance tax because for New Jersey Inheritance tax purposes, 100 percent of all jointly owned property is assumed to belong to the first joint tenant to die.

Another problem with the inheritance tax is that it is due eight months after the date of death.

This can be a problem if the only asset you own is your house and your sister does not have the money to pay the tax, Scrupski said.

Assume that the house is worth $250,000. The tax would be $24,750 (11 percent of the amount over $25,000). If no one has the cash to pay the tax by the time it is due, your sister can get an extension of time to pay the tax, but eventually the tax will have to be paid, Scrupski said. There will also be interest charged until the tax is paid.

One exception from the inheritance tax is life insurance, she said.

“If you have a life insurance policy naming your sister as beneficiary, she will not have to pay inheritance tax on the insurance proceeds and it would also provide her with funds to pay the tax on the house,” Scrupski said.

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This post was first published in December 2016.