04 Apr Siblings and the inheritance tax

Q. What are the inheritance tax obligations when two siblings share ownership and live in the same property and there are no other heirs/individuals involved? What are the tax obligations if one predeceases the other? The home is appraised at $135,000 but homes in the area sell for $750,000.
— Sibling

A. The inheritance tax is based on the relationship between the two parties, and yes, siblings are subject to the tax.

Assuming the property where you and your sibling live is in New Jersey, there will a New Jersey inheritance tax due upon the first sibling’s death.

The tax will be based on the total value of the assets passing from one sibling to the other, so it will probably include more than just the value of your residence, said Frederick Schoenbrodt, an estate planning attorney with Bressler Amery Ross in Florham Park.

For purposes of estimating the tax liability, we’ll limit the estimate to the value that you’ve provided.

First, you noted a remarkable difference between assessed value and fair market value. Keep in mind that inheritance and estate taxes are based on the fair market value of a person’s property on the date of death, so you’re looking at the larger number.

Schoenbrodt said the value on the inheritance tax return will generally be based on an appraisal and reflect the market value on the date of death.

He said if we assume that you and your sibling each own an equal percentage interest in the property, 50 percent each, then the tax will be based on 50 percent of the fair market value.

“The 50 percent interest is not a controlling interest so the value of that partial interest may be discounted,” he said. “For example, if the house is appraised at $750,000, 50 percent of the house would equal $375,000 discounted by some percentage. If that percentage was 10 percent, the taxable amount would be $337,500.”

Under New Jersey inheritance tax law, a sibling is a Class C beneficiary.

Schoenbrodt said the first $25,000 of assets passing to a Class C beneficiary are exempt from inheritance tax. The next $1.075 million is taxed at 11 percent, the next $300,000 is taxed at 13 percent, and the next $300,000 after that is taxed at 14 percent. And any amounts over $1.1 million would be taxed at 15%.

So assuming a taxable amount of $337,500, the tax due would be $37,125, he said.

Because real estate is an illiquid asset, you may be concerned that paying this liability could affect your sense of financial security. If so, Schoenbrodt said, you could each consider purchasing life insurance to cover this potential future tax bill.

“Life insurance payable to a named beneficiary is exempt from inheritance tax, so each of you would purchase a policy that will pay directly to the survivor of you sufficient cash to pay any inheritance tax liability,” he said.

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This post was first published on April 4, 2017.