19 Jun Complex inheritance taxes on a home

Q. My main asset is my home valued at over $1 million. It would probably sell for under a million. I am single, 83 and I live with my widowed sister. My will says my sister should have life ownership when I go and then I left it in trust for my brother’s children — my two nephews and two nieces. brother’s children. How much tax would they be liable for?
— Not gone yet

A. For purposes of the estate and inheritance taxes, the home will be valued based on its fair market value on the date of death.

The home’s value is generally determined obtained through an appraisal that would establish the home’s fair market value, said Frederick Schoenbrodt, an estate planning attorney with Bressler Amery Ross in Florham Park.

Schoenbrodt said fair market value for these purposes is generally defined as “the amount at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

The transfer of a life estate to your sister, followed by a trust for your nieces and nephews, would result in an inheritance tax liability, he said.

Your sister is a Class “C” beneficiary for New Jersey inheritance tax purposes and your nieces, nephews, grandnieces and grandnephews are Class “D” beneficiaries.

As a general rule, Class “C” beneficiaries have a $25,000 exemption and then amounts exceeding that exemption are taxed at 11 percent on the next $1.075 million, and the rates move higher as the amount increases, he said. Transfers to Class “D” beneficiaries are taxed at 15 percent on the first $700,000 and 16 percent on amounts exceeding $700,000, he said.

“Unlike the situation where a beneficiary receives a readily determinable amount at death and the tax can be quickly calculated by reference to the beneficiary classes and applicable tax rates, here the value of the interests that the beneficiaries will ultimately receive is uncertain,” Schoenbrodt said.

But there state has a solution for that.

The estate and the New Jersey Division of Taxation may use the “Compromise Tax” procedures to agree upon an inheritance tax liability, he said.

“The method of calculating the compromise tax is based upon actuarial factors according to the life expectancy of the current beneficiary, and his or her beneficiary class, and the relative probability of assets passing to the remainder beneficiaries and their respective beneficiary classes,” he said.

Typically, the taxpayer will present a proposed compromise on the inheritance tax return for consideration by the Division of Taxation, and the compromise is based on the taxpayer’s assessment of the most probable outcome, Schoenbrodt said.

The Division of Taxation has published a guide — “Inheritance Tax Guide for Computation of the Compromise Tax” — for this fairly technical process.

Consider working with your estate planning attorney to make sure you understand and plan accordingly.

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This post was first published in June 2017.