08 Feb Joint bank accounts and inheritance taxes

Q. Is a joint bank account between an aunt and a niece totally taxable or just the aunt’s half when she dies?
— Planning ahead

A. The Tax Cuts and Jobs Act, effective Jan. 1, 2018, made some changes that you’ll want to understand.

It substantially increased the federal estate and gift tax exemption per person from $5.6 million to $11.2 million, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

Also effective Jan. 1, the New Jersey estate tax was eliminated, thus allowing individuals the opportunity to pass an unlimited amount of assets free of New Jersey estate tax.

However, Romania said, the New Jersey inheritance tax was not changed.

“The New Jersey inheritance tax is levied against certain bequests and gifts within three years of death to beneficiaries other than a spouse, grandparents, parents, descendants and stepchildren,” she said.

Transfers to a sibling, the spouse or widow/widower of a child of a decedent are taxed at 11 percent for transfers in excess of $25,000 up to $1.1 million, the excess at 13 percent up to 1.4 million, the excess at 14 percent up to $1.7 million and any excess above that at 16 percent, Romania said.

Transfers to all others — including nieces and nephews — in excess of $500 are taxed at the rate of 15 percent up to $700,000 and at 16 percent on any excess.

Now to your specific question.

“Except in the case of a deceased spouse/domestic partner, when a New Jersey resident dies owning a joint bank account, the entire account will be taxed as if it belonged to the decedent,” Romania said. “A portion can be excluded from taxation if the surviving joint tenant can prove to the New Jersey Division of Taxation that such portion belonged to the surviving tenant and not the decedent.”

For example, she said, each party may have contributed equally to the account from their wages to pay living expenses.

“So to answer your question, unless a niece can prove contribution or ownership of a portion of the joint account, upon her aunt’s death, the entire account will be taxed in her aunt’s estate at a rate of 15 to 16 percent,” Romania said.

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This post was first published in February 2018.