14 Jan Who has to pay tax on this inheritance?
Q. I’m one of nine beneficiaries of an estate from my great-uncle who died in 2018. Each beneficiary is Class D, so we will all be hit with the same 15-16% inheritance tax. Eight of the beneficiaries split the cash evenly and the ninth beneficiary — the executor — gets the house. Can the executor use a portion of the beneficiaries’ cash to cover the tax owed on the house so that the executor pays no tax on the house he’s inheriting? Does the executor have an obligation to reimburse the estate for his portion of the tax due based on the value of the individual assets that each beneficiary will inherit? The state tells us it doesn’t care who pays the tax as long as it is paid.
A. This is a great question.
It will depend in part on the language of the will.
If nothing is stated in the will with respect to how the inheritance tax is to be paid or apportioned, then each beneficiary is responsible for contributing an amount equal to the inheritance tax attributed to his or her inheritance, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
She said it’s common for the decedent to provide in the will how taxes should be paid or apportioned.
“For example, the will may provide that specific bequests are exempt from liability for tax payments requiring instead that such tax be paid from the residuary,” she said. “Alternatively, the will may provide that the tax be calculated and paid from the residuary estate before distribution instead of being paid from each individual beneficiary’s share.”
One reason for instructing that payment of the tax be from the residuary is that individuals receiving specific bequests of property — whether real estate or tangible personal property — may not have the cash necessary to pay the tax due and the decedent does not want to force the beneficiary to have to sell the property to pay the tax, she said.
So for your situation, if there is no tax clause or direction in the will, the beneficiary of the house is responsible to pay the tax on the house, she said. Then the residuary beneficiaries — those of you getting cash — would each pay his/her share of inheritance tax on his/her share of the estate.
“If the will exempts the specific bequest of the real estate from liability for tax or directs the executor to pay the tax from the residuary, then the executor is correct in first paying the entire tax assessed from the share of the estate that would otherwise pass to the eight residuary beneficiaries allowing the house to pass without the burden of an inheritance tax payment,” she said.
Romania said the N.J. Inheritance Tax Bureau requires the tax be paid and will hold the executor liable for the payment if he or she distributes any property of the estate before paying the tax.
“Therefore, although the State of New Jersey does not care who pays the tax, it is the obligation of the executor to ensure payment of the tax before distribution of any assets — including property to himself,” Romania said. “Moreover, in order to release the property from the tax lien, the tax must be paid and a waiver — NJ Form 0-1 — must be issued and in the case of real property, filed in the county where the real estate is located.”
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This story was originally published on Jan. 14, 2020.
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