Do I have to pay tax on this inheritance from my aunt?

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Q. My 84-year-old aunt was a lifelong New Jersey resident. At age 81, she began showing serious signs of Alzheimer’s. She had lived alone all her life, never married, no children. A single unmarried cousin who lived in Pennsylvania took it upon herself to volunteer to be our aunt’s power of attorney and decided to move her to a Pennsylvania assisted living facility against our aunt’s wishes. Most of her savings were used up except for a modest amount of money she left to a few of her favorite nieces and nephews, to our great surprise. I received $8,500. Because I live in New Jersey and my aunt moved out-of-state against her will, and only lived there for three years, why must I pay Pennsylvania inheritance tax? I am 61 and live in New Jersey.
— Beneficiary

A. We’re sorry to hear about the loss of your aunt.

Confusion about any inheritance taxes due sure can make that harder.

Both Pennsylvania and New Jersey have an inheritance tax where the tax rate is based upon the beneficiary’s relationship to the decedent, said Adam L. Sandler, said Adam L. Sandler, an attorney with the Wills, Trusts & Estates and Taxation Group at Einhorn, Barbarito, Frost & Botwinick in Denville.

“For nieces and nephews of a decedent, both states impose a tax rate of 15% on the amount of the inheritance,” he said. “That rate actually increases to 16% in New Jersey on amounts in excess of $700,000.”

So, Sandler said, whether your aunt lived in New Jersey or in Pennsylvania, the same amount of tax would be due on an $8,500 inheritance.

But the question of who bears the burden of paying the tax is not all that clear, he said.

“Under both New Jersey and Pennsylvania law, the beneficiary is liable for any estate or inheritance taxes assessed on their inheritance unless there is language in the decedent’s last will and testament or other testamentary substitute to the contrary,” he said.

This is what is known as “tax apportionment.”

The beneficiary bears their proportionate share of the tax caused by the amount of their inheritance, Sandler said, but in many instances, a will provides that death taxes are to be paid out of the “residue” or “residual estate” — without apportionment.

If the will has such language, then the estate bears the burden of paying the tax, assuming there are enough assets in the estate to do so, he said.

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This story was originally published on Nov. 30, 2021.

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