20 Jan What is the inheritance tax for different kinds of beneficiaries?

Q. What happens with the inheritance tax for Class A and C beneficiaries? Is it a good idea to purchase a life insurance policy with the beneficiary as the recipient so they can use the funds to pay the inheritance tax?
— Planning ahead

A. Let’s start with how different kinds of beneficiaries are treated.

Class A beneficiaries include a parent, grandparent, children and grandchildren of the decedent, as well as step-children — but not step-grandchildren.

Class A beneficiaries also include a child to whom the decedent, prior to the child’s fifteenth birthday, began to act as the child’s mutually acknowledged parent where he/she continued to act as such for at least 10 years, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

There is no inheritance tax on transfers by a decedent to Class A beneficiaries, she said.

Class C beneficiaries include the decedent’s siblings, the spouse of a child of decedent or the surviving spouse of a deceased child of the decedent, Romania said.

Class C beneficiaries do not pay any tax on the first $25,000 of taxable property received. On amounts in excess of $25,000 up to $1.1 million, the tax is 11%, she said. Amounts in excess of $1.1 million up to $1.4 million will be taxed at 13% while amounts from $1.4 million to $1.7 million is taxed at 14%. Any amounts in excess of $1,700,000 the tax are taxed at 16%, Romania said.

Life insurance is a popular strategy to cover the inheritance tax.

Romania said life insurance is not taxable for inheritance tax purposes if paid directly to the beneficiary including a Class C beneficiary. But there is a tax if the life insurance is paid to the estate and then the estate is divided among Class C beneficiaries.

“Utilizing the cash from his or her life insurance benefit to pay a tax obligation on non-cash bequests is an option available to a beneficiary, however, it should not be mandated by the decedent in the documents nor should the life insurance be paid to the estate in order to pay the tax as this may cause the amount to be included in the estate and increase the tax burden,” Romania said.

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This story was originally published on Jan. 20, 2022

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