16 Jan Do Class C and D beneficiaries pay inheritance tax on retirement accounts?
Q. If a Class C or Class D beneficiary is left money in a retirement account, is an inheritance tax due? Or is it only on money paid through the estate?
A. New Jersey has an inheritance tax.
The amount of the tax is based on the relationship between the beneficiary and the deceased.
Class A beneficiaries are excluded from the inheritance tax. These include a parent, grandparent, spouse, child of a decedent and others.
Class C beneficiaries include a brother or sister of a decedent, a spouse or surviving spouse of a child of a decedent and a civil union partner.
Class E includes qualified charities, religious institutions, educational and medical institutions, non-profit benevolent or scientific institutions, the State of New Jersey or any of its political subdivisions.
Class D beneficiaries are anyone not included in Classes A, C, or E, including nieces and nephews.
Although certain assets left directly to Class C or Class D beneficiaries are exempt from the New Jersey inheritance tax, a retirement account does not have a blanket exemption, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
So, Class C and Class D beneficiaries may have to pay inheritance tax upon the receipt of such assets, she said.
Class C beneficiaries are entitled to a $25,000 exemption, therefore to the extent the proceeds do not exceed that amount, or the first $25,000 of such amount received, will not be taxed, Romania said.
Class D beneficiaries are entitled to an exemption only if the entire bequest is less than $500 otherwise it is entirely taxable.
“In addition, neither Class C nor Class D beneficiaries are taxed if the proceeds are from a life insurance policy paid directly to the beneficiary or the proceeds are from a pension, annuity or retirement account under a teacher’s retirement plan, police or fireman’s retirement plan or other government service retirement plan,” she said.
Unless the account is a Roth account, all beneficiaries who are left money in a retirement account will have to pay the income tax on such funds as they withdraw the funds from the account, Romania noted.
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This story was originally published on Jan. 16, 2023.
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