09 Feb How do we pay inheritance tax on this inherited IRA?

Q. I’m the executor of an estate where the testator left a $20,000 IRA that had a lapse in a designated beneficiary. I’m aware that since the estate is now the beneficiary, this IRA now needs to go through probate, and I have already transferred title to the estate. However, the added problem is that the testator willed the IRA to a specific person, a Class D beneficiary. How do I report this on the New Jersey inheritance tax return? How are inheritance taxes paid?
— Executor

A. We’re glad to hear you’re taking care of business for this estate.

It’s an important reminder that we all need to make sure our beneficiary designations are up-to-date.

We’re going to assume the decedent, or testator, died as a resident of New Jersey.

You are correct that based on what you described, the IRA will need to be treated as a probate asset, and therefore will be subject to the probate process, said Tom Szieber, a trusts and estates attorney at Chiesa Shahinian & Giantomasi in Roseland.

As a result, the IRA will pass in accordance with the testator’s will, he said.

You say the testator “willed the IRA” to a specific person who is a Class D beneficiary.

Class D beneficiaries include any person who is not a spouse/civil union partner, descendant, stepchild, ancestor, sibling, child-in-law, or spouse or surviving spouse of a child.

“The fact that the testator would bequeath the IRA in his or her will in the first place is odd considering that, at the time the testator signed his or her will, the IRA appears to have had a designated beneficiary; a beneficiary designation would have overridden the purported transfer of the IRA in the will if it were not for the lapse you mention,” Szieber said.

In any event, since the IRA now must pass in accordance with the testator’s will, and since the will bequeaths the IRA to specific Class D beneficiary, you, or, more likely your attorney or accountant, will need to prepare and file a New Jersey Inheritance Tax Return (Form IT-R), he said.

“The IRA will need to be included on the Form IT-R as part of Schedule B(1) and on Line 3 of Page 1, and, since the value of the IRA is below $700,000, the IRA will be taxed at a rate of 15%,” he said.

To pay the tax, you or your tax preparer will need to complete the IT-PMT form, which is attached to the Form IT-R on the State of New Jersey’s website, and remit payment to the NJ Inheritance and Estate Tax unit in a timely manner, he said. Failure to do so would cause the estate to incur interest and penalties, he said.

“One issue you should be aware of is unless the will directs that all taxes are to be paid from the residuary estate, then the inheritance tax on the IRA will need to be paid from the IRA funds, rather than from the residue,” Szieber said. “Thus, as the executor, you would need to withhold the amount needed to pay the tax or, if the IRA custodian paid the funds directly to the beneficiary, arrange for such beneficiary to provide the necessary funds to the estate so the estate can use them to pay the tax.”

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This story was originally published on Feb. 9, 2023.

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