24 Nov What taxes are due on this rental property that was in a trust?

Q. My mother, who died in 2014 and was a Florida resident, co-owned a New Jersey commercial piece of property with my uncle, who lived in New Jersey and died in 2018. I am the trustee of my mother’s trust and my aunt is the executrix of my uncle’s estate. We recently sold the property in New Jersey. Do I need to file a New Jersey tax return since the beneficiaries of my mother’s half of the sale proceeds are my two sisters and myself, all Class A beneficiaries? Also, I know that there is no Florida inheritance tax or capital gains tax since there is no state income tax, but I would imagine that my mother’s trust would be subject to a federal capital gains tax. Her trust became irrevocable before her death as I took over as trustee 10 months before her passing due to Alzheimer’s, so I believe that disqualifies us from a step-up cost basis.
— Beneficiary

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

There are several things to consider here.

You correctly point out that transfers made to lineal descendants, or “Class A” beneficiaries, are not subject to the New Jersey inheritance tax, said Christine Melilli, a certified public accountant with Smolin, Lupin & Co. in Red Bank.

Therefore, she said, your mother’s estate would not be subject to New Jersey inheritance tax on the transfer of her ownership interest in the New Jersey commercial real property to her three daughters, Melilli said.

However, if she left any other assets to non-class A beneficiaries, then those transfers would be subject to New Jersey inheritance tax and a New Jersey inheritance tax return should have been filed within eight months of the date of your mother’s passing, she said.

“To the extent that your uncle has bequeathed any of his share of the New Jersey property to non-Class A beneficiaries, your aunt would have been responsible for filing a New Jersey inheritance tax return and paying any taxes owed on behalf of your uncle’s estate within eight months of his date of passing,” she said.

You said your mother was a Florida resident when she passed. Therefore, no tax waivers from the New Jersey Division of Taxation would be needed, Melilli said.

“However, since your uncle was a New Jersey resident when he died, it is likely that a tax waiver from the New Jersey Division of Taxation is needed so that the financial institution holding the proceeds from the sale of the commercial property can distribute the funds to the beneficiaries,” she said.

If your uncle’s estate was not required to file a New Jersey inheritance tax return, your aunt, as the executor of your uncle’s estate, will be required to file a Form L-9, Affidavit for Real Property Tax Waiver Resident Decedent with the New Jersey Division of Taxation, she said. Once processed, Taxation will issue a Tax waiver certificate.

The second part of your question deals with potential capital gains tax on the sale of assets held by your mother’s irrevocable trust.

“The assets held inside an irrevocable trust pass to its beneficiaries outside of the decedent’s estate,” Melilli said. “Therefore, the assets inside an irrevocable trust generally do not qualify for a step-up in basis.”

Instead, the grantor’s taxable gains are passed on to the beneficiaries when the assets are sold, she said.

On March 29, 2023, the IRS issued Rev. Rul 2023-2, confirming that the assets of an irrevocable grantor trust, includable in the grantor’s estate, do not receive a step-up in basis, she said.

“Therefore, the beneficiaries of your mother’s irrevocable grantor trust would step into the shoes of the grantor and take a carryover basis in the assets,” she said.

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This story was originally published on Nov. 24, 2023.

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