21 Dec What tax is due on this inherited IRA?

Q. I’ve seen there is a difference between a “willed” IRA and an IRA with a named, “designated” beneficiary. I am the designated beneficiary of my brother’s retirement account, which is now in my name. It is my understanding that this is not a probatable asset and that any taxes are paid when distributions are made. But what happens with the inheritance tax given that I’m a Class C beneficiary? I am getting calls that the estate needs to pay taxes on this money or this account. Am I required to write the estate a check? What exactly do these people making demands of me want regarding this account?
— Heir

A. We’re sorry about the loss of your brother.

When someone dies in New Jersey, depending on their relationship to the beneficiary, certain taxes could be due.

As you noted, siblings are considered to be Class C beneficiaries under the laws governing New Jersey’s inheritance tax, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.

She said the tax may be imposed on inherited IRAs with beneficiary designations or IRAs that pass under a will.

“Class C beneficiaries receive a $25,000 exemption so the first $25,000 will not be subject to the inheritance tax,” she said. “An 11% tax is imposed on any amount between $25,000 and $1.1 million. The percentage increases for amounts in excess of $1.1 million up to 16% for inheritances over $1.7 million.”

She said the executor or administrator of the estate is obligated to ensure payment of the inheritance tax.

“If the will states that the inheritance tax is paid from the estate, the executor or administrator will pay the tax from the residue of the estate,” Whitenack said. “If, however, the will is silent regarding the payment of taxes, then the Class C beneficiary must contribute an amount equal to the inheritance tax imposed on his or her inheritance.”

So you should speak to the executor or administrator and see what the will actually says to determine who has to pay the tax bill.

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This story was originally published on Dec. 21, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.