11 Apr Who has to pay the inheritance tax when someone dies?

Q. My sister passed away, leaving a house and a 401(k). The house is part of the estate and the 401(k) has a beneficiary – her niece (my daughter). Suppose each is worth $500,000. How is the inheritance tax paid? Does it all come out of the house estate? Does some of it come out of the 401(k)? What if there is no house and just a 401(k), then how is the inheritance tax paid?
— Unsure

A. We’re sorry to hear about your sister.

The inheritance tax is assessed based on the relationship between the deceased and the beneficiary.

There are several ways this can work.

Many times, a will provides that the inheritance tax is to be paid from the residuary estate, that is, with anything left after any specific bequests are paid out, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

If the will doesn’t say the tax would be paid from the residuary estate, each beneficiary is responsible to pay his or her proportionate share of any inheritance tax assessed, Romania said.

“Notwithstanding that rule, it is the obligation of the executor or administrator to ensure that the inheritance tax is paid before any probate assets — assets without a named beneficiary or joint owner — are released to the beneficiaries,” Romania said. “If the executor or administrator releases assets before payment of the tax, he or she may be personally liable for payment.”

Moreover, she said, where real estate is in the estate, and if it is to be sold by the estate, a tax waiver is required otherwise an escrow is likely to be held at closing to ensure the tax is paid so that there is not a tax lien on the property.

Where a beneficiary is named only on a non-probate asset such as a 401(k), or receives an asset that is not liquid, and no probate assets from which to pay his or her share of the inheritance tax, the executor must ask the beneficiary to contribute to pay the tax owed by liquidating the asset or from other assets, she said.

“If the beneficiary is not cooperative, depending on the amount of tax owed, it may not be cost effective to pursue payment from the beneficiary,” she said. “In cases where there may not be sufficient estate assets to pay the inheritance tax from the estate, the executor may ask the N.J. Division of Taxation to directly pursue the uncooperative beneficiaries.”

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This story was originally published in April 2025.

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.