21 Jul My brother died. Will the inheritance tax be due?

Q. My brother passed away in January without a will however my sister was the beneficiary on the Roth and IRA and she was a joint owner of his home. What happens with the inheritance tax? Wasn’t there a bill to eliminate it for the home? And they had a joint bank account, but my sister is the only one who contributed to that. How does that work?
— Sibling

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

Although New Jersey eliminated its estate tax as of Jan. 1, 2018, New Jersey still has an inheritance tax.

Legislation is periodically introduced to amend or eliminate the inheritance tax in New Jersey, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

Bit as of now, New Jersey remains one of a few states, along with Kentucky, Maryland, Nebraska, Pennsylvania and Iowa — which is set to repeal its inheritance tax in 2025 — to impose an inheritance tax, she said.

“In particular, a bill was recently introduced to eliminate the inheritance tax when residential real property was transferred to a family member, including a sibling, cousin, niece, nephew, aunt or uncle) who co-owned the property,” she said. “This legislation was not passed.”

Romania said that transfers to Class A beneficiaries — spouse, domestic partner, civil union partner, parent, grandparent, child, descendant, step-child — are exempt from the inheritance tax.

Class C beneficiaries, which includes siblings, the spouse or surviving spouse of a child, are exempt up to $25,000, Romania said.

Transfers of certain types of property, such as life insurance, are exempt, regardless of the relationship between the decedent and the individual beneficiary to whom it is transferred, she said.

Romania said both traditional and Roth IRAs are subject to the New Jersey inheritance tax when passed to a Class C or Class D beneficiary.

She said it is normally reported on Schedule B and due within eight months from the date of the decedent’s death.

The due date is not related to the date of withdrawal of the funds from the IRA, she said.

“For purposes of calculating New Jersey income tax owed by the beneficiary, however, where a traditional IRA was subject to New Jersey inheritance tax, the value used for inheritance tax purposes is deemed to be the decedent’s previously taxed contributions and thus deductible in determining the taxable amount of income received by the beneficiary,” she said.

Joint accounts with someone who died are taxed for inheritance tax purposes as if the account is owned entirely by the decedent, except to the extent that the surviving joint tenant can prove the funds belong to him or her, she said.

“Therefore, assuming your sister can trace all of the funds in the joint account back to her individually-held account as the source, such account should be shown on the return, with the explanation provided, and a zero balance included as belonging to the decedent,” she said.

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This story was originally published on July 21, 2023.

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