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The Problem of the Unmarried Siblings – Part 2

Last week we were discussing Denise’s problem.  Her Mom was one of 10 children.  2 of her uncles and 1 aunt had never married but lived together for many years.  As their health declined Denise became their support system.  We discussed how Medicaid views their assets and the trap that results when they combine their assets.  This week we are going to look at what happens when one of the siblings dies.

Let’s change the facts a bit.  What if Al entered the nursing home but died before needing Medicaid.  At the time of his death he owned the home with Betty and Carl joint tenants with right of survivorship.  This means that Betty and Carl by operation of law received Al’s interest and now owned the home together.  No problem, right?  Well, not so fast.  We have to consider estate and inheritance taxes. 

Estate taxes are owed on estates over a certain size.  In the case of federal estate tax this year there is no estate tax and next year tax is owed on estates greater than $1,000,000.  New Jersey imposes a tax on estates greater than $675,000.  Al only owned the home, worth $600,000, and a few thousand dollars that he hadn’t yet spent towards his long term care.  Since his share of the home is worth $200,000 we don’t have to worry about estate tax.

New Jersey, however, also has an inheritance tax.  This tax is based first on the relationship of the heirs to the person who died and then on the amount received by that heir.  Children, grandchildren and spouses are exempt from the tax, but siblings are not.  The first $25,000 is free of tax but then the tax rate starts out at 10% and eventually reaches a maximum of  15%.  The tax is due 8 months after death and if not paid incurs interest at 10% per year.

Betty and Carl owe approximately $8000 each in tax.  Most people are unaware of this tax unless they have consulted with an estate or elder law attorney.  What happens if they don’t have the money to pay the tax?  The interest can start to really add up.  And if Betty and Carl need long term care themselves the tax can eat up what they have left in assets.  If Denise is aware of the tax and comes to see us before Al dies we can plan for the payment or possibly avoid it altogether until the last sibling dies.  If she waits till Al dies the choices are much less appealing.