How Death Taxes Get Paid – Part 1

In this week’s blog post, I address death taxes – the taxes owed as a result of one’s passing – but more specifically how to pay them.  It is not always as straightforward as one might think.

First, let’s be clear what we are talking about.  In New Jersey, we need to be concerned with estate taxe and inheritance tax.  Estate tax is based on the size of the decedent’s (the person who died) estate.  A certain amount – referred to as the “exemption amount” is not subject to the tax.  There is a federal estate tax and there was a New Jersey estate which was phased out for anyone who has passed away January 1, 2018 or later.

The federal estate tax exemption is now $15,000,000, meaning the tax is owed on estates greater than that amount with one exception.  Amounts left to a surviving spouse are never subject to federal estate tax even if they exceed $15,000,000.  This amount is currently indexed for inflation so will increase each year.

While New Jersey no longer has an estate tax, it still has an inheritance tax.  This tax is based on the relationship of the heirs to the decedent.  Class A beneficiaries are exempt from the tax.  These heirs are children, grandchildren, parents, grandparents and spouses.   That is the reason why most estates are not subject to inheritance tax unless there is some amount left to more distant relatives or non-relatives.  In cases where the decedent is not married and has no children a substantial inheritance tax may need to be paid.

When there is an executor (under a will) or an administrator (when there is no will or no executor in the will who is willing and able to serve), that person is responsible to file the tax returns and pay the tax.  Property that is subject to the tax, however, is not limited to assets under the control of this fiduciary, what is known as the probate estate.  Non-probate assets are also subject to these taxes.  And that is where problems arise as far as how to pay the tax.  

I’ll explain more next week.