Estate Administration Tales – Part 5

In my blog post last week, I told you about the last piece of information that Daughter provided me.  There was an account in Dad’s name that she said was not really his.  That’s because he was “holding” the money for his friend.  As I explained last week, because there was no written agreement, all heirs would have to agree to waive any interest in the account since it was titled only in Dad’s name.  Daughter had not yet had a conversation with her half sister to know whether she would agree.

Had Dad executed a will specifically leaving the bank account to his friend, there would be no question as to Dad’s intent.  It does, however, raise another issue.  Since the account was in dad’s name, as far as the State of New Jersey is concerned the account is his.  By leaving it to his friend, it triggers inheritance tax.

Inheritance tax is different than estate tax.  New Jersey eliminated its estate tax in 2019 but it still has an inheritance tax.  Heirs are placed in different classes based on their relationship to the person who died and are taxed at different rates. Children and spouses are Class A beneficiaries, exempt from inheritance tax.  Dad’s friend, however, is a  non family member.  He is a Class D beneficiary.  Leaving him $50,000 results in a 15% tax – $7500.  That tax can be paid either from the friend’s share – in which case he would actually receive $42,500 – or out of the residuary.  In that case the surviving spouse and children would receive less.  Which method would depend on what the will provides.

It doesn’t seem fair either way, since the State would collect a tax in either case.  But, of course, there was a reason why Dad was holding the money for the friend in the first place.  While Daughter wasn’t sure why, it presumably was done because Dad’s friend was trying to avoid creditors or someone who he thought had a potential claim to the money.  So Dad probably agreed to help him by putting the money in an account in his name to protect it.  

What they didn’t think about was what would happen if either of them dies.  By Dad taking ownership of the funds to gain a benefit, the estate cannot now claim it isn’t Dad’s money because the circumstances have now changed and it would be better for the estate to deny ownership.