Total Counsel Law Group

What Happens When Inheritance Taxes are Paid Late?

“The New Jersey inheritance tax return is due, and the tax is required to be paid eight months after the death.”

It’s not that uncommon for an elderly relative to pass away, and for younger family members to be tasked with cleaning out her home. That can take some time.

If the siblings started cleaning up the place but it took a year to sell the home, there may be some tax issues.

Because of the delay, perhaps a sibling didn’t pay the inheritance tax on time, because the home wasn't yet sold. The taxes were finally paid, with interest, but the question arises, could the sister have used a “guesstimate” for the value of the home to pay the inheritance tax on time? Or could she have asked for an extension or an amended return?

nj.com’s recent article, “Inheritance taxes were paid late, with interest. Can we get a redo?” explains that an extension of time to file the return can be obtained for up to four months with another two-month extension without explanation. However, the taxes must still be paid. If not, interest accrues at the rate of 10% per annum.

Interest payments could’ve been avoided, by getting a market analysis from a real estate agent to assess the value of the home. Each of the beneficiaries could have then paid their estimated share of the tax from their personal funds, assuming there were not enough liquid assets in the estate to pay the tax.

If the beneficiaries were not willing to do so, and there weren’t enough liquid funds in the estate to pay the tax until the house was sold, it may be that a fiduciary had no other option but to let interest accrue, until funds were available to pay the tax.

Also note that not every expense that’s paid by an estate, is available as a deduction on the inheritance tax return. However, if the deductions that are available weren’t taken on the original return, an amended return can be filed prior to a Notice of Assessment or other such notice being received from the Division of Taxation. That will close the matter.

Appeals and applications for refunds at that point may be made. However, limited time periods and certain procedures must be followed.

An estate planning attorney would be able assist with preparing and filing this type of return and reduce the risk of the taxing authority auditing the estate returns. The cost of working with an attorney would no doubt be less than the time and expense of handling this aspect of the estate incorrectly and racking up taxes and penalties.

Reference: nj.com (April 24, 2019) “Inheritance taxes were paid late, with interest. Can we get a redo?”

Must I File Taxes When My Dad Dies?

“Do I file 2018 tax returns for my father? He passed away in October 2018.”

Generally, when someone passes away, the final individual federal and state tax return must be prepared and filed in the same way as when they were alive, says nj.com, in the recent article, “What tax returns need to be filed after someone dies?”

All of the income starting at the beginning of the year up to the individual’s date of death, must be reported on the tax return. All of the tax deductions and tax credits that the person was entitled to may be claimed. This final return is typically filed by the surviving spouse or by the executor of the individual’s estate.

The final return can be either electronically filed or filed on paper. The tax preparer should also be sure to write “deceased” after the taxpayer’s name and include the date of death, so that the IRS knows that this will be the last individual return filed.

However, at the death of a taxpayer, a new taxpaying entity—the taxpayer’s estate—is automatically created to make certain that no taxable income escapes review by the IRS. Income that’s earned during the tax year, up to the date of the person’s death, is reported on the final individual tax return, and any earnings after that date are taxable to the decedent’s estate. Earned income of the estate is any income for which the decedent was entitled to during the year that occurred after the date of death. This could include any dividends or interest from stock or bond investments held in the decedent’s name that was collected between the date of death and the end of the calendar year.

In addition, beneficiaries of assets paid directly to them outside of probate, like IRAs already in distribution mode or life insurance policies, may be subject to what is called “income in respect of a decedent,” or IRD. Two things must apply for this to occur: (i) the asset earns interest before the balance is transferred or paid to the beneficiaries; and (ii) the interest isn’t reported on the deceased taxpayer’s final tax return. If both of these occur, then beneficiaries are responsible for reporting IRD on their own tax returns.

The deceased father’s estate may then also need to file returns, so talk to an estate planning attorney to be certain that everything is correct.

Reference: nj.com (March 21, 2018) “What tax returns need to be filed after someone dies?”

What Taxes Do I Owe When I Inherit My Dad’s House?

“There are many types of taxes to consider in connection with an estate: estate tax, inheritance tax and income tax.”

After the last surviving parent passes away, the estate may sell his home. The proceeds are then divided up, pursuant to the directions set out in the will. If children are the heirs, they may split the funds among themselves. However, what are the tax consequences?

nj.com’s recent article asks: “I inherited my father’s home. Do I owe any kind of taxes?”

The article explains that the federal estate and gift tax exemption amount is now $11.4 million. In New Jersey, residents who die on or after January 1, 2018 are no longer subject to a New Jersey estate tax and children are exempt from the inheritance tax. There is also, however, the question of income taxation.

The proceeds from the sale of the house will be subject to income tax. However, it’s unlikely that a person would incur the tax, because income tax is paid on the difference between the sales price and the basis of the asset, minus costs of the sale.

“Basis” is generally defined as the purchase price, plus the cost of improvements.

Assets owned by a decedent receive a “step-up” or a “step-down” in basis to the value, as of the date of death.

This means that a sibling inheriting a parent’s home and then selling it, would only be taxed on the difference between the sales price and the value at the date of death, less selling costs, assuming the parent owned 100% of the home at the time of his death.

If this difference between date of death and sale values is substantial, the adult child would incur a tax, typically at capital gains rates. However, as a general rule, there’s little or no gain to tax.

Be sure to keep evidence of the date of death value of the parent’s home, in case there’s an income tax audit down the road.

Reference: nj.com (March 11, 2019) “I inherited my father’s home. Do I owe any kind of taxes?”

How Do I Avoid Life Insurance Mistakes?

“Life insurance may play a vital role in an estate plan, because insurance proceeds can be counted on to provide liquidity when it’s needed. With proper planning, insurance money can pay expenses, such as the estate tax and keep other assets intact.”

Let’s say that Howie passes away and leaves a big estate to his daughter Eva, and there’s an equally large estate tax due. However, most of Howie’s assets are tied up in real estate and in his IRA.

With that scenario, Eva might not want to immediately force a sale of the real estate. However, if she accesses the inherited IRA to raise money, she’ll have to pay income tax on the withdrawal and lose a terrific opportunity for extended tax deferral.

FedWeek’s recent article, “Common Mistakes in Life Insurance Designations,” explains that considering this type of scenario, Howie could purchase insurance on himself.

The proceeds from Howie’s life insurance policy would then be used to pay the estate tax bill. With that taken care of, Eva could keep the real estate, while taking only minimum required distributions from the inherited IRA.

If the insurance policy is owned by Eva or by a trust, the proceeds probably will not be included in Howie’s estate and will not increase the estate tax obligation.

That’s a smart way to plan it out. However, some life insurance errors can wreak havoc with an estate plan. Let’s look at some common mistakes:

Naming your estate as beneficiary. This puts the proceeds in your estate—and the money will be exposed to estate tax and your creditors. Your executor will also have more paperwork, if your estate is the beneficiary. Instead, designate the appropriate people or charities.

Designating a single beneficiary. Always name at least two contingent or “backup” beneficiaries, which will decrease or eliminate any confusion, if the primary beneficiary predeceases you.

Filing and forgetting the policy. Review your policies every three years. If the beneficiary is an ex-spouse or someone who’s died, make the appropriate change and get a confirmation, in writing, from the insurance company.

Not having adequate coverage. If you have young children, it will take a small fortune to pay for their expenses, including college, in case of your untimely death. Be wise with enough coverage for your children and for whoever will take care of them. It may not or may not be a spouse, but children don’t raise themselves and you don’t want a bargain basement mom for your kids.

Reference: FedWeek (February 14, 2019) “Common Mistakes in Life Insurance Designations”

Nevada’s New Laws Mean Reviewing Your Estate Documents

“If you moved to Nevada recently from some other state, you need to get your estate planning documents changed at least to show Nevada law controls, not the other state law.”

An estate planning attorney will be able to craft an amendment to your grantor (living, revocable) trust to be legal with the changes to Nevada law. The attorney can also correct your will by doing a codicil.

The Nevada Appeal’s recent article, “Change to estate planning documents if you moved,” also notes that as long as you're working with the attorney, it would be a wise move to also have her prepare a power of attorney for medical decisions and the power of attorney for financial matters to be in compliance with Nevada law.

Making those changes can avoid a lot of time, trouble and confusion in the future for you and your family.

Another thing to consider while you're making those changes, is to be certain the documents show your current goals and desires. If you want to make a change in trustees and/or executors, now is a good time to do that.

Remember that serving as trustee and/or executor isn't an easy task. It is possible that one of your children or a close relative is no longer the best choice at this point in time. Whoever is selected to do that work, will probably work with your CPA and your estate planning attorney. Therefore, it might be a good idea for you and the person you name to meet and go over all your goals and wishes.

In addition, many people leave an additional letter of instructions for other items like funeral services and burial or cremation instructions. You can keep the letter with your trust and will. However, you also should discuss it and make sure to tell your family members where it's located.

If you have a safe deposit box, you might tell your executor or trustee where the key to the box is kept. You may want to keep that key with your important documents. Discuss giving your executor or trustee access to the safe deposit box; you’ll need to visit the bank branch to ensure that authorization to access the safe deposit box is taken care of.

If you’ve acquired special items such as antiques, valuable jewelry, or collections, you may draft a list of possible appraisers and information about those special items. Another good idea is to take some photographs of the items that need special valuation or handling.

Another option is to make gifts now of some of these items, to be certain that the right person receives them. There’d be no gift tax to pay if the total gifts are less than $11.4 million. If it turns out they don’t want the gift, then you have an opportunity to give it to someone else.

Reference: Nevada Appeal (February 22, 2019)

Do I Pay Estate Tax on Property in Canada?

“New Jersey can't impose the inheritance tax on any property it wants.”

If a loved one dies in Canada, and you reside in New Jersey, how do the estate and inheritance taxes work?

nj.com’s recent article asks what happens if “My sister died in Canada. Will I owe inheritances taxes to New Jersey?” The answer: unless the relative owned property in New Jersey, any inheritance would be free of state inheritance taxes.

This is due to the fact that New Jersey has an inheritance tax on the estate of a nonresident for the transfer of real property and tangible personal property located in New Jersey, belonging to the decedent or transferred within three years of death in contemplation of death.

In addition, the transfer of intangible personal property, like bank accounts, stocks, bonds, and annuities, that belong to a nonresident decedent, isn’t subject to New Jersey inheritance tax.

It doesn’t matter where the beneficiary resides, experts say.

Therefore, if the relative had no real or tangible personal property located in New Jersey, there will be no New Jersey inheritance tax owed to New Jersey. If he or she had property located in the Garden State, then the tax will be calculated, based upon the relationship of the beneficiary to the decedent—no matter where the beneficiary lives.

If the relative did own property in New Jersey, waivers must be obtained from the New Jersey Division of Taxation to release the lien for any New Jersey inheritance tax on the decedent's impacted New Jersey property.

If a New Jersey resident is inheriting the property from a sister, he or she is considered a Class C beneficiary and generally subject to tax at a rate of 11-16% on inheritances of greater than $25,000.  However, for tax calculation purposes, a ratio of the New Jersey property, compared to the entire estate can be utilized.

In New Jersey, a Form IT-NR would need to be filed (and any tax paid) within eight months of death for a decedent with beneficiaries who are other than Class A, which includes the spouse, civil union or domestic partner, parents, grandparents, descendants or stepchildren of the decedent or charities.

There are no inheritance taxes in Canada. However, the estate could be subject to estate taxes. It’s smart to speak with an attorney there to be certain.

Reference: nj.com (January 15, 2019) “My sister died in Canada. Will I owe inheritances taxes to New Jersey?”

Why Do I Need Estate Planning If I’m Not Rich?

“Estate planning isn't only for the rich. Without a plan in place, there could be a long-lasting impact on your loved ones, even if you don’t have a pricey home, large IRA or valuable art to pass on.”

Many people spend more time planning a vacation than they do thinking about who will inherit their assets after they pass away. Although estate planning isn’t an enjoyable activity, without it, you don’t get to direct who gets everything for which you’ve worked so hard.

Investopedia asks you to consider these four reasons why you should have an estate plan to avoid potentially devastating results for your heirs in its article “4 Reasons Estate Planning Is So Important.”

Wealth Won’t Go to Unintended Beneficiaries. Estate planning may have been once considered something only rich people needed, but that's changed. Everyone now needs to plan for when something happens to a family's breadwinner(s). The primary part of estate planning is naming heirs for your assets. Without an estate plan, the courts will decide who will receive your property.

Protection for Families With Young Children. If you are the parent of small children, you need to have a will to ensure that your children are taken care of. You can designate their guardians, if both parents die before the children turn 18. Without a will and guardianship clause, a judge will decide this important issue.

Avoid Taxes. Estate planning is also about protecting your loved ones from the IRS. Estate planning is transferring assets to your family, with an attempt to create the smallest tax burden for them as possible. A little estate planning can reduce much or even all of their federal and state estate taxes or state inheritance taxes. There are also ways to reduce the income tax beneficiaries might have to pay. However, without an estate plan, the amount your heirs will owe the government could be substantial.

No Family Fighting (or Very Little). One sibling may believe she deserves more than another. This type of fighting can turn ugly and end up in court, pitting family members against each other. However, an estate plan enables you to choose who controls your finances and assets, if you become mentally incapacitated or after you die. It also will go a long way towards settling any family conflict and ensuring that your assets are handled in the way you wanted.

To protect your assets and your loved ones when you no longer can do it, you’ll need an estate plan. Without one, your family could see large tax burdens, and the courts could say how your assets are divided, or even who will care for your children.

Reference: Investopedia (May 25, 2018) “4 Reasons Estate Planning Is So Important”

How Do I Waive My Inheritance?

“An inheritance or estate waiver releases an heir from the right to claim assets, in the event of another person's death. A legal document is drawn and signed by the heir that forgoes the legal rights of the items.”

There are several primary legal reasons why a person will use a waiver of inheritance or estate. For example, the heir could be liable for federal and state taxes based on the estate's value; she may find maintaining property or other assets to be inconvenient; she’s currently in bankruptcy or a lawsuit; or she may agree to a waiver to protect the assets from seizure from creditors.

Investopedia’s article, “How Inheritance and Estate Tax Waivers Work,” provides some tips to consider, when deciding on an inheritance or estate waiver release.

Waiver Form Language. The waiver must have specific words to be considered complete and binding. The heir must state her name, along with the name of the deceased individual. A general waiver of all benefits as to the estate of the decedent is appropriate. However, if any specific items were personally designated to the heir, or if the heir has an entitlement to any items, a waiver should list the specific items being waived. The waiver also should state that the decision is being made freely and without coercion to be legally binding.

The Legal Process. Every state has its own laws that govern wills and estates. As a result, each state has a different set of rules relating to waiving an inheritance or estate. However, generally, the disclaimer must be a written document that is filed with the court having jurisdiction over the estate. The executor of the will must get a copy of the disclaimer. In order for the waiver to be valid, the heir can’t receive compensation or other benefits for agreeing to revoke rights for certain items.

Timing and Taxes. A waiver is typically due up to nine months after the decedent's death. If the deadline passes for filing, the heir must take possession of the distributed assets. Any federal and state estate or inheritance taxes are also due nine months after the date of death. The taxes are calculated based on the taxable estate value, and these taxes must be paid before assets are distributed to the beneficiaries.

Legal Consequences of Waiving Rights. After filing a waiver, the estate’s executor has complete responsibility for the distribution of assets. A waiver can’t direct that another person receives the waived assets. If no additional instructions are outlined in the will, the executor has the discretion to transfer the items to another individual, to an entity not listed in the will, or to a charitable cause. The probate court has to okay these types of transfers.

Remember that the primary guide to how a waiver works is your state's requirements, so you’ll want to work with a local estate planning attorney. Certain states require certain language or actions, depending on the relationship between the heir and the deceased.

Reference: Investopedia (October 1, 2018) “How Inheritance and Estate Tax Waivers Work”

Give the Gift of Estate Planning

“Estate planning can be morbid, and no one wants to think about the end of life during the holiday season. However, that's all the more reason to start planning now. We'd like to change your perspective on estate planning and we ask you to think of it as more of a gift than an obligation.”

As the Brainerd (MN) Dispatch reports in its story, “Give the gift of estate planning to loved ones this holiday season,” estate planning is a gift for your family in the form of peace of mind. By preparing for what will happen after you're gone, you can eliminate the stress and guilt of having to guess at the type of funeral service you want, where you want your assets to go and how they can honor your memory.

When you pass away, your family will be dealing with stress, pain and emotional hardships. If you fail to create a will or other legal documentation, the process for your family to access your assets will be long and expensive. The probate process can take many months and money to distribute assets to your spouse, children, and grandchildren.

Without a will, there's also no guarantee that your assets will pass as you intended. For example, if you have a stepchild you reared as your own or aren’t married but in a serious relationship when you die, then many states do not recognize that stepchild or your significant other. These individuals may not get any of your assets, because there's no legal documentation linking them to your estate.

Lifetime giving is a great way to see the money you are donating goes to good use. There are also tax deductions that go along with these gifts. You may not consider charitable giving as a part of your estate plan right now but discussing how much and when to give with your estate planning attorney, can decrease your taxable estate. That could result in more money for your family in the future.

If you do plan to leave a donation after you're gone, there are several options to accomplish this. You can create a trust, scholarship fund, or donor advised fund to leave a legacy of giving to the causes you support. Because there are so many options available, your estate planning attorney is your best resource to help you decide which course of action will fit your circumstances and best meet your needs.

There are a number of decisions to make, when preparing your estate plan. Nevertheless, the process shouldn't be difficult or intimidating. Your estate planning attorney knows you and your situation. She can help you take the next step and navigate the planning, by asking the right questions and guiding you along the way. In the end, you will know that you’ve set yourself and your loved ones up for success.

Reference: Brainerd (MN) Dispatch (December 8, 2018) “Give the gift of estate planning to loved ones this holiday season”

Estate Tax Exemptions Encourage Gift-Giving to Family

“Thanks to a late-year IRS decision, planners can now reassure clients that they won’t have to worry about making large gifts.”

There were many questions after the new tax law increased the basic estate and gift tax exemption levels, but didn’t make those changes permanent.

The changes increased the exemption to $10 million per person from $5 million. Now, when you account for inflation adjustments, that exemption is currently at $11,180,000 for 2018 and increasing to $11,400,000 for 2019.

Financial Planning’s article, “IRS update will benefit clients making gifts to family members,” says that for a married couple, the exemption can be doubled to $22 .8 million for 2019.

The estate and gift tax exemption can be used for lifetime gifting. However, it’s set to revert back to the pre-law levels after the year 2025.

The annual gift exclusion amount is $15,000 for this year. That’s an increase from $14,000, where it had been since 2013. The federal estate and gift tax exemptions rise with inflation.

This leaves an open question: What if I make a large gift now and use up the current $11 million exemption, but then die after 2025 when the exemption goes back to the lower levels?

Is it possible that the IRS will claw back these gifts and tax them?

The IRS finally answered this lingering concern, in its newly issued-proposed regulations.

It says that making large gifts now, won’t create any issues for estates after 2025.

Now, you won’t have to worry about making large gifts under the current larger exemptions levels.

In effect, it’s a “use it or lose it” proposition for taking advantage of the current exemption before it expires.

Meet with your estate planning attorney before making large gifts. You want to be sure that your gifting strategy works with your estate plan.

Reference: Financial Planning (November 21, 2018) “IRS update will benefit clients making gifts to family members”