cost basis on annuity with respect to NJ inheritance tax

Submitted by Douglas Bauerband on Mon, 2016-05-09 17:08

client passed with no family and left 33k to friend.

35k is the cost basis on the money invested.

The attorney has them paying 15% inheritance tax on the date of death value, which we know is correct.

Question:
when the friend pays the inheritance tax of approx. $5250:

a. does the friend who inherited the 33k also have to pay individual tax on the balance?

or…

b. since the balance in under the cost basis, there is no more taxes on the friends inheritance?

Thank you.
Douglas

Permalink Submitted by Ben Meyer on Tue, 2016-05-10 03:35

a. There would be no income tax to be paid by the friend for receipt of the bequest. However, if any future income is generated from the asset, such as interest or dividends, that would be taxable income. But no deduction can be taken for the inheritance tax paid.
Since you mentioned only inheritance tax, it looks like the total estate value is under $675K, which is the NJ threshold for estate tax. In this case no estate tax would be due to NJ, only inheritance tax.
b. The basis of the inherited asset would be the fair market value at the date of death, $33K, plus the tax paid, $5,250, total $38,250. The old cost basis is now superceded even though it was higher than the date of death valuation. When the friend sells the inherited asset in the future, he would report a gain or loss against the adjusted basis. Thus, if the friend sells the asset soon after receiving it, he will receive proceeds around $33K and have a long term loss of approximately $5,250, corresponding to what he paid as NJ inheritance tax.