NJ inheritance tax & Inherited IRA not part of probate

Submitted by Stephanie Priolo on Wed, 2018-08-15 16:07

I’m the beneficiary of a substantial Vanguard account. This account has properly been transferred to a “inherited IRA” and is not part of the estates probate. Disgusted to learn that New Jersey will hit me with a substantial inheritance tax based on the valuation of this account at date of death since I am a class D beneficiary. I think it’s worth mentioning to all that reside in a Inheritance Tax state (7 of them) that Retirement accounts are not safe outside of probate. Paying this tax from your IRA is a nightmare because you then have to pay income tax on withdrawals to pay your states inheritance tax.



Submitted by Alan - IRA critic on Wed, 2018-08-15 16:30

Yes, both the income and inheritance tax provisions are a mess there. If the IRA is substantial, it was probably funded in large part by qualified plan rollovers. However, to the extent regular IRA contributions funded the account, since those contributions were not able to be deducted by the IRA owner, there would be a NJ tax basis in the IRA. If you can determine what that figure is, it would reduce the taxable amount on your RMDs and other distributions.

Submitted by William Tuttle on Wed, 2018-08-15 16:32

So do they add insult to injury and not include an “income with respct to the decedent” deduction? Resulting in the money being taxed twice.

Submitted by Ben Meyer on Wed, 2018-08-15 16:39

It might be worthwhile to see what the will says regarding the payment of inheritance taxes.  If no help there, possibly the NJ Taxation Division will accept a tax payment from your own funds, which will avoid depleting the IRA.  The NJ inheritance tax applies when the decedent was domiciled in New Jersey, but not necessarily the beneficiary.

Submitted by Bruce Steiner on Fri, 2018-08-17 20:49

  • The Section 691(c) deduction for estate taxes on income in respect of a decedent is only available for the Federal estate tax, not for state estate and inheritance taxes.  A Roth conversion would avoid this.
  • You can reduce the burden of the New Jersey inheritance tax by leaving assets in trust rather than outright.
  • Benn is correct to check the Will.  Often the Will provides that estate and inheritance taxes are payable out of the residuary estate.
  • Benn is also correct that (if the Will doesn’t provide for payment of the tax out of the residuary estate) that you can pay the tax out of other money, so as to preserve the stretch.
  • Bruce Steiner

Submitted by Ben Meyer on Sat, 2018-08-18 02:59

There is also the NJ Compromise Tax.  If assets are left to a trust by a NJ decedent, with a Class D beneficiary, the trust may be subject to the Inheritance Tax or possibly the Compromise Tax.  If payments to the Class D beneficiary are subject to a contingent future event, the NJ Compromise Tax would be applied.  The Compromise Tax might be lower than the Inheritance Tax, as determined by actuarial factors related to the likelihood and timing of the contingent future events, in a complex manner.

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