Ask the Expert: Inheritance taxes

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Nearly 70 percent of adults say "major barriers" prevent them from discussing who will make financial decisions for aging family members, according to a new survey commissioned by the National Endowment for Financial Education. (Credit: iStock)

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I'm a New York resident. I've learned I'll be receiving a $42,000 inheritance from a friend who lived in New Jersey. I'm told New York has no inheritance tax, but New Jersey does. Must I pay this tax on my inheritance? If so, will I file a New Jersey tax form?

 

Your friend's executor will file the New Jersey inheritance tax return.

An inheritance tax sounds like an estate tax, but they're different, even though both are levied on assets left to heirs. An estate tax applies to an estate's total value. Inheritance taxes apply separately to each heir's share of the estate.

New York levies an estate tax on estates worth more than $1 million, but has no inheritance tax. New Jersey collects an estate tax on estates worth more than $675,000 and an inheritance tax of 11 to 16 percent on bequests valued at $500 or more, with some exceptions. (Surviving spouses, civil union partners, domestic partners and their children and grandchildren are exempt from the inheritance tax.)

Your friend's executor likely won't release this bequest to you until the inheritance tax return has been filed and the tax paid, says Mary Wanderpolo, a Montclair estate lawyer. Is the tax subtracted from your $42,000? That depends on how the will is written, she says.

If the will tells the executor to pay inheritance taxes from the residue of the estate -- i.e., from the assets that remain after all debts and specific bequests have been paid -- you'll get the entire $42,000. If the will is silent on the subject, the tax is prorated among the heirs. In that case, your share of the tax will be subtracted from your inheritance before you receive it.

The bottom line The will's executor oversees the filing of any estate and/or inheritance tax returns.

Websites with more information: bit.ly/18P4eiM and bit.ly/19YZSUx

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