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Urbach & Avraham, CPAs, is proud to offer an executor checklist to help alleviate the nightmare of financial affairs of a deceased relative. This comprehensive list, which is regularly updated to reflect the latest changes in estate tax regulation, will help you:
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Do you have a life insurance policy without a specified beneficiary (other than your estate)? Are you leaving your estate (residuary estate) to individuals other than a spouse or child?
Many people assume life insurance proceeds, regardless of who the beneficiary is, are exempt from NJ Inheritance tax. Therefore, even if they are leaving their estate to a beneficiary who is not a spouse or child, they see no need to designate a beneficiary for the life insurance policy. However, life insurance left to an estate where the ultimate beneficiary is not a spouse or child is not exempt from NJ Inheritance tax. As NJ Inheritance taxes can be as high as 16%, it is prudent to take the simple step of naming a beneficiary to avoid the NJ Inheritance Tax.
Unfortunately life insurance policies owned by individuals are includable for NJ Estate tax purposes, regardless of who is named as the beneficiary, if the assets of the estate are at least $675,000 (not an uncommon scenario for an insured decedent). However, unless you cherish Chris Christie more than your loved ones, you can at least avoid paying NJ Inheritance taxes by simply naming an individual as beneficiary on your life insurance policy.
Let’s illustrate:
Example #1: Uncle Harry dies and names his nephew in his will as sole heir of his entire estate. His only asset is a $500,000 life insurance policy. Since his estate is less than $675,000 there is no US or NJ Estate tax. If he named his nephew as beneficiary of his life insurance policy, there is no NJ Inheritance tax as well. However, if there is no named beneficiary (the estate is the beneficiary), the $500,000 is subject to a 15% inheritance tax, or $75,000.
Example #2: Same as above, except the policy is $1,000,000. NJ law states that the estate calculates the estate tax and the inheritance tax and pays the greater of the two, not both. The NJ Estate tax on $1,000,000 is $33,000. If Uncle Harry named his nephew as beneficiary, the inheritance tax is zero and the estate pays $33,200. If Uncle Harry did not name his nephew as beneficiary, the inheritance tax is 15-16% of $1,000,000 or $153,000. The Estate pays $153,000. The cost of not naming a beneficiary is $119,800 ($153,000 less $33,200).
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An estate’s assets are valued for tax purposes by their fair market value at the time of the decedent’s death. A subsequent decrease in value would generally not affect that tax basis, as has been ruled in several NJ court cases. An interesting issue brought up in Estate of Warshaw v. Dir., Div. of Taxation was whether a subsequent discovery that the funds in an IRA account were worthless on the decedent’s date of death would be taken into consideration by the court. [Read more…] about NJ Court Rules in Favor of Estate with Madoff Account
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While being the executor or executrix of an estate has its financial advantages, it can carry an enormous liability as well. Suppose Aunt Gertrude dies, leaving behind a $1 million dollar estate. You, the executor, fairly distribute the estate to the beneficiaries. Most people would assume it’s all over at that point. The shocking reality is that if Gertrude had an income or gift tax liability when she died, that liability now rests squarely on your shoulders. As far as the IRS is concerned, the executor or executrix should have kept the funds in the estate until the liabilities were paid off, even if he or she knew nothing about the tax liability at the time of the distribution. The only door they will come knocking on is yours. There is hope however, in the form of three important IRS forms that help alleviate your liability as executor or executrix: [Read more…] about Discharge of Executor IRS Liabilities
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An important and commonly misunderstood law regarding gift giving prior to one’s death was recently highlighted in a NJ case. As background, when a child inherits from a parent there is no New Jersey inheritance tax, whereas there is a tax if any other relative or friend inherits. As a result, if one gifts an unusually large amount of money within three years of his or her death to someone other than a child, the possibility that the gift was made to avoid paying state inheritance tax comes into question. A common misunderstanding is that unless there is reason to assume the giver was aware of his impending death the transfer is not a taxable one. In fact, the truth is quite to the contrary. [Read more…] about Gifts in Contemplation of Death: The Burden of Proof is on You
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While the recent IRS crackdown has increased awareness of filing requirements for foreign assets and income, the requirements regarding foreign inheritances are much less well known. As a rule, there is never a recipient income tax liability on foreign inheritances. Estate tax (for which the estate is liable), is a different matter. If the person leaving the foreign inheritance is a U.S. citizen then it would be subject to estate tax. If not, there is no estate tax liability. [Read more…] about Do I Have To Report My Foreign Inheritance?