That Pesky Tax Waiver – Part 2

                In my post last week, I referred to New Jersey’s tax waiver.  It is an often misunderstood process designed to insure that the State receives the appropriate amount of taxes when someone dies.  As I explained, New Jersey’s estate tax was phased out as of 2018 but we still have an inheritance tax.  Very few estates actually owe the tax.  New Jersey has a law in place that places a lien on certain financial accounts and real estate.  This is the way it can insure that it will be paid.

                The State releases the lien by way of a tax waiver which is usually issued when a tax return is filed and the appropriate amount of tax is paid.  New Jersey has also created what are called self executing affidavits, which if used will automatically release the lien.  There are a series of questions on the affidavits – one is used for New Jersey real estate and the other for New Jersey bank accounts, stocks, bonds and brokerage accounts.  Using the forms allows most estates to avoid filing a complete inheritance tax return just to obtain the waivers.

                Given the very small number of estates that owe inheritance tax you would think that using these affidavits would apply in just about every instance, however, we are finding that there are more cases than we would have imagined where the affidavits can’t be used.  There is more than one reason for this but it goes back to the questions on the forms.

                Remember that inheritance tax is paid based on the relationship of the heir to the decedent – the person who died as contrasted with estate tax which is based on the size of the estate.   If any assets of the estate pass to – or could pass to – non Class A beneficiaries then a full inheritance tax return must be filed.  Class A beneficiaries are spouses and civil union partners, parents, grandparents, children, grandchildren and any other descendants in a direct line up or down from the person who died.

                The first question on each form asks whether any of the assets will pass to non Class A beneficiaries.  If so, there may be inheritance tax on that specific bequest, depending on the relationship of the heir to the decedent.  A small bequest to a niece or to a housekeeper of $1000, for example, means you cannot use the affidavits and a full tax return will be necessary.  The tax is small in that example, only $150 but the return must be filed.  That makes sense.

                However, there are other instances in which no tax is due and yet the return must also be filed.  I’ll explain that next week.