That Pesky Tax Waiver – Part 3

                This week’s post is the last of 3 on New Jersey’s tax waiver.  Last week I showed you how a small bequest in a will to a non-Class A beneficiary will trigger the need to file an inheritance tax return.  I also said, however, that in some instances a return must be filed even if no tax is due, which is what the L-8 and L-9 affidavits are supposed to help avoid.  Let’s look at some examples.

                The first $25,000 left to a sister or brother – Class C beneficiaries – is exempt from inheritance tax so you might think that using the affidavits should be permissible.  The need to file a complete return, however, does makes sense because the State wants to take a look for itself at where the money is going.  It is not willing to take our word that there is no tax due.

                Another example involves trusts and disclaimers.  A disclaimer is a statement by an heir that he/she does not wish to receive an asset to which he or she is entitled.  The person disclaims it.  The asset then passes to someone else according to instructions established in the will or according to state law.  If a disclaimer is filed, then an inheritance tax return must be filed, even if the next person to inherit that asset is a Class A beneficiary.

                Although disclaimers are not often used, more common is the use of trusts.  If the assets in banks or financial institutions pass into a trust then the L-8 cannot be used and a full return must be filed.  The State wants to examine the trust to establish if there could be any non-Class A beneficiary.  If the asset passing into the trust is real estate, however, the L-9 instructions do indicate that if a trust agreement exists or is creating by the will then the State might require a full return.  At least we can submit the L-9 with a copy of the trust agreement and if the State is satisfied that there would be no inheritance tax owed because of non-Class A trust beneficiaries it just might issue the tax waiver without requiring a return.

                You might wonder what all the fuss is about the tax waiver.  What if the heirs who inherit the real estate take title and don’t intend to sell it?  What prevents the executor from signing the deed over to them?  Nothing, but the problem will rear its head when it comes time to sell that property.  Any buyer will need title insurance and the title company will not issue a policy without seeing the recorded waiver or withholding money to cover any potential tax.  This could be years after the estate has been closed when information and documents may not be handy and memories faulty.  Better to take care of the tax waiver issue as part of the probate or estate administration to avoid later problems.