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Learning, Sharing, and Teaching => Taxes => Topic started by: fernie on September 05, 2017, 11:04:39 AM

Title: inheritance investments and tax questions
Post by: fernie on September 05, 2017, 11:04:39 AM
My brother passed in January 2016, in NJ a few months before his 40th birthday.  He had prior lived and worked in PA.  A few months before he passed he became unemployed and uninsured.  He spent his last few months living with my mom in NJ.  She is the intestate executor and opened up that account in NJ.  When he passed he had two investment accounts but did not leave an updated assigned beneficiary.  No will. 
Presently my mom, a widow, age 64, “retired”-has an attorney, a “family member”.  A CPA/investment firm who is an “old friend” who has always done her taxes- giving her investment advice.  I’m not getting the impression anyone is trying to take advantage of her.  She is getting partial advice, not understanding or isn’t asking the right questions?  Aside from being overwhelmed, her goal is to divide the estate 4 ways between: herself, NJ., my sister-age 36- CO., me, age 43, VT., and his girlfriend, age 48, PA.  Assuming taxes vary on ages and state I’m not sure where to find answers. 
•   $55,000 in medical/hospital bills in collections- waiting to settle?
•   $30,000 cash owed to my mom for final expenses and rehab
•   Tax???? What is taxed, who will get taxed
•   Other state/federal fees? Anything else to expect?
Intestate Estate, NJ. Mom, executor has “transferred the accounts to her name”  they have been making good returns.
•   Fidelity IRA $73,000 as of 3/ 2017
•   TRowePrice 401K $135,000 as of 3/2017
•   Cash/Checking acct $5,000
•   Nissan SUV worth $10,000 (my sister has it)

Waiting idly, she is getting impatient;  and wants this put behind her. 
Waiting for the atty to reach a settlement number on the hospital bills.  Is there a standard % they may settle on accepting? 
She is considering liquidating the accounts and dividing remainder up after paying herself back.  I am worried she will not pay herself back first!!!
Does tax come off the total of liquidated sum? Prior to paying out expenses?
Can she opt to draw out the funds over a few years to avoid paying more tax?  If she gives us less than $10,000 we don’t have each to pay income tax on the gift? She can gift however she wants to?
What is the best case scenario, what is the worst case scenario? 
Title: Re: inheritance investments and tax questions
Post by: RWD on September 05, 2017, 12:24:24 PM
I'm sorry for your loss.

I found this article on inheritance and estate tax in New Jersey, might be a good place to start:

For these low amounts it looks like there shouldn't be any estate tax in New Jersey or any federal gift/inheritance tax.
Title: Re: inheritance investments and tax questions
Post by: secondcor521 on September 05, 2017, 01:30:47 PM
Regardless of your Mom's goals, the legal thing to do is to follow the laws of intestacy in New Jersey (or maybe PA, depending on whether you consider him to have moved to NJ or if he was merely visiting when he died).  This probably means that your brother's estate will pass to his siblings and/or his parents in some predetermined ratios.  The girlfriend is out of luck, although you could give her something afterwards if anyone wanted to.

His estate will pay federal estate taxes of zero, because he is under the federal exemption amount of $5.x million.  It appears that his estate would owe NJ inheritance taxes on the portion of his estate that his siblings (but not his parents) receive.  The taxes would be based on the amount transferred to his siblings, regardless of where the siblings live or their ages.  It looks like the inheritance tax would be 40% of the amount transferred minus a $500 exemption.

Generally speaking, when an heir receives something from an estate, they do not owe any taxes on it - the estate already paid the taxes due.  In particular, it is not treated as income and you don't owe income taxes on it when you receive it.  Of course, once something is in your name, then you would owe taxes on it like normal.

As far as settling the hospital bills, it seems that he had enough money to pay them.  Assuming they are legitimate, the reasonable thing would be to pay them out of the estate's assets.  You may look into whether money can be removed from the IRA and/or 401k without penalty given the circumstances; I believe there are exemptions from penalties for medical expenses.  That all being said, if you call the hospitals/doctors and ask what they would take to settle it all today, they'll probably give you a discount of (just guessing) 10-25%.

Your mom, as the executor, is obligated to pay the expenses of the estate - including any final medical expenses, burial expenses, debts, and taxes - before distributing anything to the heirs.  If she takes and/or spends any of the money from the estate before paying the estate's debts, she could be in serious trouble.

Your Mom can't just willy-nilly give money to people from the estate.  It is not her money to give; it belongs to your brother's estate.  Once you have gone through the inheritance process and the money becomes the heirs, then yes, they can give money to anyone they want, up to $14,000 per person per year tax free.

Until the estate is settled, she should be filing estate tax returns.  The estate pays taxes like an individual although the brackets are smaller, which means that it is in everyone's best interest to get the estate settled sooner rather than later because the income earned in his accounts is taxed more aggressively than it would be in your names.

Finally, once everyone inherits their portion of the IRA, they will be obligated to start taking RMDs from their inherited IRA.  Consult the IRS for the amount, but the basic idea is you take the amount of your portion of the account as of the end of the previous year and divide it by your life expectancy in years.  You have to take at least that much every year.  And that RMD, assuming your brother had a traditional IRA, counts as taxable income to you.

It's a complicated subject, but hopefully some of that helps.

Good luck!
Title: Re: inheritance investments and tax questions
Post by: dandarc on September 05, 2017, 01:58:10 PM
Not an attorney, but (

Indicates that the inheritance tax is:

0% for your mom
11% for you and your sister on amounts over $25K (except you're not inheriting directly)
15% for GF (again, see next link)

And according to this, as secondcor says - it all goes to  your mom, so (

So, to this layman's eyes, your mom inherits everything, after creditors are paid as required and there shouldn't be any inheritance tax.  If she really wants to divide it up, then she can just give the other 3 money after the estate is closed - stay under the gift tax exemption amount (currently $14K per recipient), and she should be OK, and in a few years she's accomplished what she wanted to do with the money.

Probably best to speak with an actual, expert estate attorney on the matter though - worth a little bit of money to get it right.
Title: Re: inheritance investments and tax questions
Post by: fernie on September 05, 2017, 05:11:29 PM
Thank you for the insight. I have reached out to an estate atty in NJ...  it seems so far she's followed all necessary protocols.
Title: Re: inheritance investments and tax questions
Post by: Catbert on September 07, 2017, 05:43:09 PM
Please have her double check that the IRAs and 401k's don't have designation beneficiaries.  IIRC every IRA or 401k I've ever opened forced me to designate a beneficiary.