In New Jersey law, there are not only federal estate tax, gift tax and income taxes to consider, but also state estate taxes and inheritance transfer taxes. Inheritance tax is not due for certain types of beneficiary-specifically, father, mother, grandparents, descendants, spouses, civil union partners, or domestic partners-though it is due for other types of beneficiaries in varying amounts. Those who owe inheritance tax are required to file a return with eight months of the decedent's date of death.
It is worth noting, though, that paying inheritance tax is not the only reasons people file an inheritance tax return. Those who don't owe any tax may also file the return to lock in the value of an asset for capital gains tax purposes.
As we mentioned in our last post, capital gains tax is a form of income tax on appreciated property. When an asset becomes part of a person's estate, the tax value of that asset is evaluated as of the date of the decedent's death, meaning that all previous appreciation is wiped out for capital gains tax purposes. When the heir sells the property later on, the amount of capital gains tax will be minimized.
Filing an inheritance tax return with an appraisal of each asset as of the decedent's date of death serves the purpose of creating a record of the assets' value. Basically, it provides an easy way to determine the amount of money on which capital gains tax will be due.
Those receiving an inheritance of real estate or other appreciated property should strongly consider filing an inheritance tax return, regardless of whether they owe inheritance taxes.
Source: nj.com, "Biz Brain: Reasons for filing an Inheritance Transfer Tax," Karin Price Mueller, May 13, 2012.