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Wills and Estates Blog

Revocable Living Trusts: Are They Worth the Hype?

Thursday, September 22, 2016

In many states, the use of a Revocable Living Trust has become increasingly popular as a viable estate planning option. But in Maryland, the ease of the probate process, among many other reasons, makes this option usually not worth the hype, money or time.

A Revocable Living Trust is a written document that contains provisions of how to hold, manage, and distribute property during your life and after your death. It is revocable, meaning that even though assets are transferred (or re-titled) to the living trust, the person who creates the trust, the grantor, can get his or her property back by revoking the Trust during his or her lifetime. The persons who manages the assets in the Trust is the Trustee and this is almost always the grantor during his or her lifetime. The primary purpose of a Revocable Living Trust is to avoid probate. It is most popular in states with probate systems which are expensive and time consuming.

In Maryland, the advantages of having a Revocable Living Trust are typically outweighed by other estate planning alternatives and the ease of the Maryland probate system. After a person's death and once the probate documents are filed in Maryland, a personal representative can be appointed within days and the Letters of Administration can be used to access funds and manage probate assets. In addition, the costs associated with probating an estate are modest with probate fees depending on the size of the probate estate. For example, an estate of $200,000 would have a probate fee of$400.00. Unless there is some complicating matter, many estates can be closed after 6 months which is the period that creditors have to make claims against the estate.

Despite the ease of the Maryland probate process, many who have heard of the evils of probate will still insist on a Revocable Living Trust, and for them, the following information should assist them with making an informed decision.

Pros

  1. Avoiding Probate

    Upon your death, assets that were titled in the Revocable Living Trust pass directly to the Trust without going through probate. This is particularly important if you own real estate in more than one state because without a trust, your loved ones would have to open a probate estate in each state real property is located. In addition, a Revocable Living Trust allows immediate access to bank accounts titled in the Trust after your passing, instead of waiting for the documentation from the probate estate to gain access to the account(s). Lastly, the decedent's affairs could theoretically be finalized in weeks or months as there is no 6 month creditor claims period. Note that this may in fact also be construed as a disadvantage because creditors may have three years to file a claim against assets that were in the trust.

  2. Management of Assets

    Should you become ill or incapacitated, some argue that it is easier to manage Trust accounts versus accounts in your individual name. If your assets are held in a trust account and you become incapacitated, the Trust document outlines the Trustee's power with regard to managing your assets. Financial institutions will require your trustee to provide a copy of the Trust Agreement.

    For accounts held in your individual name, a properly executed Power of Attorney will allow your agent to control those assets. Although recent changes in the Maryland law regarding Powers of Attorney should make it easier to use a Power of Attorney, some may still find it difficult to use POAs with certain financial institutions.

  3. Privacy

    Unlike a Last Will and Testament, upon your death a Revocable Living Trust is not public record. Therefore, information as to what you owned and how you dispose of those assets are private. Thus, your beneficiaries and the amounts they receive are not available for public scrutiny.

  4. Avoiding Multi State Probate

    The most compelling reason for a Revocable Living Trust is to avoid probate in multiple states if you own real estate outside of your home state. In this instance, your Last Will and Testament must generally be probated in your home state and the state for which you own real property, a process which is called "Ancillary Probate." If your real property is titled in your Living Trust, this will not be necessary. Your real property can be distributed by your Trustee, upon death, no matter where it is located.

Cons

  1. A Last Will and Testament is Necessary

    Invariably, not all of the assets will have been re-titled in the name of the Revocable Living Trust before death. There will be a bank account or vehicle that was still in the decedent's name at the time of death. Thus, a Will is still necessary. Most attorneys will draft a special type of Last Will and Testament called a Pour Over Will to ensure that any unfunded assets (assets not re-titled) will "pour" into your trust. To do this, your Pour Over Will must also be probated, and such assets may then be distributed according to the instructions in the Trust.

  2. Initial Expense is High

    It is more expensive to create a Revocable Living Trust than a Last Will and Testament. Preliminarily, there is the initial cost of drafting a Trust Agreement, which is usually more than the price for drafting a Will. There is also the expense of "funding" the Revocable Living Trust. This is the process of transferring the ownership of every eligible asset into the name of the Trust. In addition to just the time spent on this process there may be costs associated with retitling assets. For example, real property can only be assigned to a trust by deed, which must be recorded at the applicable office of land records for a fee. This fee includes the time and cost for the attorney or titling company to draft the deed and the fees to record the deed.

  3. Funding a Trust Takes Time and Effort

    Once your Revocable Living Trust becomes effective, you must fund the Trust by contacting financial institutions, life insurance companies, and transfer agents to change account ownership and beneficiary designations; retitle vehicles, and sign and record new deeds for real estate. There is a significant cost – in terms of time – to accomplish this. If you fail to re-title, even one asset of any significance, your trustee, upon your death, would have to open an estate to administer such assets. This would defeat the purpose of the Living Trust.

  4. Cannot Avoid Tax

    Although assets that are retitled to the Trust avoid probate, they are still subject to income and estate taxes. This is because the IRS still considers that all the assets in the Revocable Living Trust are still yours. This should not be surprising as you are the trustee of the trust, the beneficiary of the trust, and can revoke it at any time. Because it is still considered your money, you and/or your estate are still responsible for income, estate, and inheritance taxes. There is simply no tax advantage to having a Revocable Living Trust over a Last Will and Testament.

    The next time you hear someone tell you that a Revocable Living Trust is a must, please consider all of the pros and cons as they specifically apply to your situation. While there are cases where a Revocable Living Trust can be beneficial, for most Maryland residents there are other legal avenues to accomplish your goals without the cost and effort of a Revocable Living Trust.

The End of the 12 Year Maryland Estate Tax Experiment

Thursday, September 22, 2016

The Maryland legislative session of 2014 began with a bang. Specifically, the House introduced HB 739 that presumably could cause major changes to the way you and I plan for the inevitable. Yesterday, the Maryland Senate approved Maryland State HouseHB 739 that will recouple the Maryland estate tax exclusion with that of the federal government.

For over a decade, Maryland has taken the position that it would operate separate from the federal system regarding the taxation of estates. When the federal government began making changes to the federal estate tax system in the early 2000’s, Maryland froze the estate tax exclusion at $1,000,000 per estate and capped the tax rate on any amount in excess of the exclusion at 16% and completely decoupled itself from the federal system.

Meanwhile, the federal estate tax exclusion has grown to over $5,000,000 and the concept of portability for married individuals was created. However, Maryland stood strong and chose to remain decoupled.

After a dramatic 12 year experiment, Maryland has decided to recouple itself to the federal system. With a vote of 119 to 14, HB739 passed in the House on March 7, 2014 and the bill passed in the Senate with a 36 to 10 vote on March 20, 2014. All that remains before this bill becomes law is Governor O’Malley’s signature of approval. Specifically, HB 739 proposes to gradually increase the estate tax exclusion, which currently sits at $1,000,000 per estate, to the federal level at $5,000,000 per estate.

Current Law
In 2002, the federal government began making substantial changes to the federal estate tax system. To avoid eliminating state estate tax revenue, Maryland enacted several pieces of legislation between 2002 and 2006, which froze the state estate tax exclusion at $1,000,000 and capped the tax rate on any amount in excess of the exclusion at 16%.

While the concept of portability has been presented on multiple occasions, the Maryland legislature has yet to approve the device.

As the law currently stands, if you or a loved one passes away this year, your estate will be able to exclude $1,000,000 of your taxable estate from estate tax. Any excess above and beyond the exclusion will be taxed at a rate of 16% and your estate will need to file a return and pay the outstanding tax liability.

HB 739 Changes
Upon enactment of the bill, the Maryland estate tax exclusion will gradually increase as follows:

  • If you (or a loved one) passes away in 2014, the estate will be able to exclude $1,000,000.
  • If you pass away in 2015, your estate will be able to exclude $1,500,000;
  • If you pass away in 2016, your estate will be able to exclude $2,000,000;
  • If you pass away in 2017, your estate will be able to exclude $3,000,000; AND
  • If you pass away in 2018, your estate could exclude up to $4,000,000.

The proposed bill does not change the cap of 16% on the excess over the exclusion amount. Therefore, any excess above and beyond the exclusion amount for a given year will continue to be taxed at a rate of 16%.

More Changes to Come?
Portability is a term used in the federal estate tax realm, where the estate of a married individual would pass any unused estate tax exclusion amount to the surviving spouse’s estate upon his/her death. The surviving spouse may exclude the sum of any unused exclusion from the deceased spouse’s estate and her own estate exclusion amount.

Currently, Maryland estate tax does not allow for portability of unused estate tax exclusion that may remain after a married individual dies. Early this month, the House introduced HB 1214 which proposes to establish portability as a mechanism that may be used for married individuals that do not exhaust their individual estate tax exclusion. By allowing “portability” the surviving spouse whose estate increased as a result of deceased spouse’s death would then be able to include the unused exclusion of the deceased’s estate with surviving spouse’s estate tax exclusion amount. In essence, if you die in 2014 and your estate tax exclusion only amounted to $500,000, then your surviving spouse would be able to claim your unused portion estate tax exclusion. Thus, your surviving spouse’s estate tax exclusion would increase to $1,500,000[1].

What does this mean to you?
With recoupling to the federal system in sight, the stresses of planning for the inevitable may have been relieved ever so slightly. By recoupling with the federal system, you as an individual can plan with ease, as your estate plan will accounts for both the Maryland and federal systems without requiring creative planning to address each system separately. Unless your estate exceeds $5,000,000 and potentially $10,000,000 if you are married, creative planning for estate tax purposes may no longer be necessary. 

[1] Your unused exclusion amount ($500,000) + Surviving Spouse’s exclusion amount ($1,000,000) = Surviving Spouse’s Total Exclusion ($1,500,000). 

How Does the New Fiscal Cliff Legislation Affect my Estate Tax Planning?

Thursday, September 22, 2016

On January 2, 2013 the American Taxpayer Relief Act of 2012 was enacted, avoiding the so-called “fiscal cliff.” In addition to income tax changes, the law contained provisions on estate taxes which certainly did avoid something very cliff-like. Had the law not been enacted, the federal estate tax exemption would have reverted to $1 million per person. The “exemption” is the amount that passes free of estate tax. Under the last change to the estate tax law in 2010, the exemption had been at $5 million (See 5 Important Facts About the New Estate Tax). Avoiding this significant (i.e., cliff-like) change in the estate tax exemption was an important feature of the new act.

The new law preserves the federal estate tax scheme which has been in place for the past two years into the foreseeable future. Each person continues to have approximately $5 million that can be given away free of estate taxes. The only real change in the new law is that the highest estate tax bracket increased from 35% to 40%. Assuming your estate planning was appropriate last year, there should be no need to change it as a result of the new legislation.

Portability

The new law also continues the portability provisions which have been in place since 2010. (See 5 Important Facts About the New Estate Tax). These provisions allow the surviving spouse to be able to use their deceased’s spouse unused $5 million exemption. Thus, a married couple’s total exemption exceeds $10 million when indexed for inflation. The portability provisions make the use of credit shelter or bypass trusts unnecessary for federal estate tax purposes. Prior to portability, these types of trusts were the only technique to preserve the deceased’s spouse tax exemption.

State Estate Taxes

Unfortunately I have some bad news for my local readers in Maryland and the District of Columbia. Maryland and the District still have separate estate taxes which have only a $1 million exemption. Thus, if you have a taxable estate (including life insurance) in excess of $1 million, state estate taxes are still a concern even if they are not federally. Moreover, the portability provisions are still only federal law. As a result, credit shelter or bypass trusts still may be needed in Maryland and the District if married couples want to be able to use both of their exemptions. (See The 5 Most Important Reasons to Have a Will).

5 Things to Understand About Maryland’s Inheritance Tax

Thursday, September 22, 2016

1. It’s All About Who Inherits

Maryland has both an estate tax and inheritance tax. The estate tax is assessable if more than one million dollars passes at death. The total dollar value of the property determines whether there is an estate tax. The inheritance tax is not dependent upon the value of the estate, as even very small estates can have inheritance tax imposed. Inheritance tax is assessed on property given to a person who is further removed in relationship than a sibling. Thus, for example, a 10% tax will be assessed on property passing to a cousin, niece, nephew or friend.

2. It Applies to Non-Probate Property

Inheritance taxes, like estate taxes, are assessed on all property passing as a result of the death, not just the probate property. Thus, non-probate assets, such as life insurance and IRAs, which pass directly to the beneficiary, are still subject to inheritance tax if the person receiving the property is further removed in relationship than a brother or sister.

3. Think Carefully About Nieces & Nephews

If you are considering including your niece or nephew in your Will (or as a beneficiary on a non-probate asset) remember that they will be subject to the inheritance tax. It is worth considering whether the property should be given to your brother or sister with the hope that the property will be used for the benefit of a niece or nephew. This option requires trust that the brother or sister will use the property for the niece or nephew as this cannot be specified in the Will.

4. Giving Away a Car or a House Can Cause Problems

Be careful about giving anything other than cash to someone who will be subject to an inheritance tax. If you give someone $10,000 in cash, the inheritance tax will simply reduce the amount inherited – in this case to $9,000. (10% comes off the top to pay the inheritance tax). But if you give them a car with a bluebook value of $20,000, they will need to come up with $2,000 to pay the inheritance tax. If they can’t afford the tax, they will have to sell the car. The same is true for houses. If you give a niece your $300,000 house she will need to come up with $30,000 to pay the inheritance taxes. Thus it is important to make sure that your intended beneficiary can pay the inheritance taxes due.

5. Same Sex Couples Beware

Same sex couples who jointly own their primary residence can be for a nasty surprise after the death of their partner. Same sex partners, if not legally married, are further removed in relationship than a brother or sister. In fact, they are not related at all. Thus the inheritance tax would apply to any property the surviving partner receives. Thus the surviving partner would be subject to 10% inheritance tax on half of the value of the house inherited as a result of their partner’s death. See Domestic Partnerships: How to Avoid Costly Inheritance Taxes on the Family Home for how to avoid this problem. 

Beneficiaries Instead of Probate: Use Caution

Tuesday, September 20, 2016

The term “probate” refers to the court process whereby a decedent’s assets are gathered together and, after the payment of the decedent’s debts, distributed to the decedent’s heirs. One way to avoid probate is through the use of beneficiary designations. The only assets that pass through probate are assets the decedent owned in his or her sole name without any beneficiary designations. Any asset that contains a beneficiary designation passes directly to the beneficiary without any court intervention. Life insurance is a classic example of an asset that passes directly to the beneficiary. Retirement plans (e.g. IRAs, 401ks) also usually pass to a designated beneficiary. Other examples are “pay on death” designations on bank accounts or investment accounts.

The beneficiary designations must be considered as a part of your <em>entire</em> estate plan. When drafting your Will you should be cognizant of the probate assets (i.e., assets which will actually be governed by the Will) and also the beneficiary designated assets that pass directly to the beneficiaries. For example, in your desire to treat your children equally, you draft your Will to split up the assets in equal shares between your children. Your desire for “equality” can be destroyed if you also have a large IRA that passes directly via beneficiary designation to only one of your children. Thus, it is imperative that when drafting a Will the beneficiary designations are considered.

It is also important to note that even though the assets pass directly to the beneficiary, these assets are still a part of the your taxable estate. The beneficiary designated assets will be counted, along with the probate assets, to calculate the total taxable estate. Often these beneficiary designated assets, such as life insurance, can be enough to cause the imposition of estate taxes. In Maryland, a $500,000 life insurance policy can turn an estate with a $600,000 house into a taxable estate.

In addition to the unexpected tax liability, the beneficiary designated assets can cause some unfair distributions. For example, let us say that your first child is the beneficiary of a life insurance policy which is about half of your total estate. Knowing this, you draft your Will and give your house, the bulk of your probate estate, to your second child. While this may seem like a fair distribution, it is fraught with problems.

First, what if at some later point you cancel your life insurance and don’t execute a new Will? Your first child has been disinherited. Second, what if the housing market takes a turn and the house, which is the primary part of the probate estate, is worth practically nothing at your death. Your second child is then effectively disinherited. Finally, most standard Wills indicate that the estate should pay all the inheritance and estate taxes prior to the distribution of the estate assets. In this scenario, your second child, inheriting under the Will, ends up paying all of the estate taxes and your first child, receiving the life insurance, will have no tax liability.

Stay tuned for Part Two – Beneficiaries to Avoid!


Domestic Partnerships: How to Avoid Costly Inheritance Taxes on the Family Home

Tuesday, September 20, 2016

In this modern era, families come in all shapes in sizes. It has become fairly common for same sex couples to buy a home and raise children. Then there are opposite sex couples who share their lives, including buying a house together, but forego the formalities of marriage. In 2009 the Maryland legislature enacted legislation providing some measure of protection to these more nontraditional families. Specifically, the legislature created “domestic partnerships” and imbued them with one of the legal advantages of marriage.

At death Maryland imposes an inheritance tax of 10% on all assets that pass to people who are unrelated to the decedent or who are further removed in relationship than a brother or sister. Importantly, there is no inheritance tax imposed on assets passing to a spouse. Thus when the family house, often times the most valuable asset in the estate, passes to the surviving spouse, it is subject to no inheritance tax.

People who are neither married or closely related, but who jointly own their own house have a problem. When the first dies, the second becomes the legal owner of the property but is now subject to a 10% inheritance tax on the amount inherited. Thus, for a house worth $300,000 the survivor owes the state of Maryland $15,000 (10% of the half inherited by the surviving spouse).

The 2009 legislation creates a class of people called “domestic partners.” Domestic partners are exempt from inheritance tax on a jointly owned primary residence. Second houses (or any other types of assets, for that matter) don’t get the exemption, only the primary residence. In addition, if only one of the domestic partners names is on the deed to the house, the exemption does not apply.

So how do people become “domestic partners?” They must be at least 18 years old and not related to one another. Their sex does not matter, they can be same sex or opposite sex couples. They must sign an affidavit indicating their agreement to be in a relationship of mutual interdependence. Attached to the affidavit must be two documents as proof of the interdependence. The types of documents that satisfy the statute are:

 

  • joint lease, mortgage or loan,
  • designation of one of the individuals as the primary beneficiary on the other’s life insurance or retirement plan,
  • designation of one of the individuals as the primary beneficiary of the will of the other,
  • health care or financial power of attorney granted by one of the individuals to the other,
  • joint ownership or lease of a motor vehicle,
  • joint checking account, investment or credit card,
  • joint renter’s or homeowner’s insurance,
  • coverage on a health insurance policy,
  • joint responsibility for child care, such as a guardianship or school document, and
  • relationship or cohabitation agreement.

 

The surviving domestic partner must present the affidavit and accompanying documents to the Register of Wills to be exempt from inheritance tax on the primary residence. Thus the affidavit and documents should be kept in a safe place - theoretically along with the Will and other important legal papers.

The End Of The 12 Year Maryland Estate Tax Experiment

Friday, March 21, 2014

The Maryland legislative session of 2014 began with a bang. Specifically, the House introduced HB 739 that presumably could cause major changes to the way you and I plan for the inevitable. Yesterday, the Maryland Senate approved HB 739 that will recouple the Maryland estate tax exclusion with that of the federal government.

For over a decade, Maryland has taken the position that it would operate separate from the federal system regarding the taxation of estates. When the federal government began making changes to the federal estate tax system in the early 2000’s, Maryland froze the estate tax exclusion at $1,000,000 per estate and capped the tax rate on any amount in excess of the exclusion at 16% and completely decoupled itself from the federal system.

Meanwhile, the federal estate tax exclusion has grown to over $5,000,000 and the concept of portability for married individuals was created. However, Maryland stood strong and chose to remain decoupled.

After a dramatic 12 year experiment, Maryland has decided to recouple itself to the federal system. With a vote of 119 to 14, HB739 passed in the House on March 7, 2014 and the bill passed in the Senate with a 36 to 10 vote on March 20, 2014. All that remains before this bill becomes law is Governor O’Malley’s signature of approval. Specifically, HB 739 proposes to gradually increase the estate tax exclusion, which currently sits at $1,000,000 per estate, to the federal level at $5,000,000 per estate.

Current Law

In 2002, the federal government began making substantial changes to the federal estate tax system. To avoid eliminating state estate tax revenue, Maryland enacted several pieces of legislation between 2002 and 2006, which froze the state estate tax exclusion at $1,000,000 and capped the tax rate on any amount in excess of the exclusion at 16%.

While the concept of portability has been presented on multiple occasions, the Maryland legislature has yet to approve the device.

As the law currently stands, if you or a loved one passes away this year, your estate will be able to exclude $1,000,000 of your taxable estate from estate tax. Any excess above and beyond the exclusion will be taxed at a rate of 16% and your estate will need to file a return and pay the outstanding tax liability.

HB 739 Changes

Upon enactment of the bill, the Maryland estate tax exclusion will gradually increase as follows:

  • If you (or a loved one) passes away in 2014, the estate will be able to exclude $1,000,000.
  • If you pass away in 2015, your estate will be able to exclude $1,500,000;
  • If you pass away in 2016, your estate will be able to exclude $2,000,000;
  • If you pass away in 2017, your estate will be able to exclude $3,000,000; AND
  • If you pass away in 2018, your estate could exclude up to $4,000,000.

The proposed bill does not change the cap of 16% on the excess over the exclusion amount. Therefore, any excess above and beyond the exclusion amount for a given year will continue to be taxed at a rate of 16%.

More Changes to Come?

Portability is a term used in the federal estate tax realm, where the estate of a married individual would pass any unused estate tax exclusion amount to the surviving spouse’s estate upon his/her death. The surviving spouse may exclude the sum of any unused exclusion from the deceased spouse’s estate and her own estate exclusion amount.

Currently, Maryland estate tax does not allow for portability of unused estate tax exclusion that may remain after a married individual dies. Early this month, the House introduced HB 1214 which proposes to establish portability as a mechanism that may be used for married individuals that do not exhaust their individual estate tax exclusion. By allowing “portability” the surviving spouse whose estate increased as a result of deceased spouse’s death would then be able to include the unused exclusion of the deceased’s estate with surviving spouse’s estate tax exclusion amount. In essence, if you die in 2014 and your estate tax exclusion only amounted to $500,000, then your surviving spouse would be able to claim your unused portion estate tax exclusion. Thus, your surviving spouse’s estate tax exclusion would increase to $1,500,000 [1].

What does this mean to you?

With recoupling to the federal system in sight, the stresses of planning for the inevitable may have been relieved ever so slightly. By recoupling with the federal system, you as an individual can plan with ease, as your estate plan will accounts for both the Maryland and federal systems without requiring creative planning to address each system separately. Unless your estate exceeds $5,000,000 and potentially $10,000,000 if you are married, creative planning for estate tax purposes may no longer be necessary.

Jeffrey K. Gordon

Maryland Same Sex Estate Planning In 2013 And Beyond

Monday, August 26, 2013

Estate planning in Maryland for same sex couples is dramatically different as a result of two groundbreaking legal developments in 2013. On January 1 same sex marriage became legal in Maryland and on June 26 the Supreme Court struck down portions of the Defense of Marriage Act (DOMA). As a result, same sex married couples in Maryland have all the state and federal benefits afforded to their heterosexual counterparts. I underlined “married” to remind you that these benefits require a marriage (i.e., don’t dilly dally). Here are the five most important things to understand going forward:

  1. No More Inheritance Tax Surprises.

    Prior to 2013, the surviving member of a same sex couple was not exempt from inheritance tax. This lead to some nasty surprises such as getting an inheritance tax bill for half of the value of the jointly owned house after the first member of the same sex couple died. (See Domestic Partnerships: How to Avoid Costly Inheritance Taxes on the Family Home). Now, so long as the same sex couple takes the steps necessary to become legally married, they are exempt from inheritance tax.

  2. Enhanced Legal Protection for Those Without a Will.

    The law in Maryland provides certain protection to spouses when there is no Will. To begin with, a spouse has the highest priority to become the personal representative (i.e., executor). The spouse is also entitled to an intestacy share of the estate, usually one-half, in the absence of a Will.Prior to 2013, unless a same sex couple had a Will, the surviving member of the couple would not be given any priority to become personal representative and would be entitled to no share of the estate.

  3. Protection From Disinheritance.

    Maryland law also contains provisions designed to prevent the disinheritance of a spouse. Regardless of what the Will provides, a spouse can “elect against the Will” and take a statutorily provided share – one third. Now same sex married couples also have that same protection against being disinherited.

  4. Unlimited Marital Deduction from Estate Taxes.

    In both the Maryland and Federal estate tax schemes, there is no limit to the amount a spouse can give to their surviving spouse without paying estate taxes. As a result of both Maryland’s enacting of same sex marriage and the defeat of DOMA, same sex married couples now enjoy the same privilege.

  5. Estate Taxes Are Still a Potential Problem.

    Just as with heterosexual married couples, same sex married couples need to understand that there is still a potential estate tax problem. While there is an unlimited marital deduction, there are still potential estate taxes due upon the death of the second spouse. The second-to-die still can only give away $1 million dollars in Maryland tax free (federally the number is $5.25 million). Thus for same sex couples whose taxable estate may be more than a million at the death of the second spouse, estate tax planning should be considered. (See No. 5 in The 5 Most Important Reasons to Have a Will). Don’t think you have enough assets to worry about this? Remember, the taxable estate includes anything that passes as a result of a death. Thus, assets like IRAs, 401ks and life insurance policies, which do not have to go through probate, are still a part of your taxable estate.

By David Galinis

How Does The New Fiscal Cliff Legislation Affect My Estate Tax Planning?

Friday, January 11, 2013

On January 2, 2013 the American Taxpayer Relief Act of 2012 was enacted, avoiding the so-called “fiscal cliff.” In addition to income tax changes, the law contained provisions on estate taxes which certainly did avoid something very cliff-like. Had the law not been enacted, the federal estate tax exemption would have reverted to $1 million per person. The “exemption” is the amount that passes free of estate tax. Under the last change to the estate tax law in 2010, the exemption had been at $5 million (See 5 Important Facts About the New Estate Tax). Avoiding this significant (i.e., cliff-like) change in the estate tax exemption was an important feature of the new act.

The new law preserves the federal estate tax scheme which has been in place for the past two years into the foreseeable future. Each person continues to have approximately $5 million that can be given away free of estate taxes. The only real change in the new law is that the highest estate tax bracket increased from 35% to 40%. Assuming your estate planning was appropriate last year, there should be no need to change it as a result of the new legislation.

Portability

The new law also continues the portability provisions which have been in place since 2010. (See 5 Important Facts About the New Estate Tax). These provisions allow the surviving spouse to be able to use their deceased’s spouse unused $5 million exemption. Thus, a married couple’s total exemption exceeds $10 million when indexed for inflation. The portability provisions make the use of credit shelter or bypass trusts unnecessary for federal estate tax purposes. Prior to portability, these types of trusts were the only technique to preserve the deceased’s spouse tax exemption.

State Estate Taxes

Unfortunately I have some bad news for my local readers in Maryland and the District of Columbia. Maryland and the District still have separate estate taxes which have only a $1 million exemption. Thus, if you have a taxable estate (including life insurance) in excess of $1 million, state estate taxes are still a concern even if they are not federally. Moreover, the portability provisions are still only federal law. As a result, credit shelter or bypass trusts still may be needed in Maryland and the District if married couples want to be able to use both of their exemptions. (See The 5 Most Important Reasons to Have a Will).

By David Galinis

5 Things To Understand About Maryland’s Inheritance Tax

Thursday, June 14, 2012
  1. It’s All About Who Inherits

    Maryland has both an estate tax and inheritance tax. The estate tax is assessable if more than one million dollars passes at death. The total dollar value of the property determines whether there is an estate tax. The inheritance tax is not dependent upon the value of the estate, as even very small estates can have inheritance tax imposed. Inheritance tax is assessed on property given to a person who is further removed in relationship than a sibling. Thus, for example, a 10% tax will be assessed on property passing to a cousin, niece, nephew or friend.

  2. It Applies to Non-Probate Property

    Inheritance taxes, like estate taxes, are assessed onallproperty passing as a result of the death, not just the probate property. Thus, non-probate assets, such as life insurance and IRAs, which pass directly to the beneficiary, are still subject to inheritance tax if the person receiving the property is further removed in relationship than a brother or sister.

  3. Think Carefully About Nieces & Nephews

    If you are considering including your niece or nephew in your Will (or as a beneficiary on a non-probate asset) remember that they will be subject to the inheritance tax. It is worth considering whether the property should be given to your brother or sister with the hope that the property will be used for the benefit of a niece or nephew. This option requirestrustthat the brother or sister will use the property for the niece or nephew as this cannot be specified in the Will.

  4. Giving Away a Car or a House Can Cause Problems

    Be careful about giving anything other than cash to someone who will be subject to an inheritance tax. If you give someone $10,000 in cash, the inheritance tax will simply reduce the amount inherited – in this case to $9,000. (10% comes off the top to pay the inheritance tax). But if you give them a car with a bluebook value of $20,000, they will need to come up with $2,000 to pay the inheritance tax. If they can’t afford the tax, they will have to sell the car. The same is true for houses. If you give a niece your $300,000 house she will need to come up with $30,000 to pay the inheritance taxes. Thus it is important to make sure that your intended beneficiary can pay the inheritance taxes due.

  5. Same Sex Couples Beware

    Same sex couples who jointly own their primary residence can be for a nasty surprise after the death of their partner. Same sex partners, if not legally married, are further removed in relationship than a brother or sister. In fact, they are not related at all. Thus, the inheritance tax would apply to any property the surviving partner receives. Thus the surviving partner would be subject to 10% inheritance tax on half of the value of the house inherited as a result of their partner’s death. See Domestic Partnerships: How to Avoid Costly Inheritance Taxes on the Family Home for how to avoid this problem.

By David Galinis

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