Estate Tax Planning

Without careful planning, much of your life’s legacy could be lost to estate taxes.  While a simple will can provide for the transfer of your estate to your loved ones, if your assets are significant, consideration should be given to estate tax planning.

Federal Estate Tax: Exemptions & Rate
The American Taxpayer Relief Act of 2013 provides for a federal estate tax exemption amount of $5.25 million.  This means that each individual can transfer up to $5.25 million in assets free of federal estate tax.  The exemption, also referred to as the applicable exclusion amount, is adjusted annually for inflation.  The exemption is $5,340,000 for estates of persons who died in 2014 and it increases to $5,430,000 for 2015.

The taxable value of the estate is calculated by adding up all the assets owned by the individual and subtracting from that total his or her liabilities.  Additional deductions can be taken for qualified charitable deductions as well as administrative and legal costs involved in settling the deceased’s estate.

The federal estate tax rate for estates exceeding the exemption amount is 40%.  The rate is applied to the taxable estate value that is in excess of the exemption amount.

Federal Estate Tax: Understanding Portability
In addition to the individual exemption, married couples enjoy an unlimited deduction for transfers to one another.  While this is great news for many couples who choose to leave their estate to each other, without proper planning it can result in a forfeiture of some of the individual estate tax exemptions after the passing of the second spouse.  

For example, this can occur when a husband leaves $3 million of his individually-owned assets to his surviving wife who already has $5 million herself, bringing her total net worth to $8 million. The bequest to his wife is not subject to estate taxes because it qualifies for the unlimited marital deduction.  After some time, the wife also passes away, leaving everything to the children.  While her estate can take advantage of her individual exemption of $5.25 million, the rest of her estate could be subject to estate taxes because her husband’s individual exemption was not utilized.

To address this issue, the current estate tax law allows for “portability” of individual exemptions between spouses.  Stated another way, estate tax portability enables the surviving spouse to utilize the unused portion of the first-to-die spouse’s estate tax exemption.  Portability is not automatic and in order to take advantage of it, an estate tax return must be filed with the IRS within 9 months of the passing of the first spouse, even if there are no taxes due at the time.

An alternative to relying on portability is to utilize a special planning tool referred to as a credit shelter trust (also referred to as a bypass or A-B trust).  If properly established, such trusts work much in the same way as portability, but do not require the filing of an estate tax return after the passing of the first spouse.  

Maryland’s Estate Tax                                                                                                                                                    
Maryland is one of a handful of states that still impose a separate state estate tax.  Similar to the federal estate tax, Maryland’s estate tax is based on the value of a decedent’s wealth at their time of death.  Under current law, the Maryland estate tax is imposed on taxable estates valued at over $1.5 million (effective January 1, 2015). 

The Maryland estate tax exemption differs from the federal exemption amount.  The Maryland legislature recently increased the amount exempt from Maryland’s estate tax.  The exemption amount is $1.5 million for 2015, $2 million in 2016, $3 million in 2017, and $4 million in 2018.  Finally, in 2019 it will match the federal exemption which is projected to be $5.9 million. 

The Maryland estate tax rate is based on a progressive/graduated scale that reaches a maximum of 16%.  In 2015, the tax is limited to 16% of the amount that the estate value exceeds $1,500,000.

Maryland’s Inheritance Tax                                                                                                                          
The inheritance tax is imposed on the privilege of receiving property that passes from a decedent and has a taxable situs in Maryland.  Tangible property acquires a taxable situs in Maryland if it is physically located within the state.  The inheritance tax is imposed on the transferee of property received on the death of a former owner. The tax is imposed at a rate of 10% on the value of property passing to non-exempt persons.  The persons exempt from inheritance tax include a child or other lineal descendant, spouse of a child or other lineal descendant, spouse, parent, grandparent, stepchild or stepparent, siblings, or a corporation having only certain of these persons as stockholders.  Charitable institutions are also exempt from inheritance tax.

Special Planning for High Net Worth Individuals
Individuals and families with significant net worth might still have taxable estates even if they take full advantage of their respective exemptions.  For these individuals, there are a variety of advanced planning techniques that can be crafted to help reduce the estate tax burden, such as strategic gifting plans, life insurance trusts, personal residence trusts and grantor retained annuity trusts.  

Same-Sex Couples
The Supreme Court's ruling on the Defense of Marriage Act (DOMA) paves the way for same-sex couples married under state law to take advantage of all the federal privileges afforded to opposite-sex couples, including those related to federal gift and estate taxes.

In 2012, The Civil Marriage Protection Act was passed by Maryland’s General Assembly legalizing same-sex civil marriages in Maryland as of January 1, 2013.  The Act permits same-sex married couples to be exempt from estate and inheritance taxes, thereby receiving the same favorable tax treatment enjoyed by opposite-sex spouses.

Tax planning strategies are inherently complex. An experienced estate planning attorney with knowledge of estate and gift tax laws can help you establish a comprehensive plan enabling you to pass on as much of your hard-earned assets as possible to your loved ones and beneficiaries.  Chris Robins, one of the attorneys at Robins & Robins, P.A., is also a certified public accountant with experience in tax matters.  We handle advanced estate tax planning cases and tailor specific plans to reduce or eliminate death taxes and preserve your legacy for future generations.

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Robins & Robins, P.A. based in Salisbury, MD serves the Delmarva Peninsula and Maryland ‘s Eastern Shore including Wicomico, Somerset, Worcester, Dorchester and Talbot Counties.

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