“In this world nothing can be said to be certain, except death and taxes.”
— Benjamin Franklin, in a letter to Jean-Baptiste Leroy, 1789
Although Benjamin Franklin famously wrote these words in 1789, it was not until 1916 that the idea of the modern estate tax was passed. The estate tax has gone through many reiterations over the last 100 years, but the most recent overhaul at the federal level was in 2011, and in 2014 Maryland. In addition to the estate tax, there are a few other taxes to consider when putting together an estate plan.
First, the federal estate tax. This tax works by adding up everything that a person owns at their death, to include real estate, cash, stocks, retirement accounts, life insurance proceeds paid at their death and personal property. The change in 2011 set an exemption of $5,000,000 meaning anything less than this amount is to be exempt from estate taxes. That $5,000,000 exemption is indexed for inflation and has gone up each year since. Currently for people dying in 2017, the exemption is $5,490,000. For any assets over the 5.49 million, the excess is taxed at a rate of 40%. Currently, 99.8% of the US population will not be subject to the Federal Estate Tax.
Second, the Maryland Estate Tax. This tax works similarly to the federal estate tax in that Maryland adds up everything that a person owns at their death and then exempts a certain amount from taxes. There was a major change to this law in 2014. For many years, the Maryland estate tax exemption was $1 million. The law change in 2014 provided for a gradual increase of that exemption. For those dying in 2017, the exemption is $3 million. For those dying in 2018, the exemption increases to $4 million. In 2019, the exemption will match the federal exemption, which again is indexed for inflation, so analysts predict it will be between $5.5-6 million.
Third, the Maryland inheritance tax. This tax is due on any sum of money passing to another person. The rate is 10%. However, a number of people are exempt from the inheritance tax, including:
- Lineal descendent of a child(grandchild)
- Spouse of a child (son or daughter in law)
- Brother or sister
Where the Maryland inheritance tax is something to be concerned about is when a person is leaving their estate to anyone not on the list above. The inheritance then will be taxed at 10%.
The first three taxes are taxes that are specific to dying. However, there may be additional tax implications of dying.
Fourth, capital gains taxes. During a person’s lifetime, they may face capital gains taxes. Those taxes are imposed on any assets that appreciate over time and are levied on the difference between your purchase price (basis) and selling price. For example, if you purchase Stock A in 1950 for $1 and sell it 65 years later in 2015 for $201, you will owe capital gains taxes on $200 of gain. One aspect of the tax code that gives an advantage, especially to investors, is that at death there is a step up in basis. In that same example if you purchase Stock A in 1950 for $1 but instead of selling, you then die in 2015 and the stock’s value at that time is $201. The beneficiary of your estate will be taxed capital gains using their selling price, and your date of death value, not your purchase price. So, if that person sells the stock for $202. They will owe the capital gains tax on just $1.
Fifth, income taxes. It is relatively well known that inheritances are not considered income to the recipient. However, if a person dies with income tax deferred accounts, such as IRAs, 401Ks, 403bs, and TSPs, they will need to consider how these accounts are taxed for the beneficiary. Ultimately, the income taxes on the distributions from these accounts will need to be paid, it is just a matter of when, and over what period of time. There are many things to consider when planning with these assets, and it is crucial to speak with your estate planning attorney about your options.
The wisdom that Benjamin Franklin exhibited in 1789 still rings true today. Because of this, everyone should speak with an estate planning attorney to discuss how their death may have certain tax implications for their loved ones. A well drafted estate plan can be devised to address estate taxes and inheritance taxes, as well as make use of advantageous capital gains and income tax strategies. Call your local estate planning attorney today for a consultation.