As an estate planning attorney, one of the biggest concerns of many of my clients is taxes. There is a lot of misconception about taxes, especially estate taxes, so let’s try to clear some of that up.
There are a few taxes that you need to be concerned about when setting up your estate plan. There is a federal estate tax, state estate tax, state inheritance tax, and income tax considerations for your beneficiaries.
The federal estate tax applies to everyone across the country. Each person has a federal estate tax exemption and in 2015 that exemption is $5.43 million. That means that if you die with anything less than $5.43 million then you will have no federal estate tax due. On the other hand, if your estate is over $5.43 million then you will be taxed on the excess. However, to further complicate things, the federal estate tax allows for a strategy called portability. Portability essentially allows a married couple to exempt double the exemption amount at the death of the surviving spouse. This strategy can be complicated so it is best to consult with your estate planning attorney if you think you may have federal estate tax concerns.
Some states also have a state estate tax. These vary state by state. Maryland is one of the states that has an estate tax. In Maryland, if you die with an estate greater than 1.5 million then you will be taxed on the excess over that exemption amount. Maryland does not allow for portability at this time. The Maryland estate tax laws were changed in 2014. The 1.5 million exemption applies if you die in 2015, the exemption is increased to 2 million for 2016, 3 million in 2017, 4 million in 2018 and will match the federal exemption in 2019. Estate planning attorneys are now focused on providing the most flexible estate tax planning solutions because of the changing landscape.
Maryland also has an inheritance tax. The Maryland inheritance tax is 10% of the value of the gift. However, there are some exemptions. The Maryland inheritance tax does not apply if the receiving person is a spouse, child, grandchild, parent, grandparent, or brother and sister. There are a few other exemptions, but where the inheritance tax most often comes up is when it is applied to cousins, or nieces and nephews.
An increasingly important tax consideration when putting together your estate planning is income tax planning for your beneficiaries. With more and more wealth in the United States concentrated in tax deferred retirement plans such as IRAs and 401ks, we need to consider how these income tax deferred plans will affect the income tax situations of those that inherit them. There are two major ways to distribute these plans upon death, either by direct beneficiary designation, or through a trust. There are certainly pros and cons to both. A qualified estate planning attorney can assist you in determining the best estate planning strategy for you and your family.
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