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Your Estate Plan and Tax Filings

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There are many taxes that we pay over our lifetime.  Here is a list of taxes we see while planning and settling estates. 

  1. While you are living and if your income is high enough, you will need to pay income taxes to both the Federal Government and the State of Maryland.  The forms generally used to file your income tax returns are the IRS form 1040 and the MD form 502.  In most cases when you have a Revocable Living Trust you will report all your income under your Social Security Number. 
  2. If you make gifts in excess of $15,000 to any one person in a calendar year, you will need to file a Gift Tax Return, IRS form 709.  There are some exceptions to the gifting limit of $15,000.  As long as your spouse is a US Citizen, you can give your spouse an unlimited amount of money.  If you make a payment directly to an educational institution or a medical provider on another’s behalf, there is no limit of how much you can give for that person.  Also you can make a lump sum transfer to a College Savings Plan of an amount equal to 5 years of gifting i.e. $65,000, and this gift is a completed gift as long as you live for 5 years. 
  3. If you own real estate, you will need to pay annual real estate taxes.  This is paid to the county you live in.  If you reside in the property you will receive a homestead credit.  Make sure you review your real estate tax bill to ensure you are getting your homestead credit.  Also if your income is below a certain amount you may also get a homeowner’s tax credit. 
  4. Once you pass away your Social Security Number can no longer be used and your Trustee and/or Personal Representative will need to apply for a Tax Identification Number for your estate and trust.  Any income earned on your estate after the date of your death will need to be reported to the taxing authorities on a separate income tax form.  The Federal form is IRS Form 1041 and the Maryland State form is MD 504.  Your estate administrator will also need to file your final income tax returns.  If you are survived by a spouse, your spouse can still file a final joint return. 
  5. Maryland has an inheritance tax.  If you leave a portion of your estate to certain people then a 10% inheritance tax must be paid on assets in Maryland.  People who do not have to pay the inheritance tax are spouses, children, grandchildren, brothers and sisters.  Non-relatives, nieces and nephews, and cousins will have to pay the tax.  Some assets are exempt from the inheritance tax, such as life insurance proceeds paid to a beneficiary or trust.  Also, joint ownership of primary residences with a domestic partner is exempt from inheritance tax.  This tax is reported to the Register of Wills on a form called the Information Report in the county where your probate is filed.  If there is no probate, then in the county where the asset is located. 
  6. When you pass away, if your estate exceeds the estate tax exemptions, your estate administrator will have to file an Estate Tax Return with the Internal Revenue Service and the Comptroller of Maryland.  Currently the Federal Estate Tax Exemption is $11,700,000.00 and the Maryland Exemption is $5,000,000.00.  To report your estate tax to the IRS you will file an IRS form 706 and to report your estate to the State of Maryland you will file a form MET1.  If you are married, even if your estate does not reach the estate tax exemptions, you may want to file an estate tax return and elect portability.  Portability allows the surviving spouse to claim the deceased spouse’s unused exemption amount at the time of death of the surviving spouse. 
  7. If you have an irrevocable trust, one of two returns will need to be filed to report the income on the trust; either an IRS form 1041 and accompanying Maryland form will need to be filed, or you will report the income from the trust on your individual return that you file with the Federal government and the State of Maryland.  Determining which return you need to file to report the income may be a complex issue and one you will want to discuss with your estate planning attorney or your tax preparer. 

This article is not meant to be an exhaustive list of all the taxes you may incur, but a list of the type of taxes we regularly see in our practice. 

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About Colleen Sinclair Prosser, Estate Planning Attorney

Colleen Sinclair Prosser offers years of experience in estate preservation and transfer. A strong proponent of the living trust, she also focuses on wills, powers of attorney, living wills, probate, trust administration, prenuptial agreements, nursing home planning, and special needs planning.