It can be hard enough to plan your estate, but then you realize that you may also have to worry about estate taxes! There are federal estate taxes, Maryland estate taxes, Maryland inheritance taxes, and other important factors you may need to take into account when planning your estate, whether you use a simple Will or set up a Trust. As a Maryland estate planning lawyer, I get many questions from clients in regard to estate taxes. Here is some basic information to help you understand what the estate tax is and whether your estate may owe any. NOTE: This is just a brief overview, the estate tax laws are very complex!
What is the Estate Tax?
The Estate Tax is the tax imposed on the value of an estate before it can be distributed to heirs. If your estate is over a certain dollar amount, you pay tax for the “right” to transfer those assets to your loved ones upon your death.
The value of your estate is calculated by combining the current market value of all of your assets, including real estate, cash, securities, and personal property. That makes up your “gross estate.” Then certain deductions are applied to the gross estate to determine the amount that is actually subject to tax—your “taxable estate.” For example, money that goes to pay off debts and charitable contributions reduce your taxable estate. Property that passes to your surviving spouse directly doesn’t get taxed (assuming both of you are U.S. Citizens), but when that property passes again upon the death of your spouse, it may be subject to tax.
The Good News for most people is that your estate is subject to the federal estate tax only if it exceeds $5 million + annual inflation adjustments per person. For 2015 this threshold is $5.43 million. However, the portion of your estate in excess of this amount will be taxed at the hefty rate of 40%.
Gifts Are Counted Too!
If you have made taxable gifts during your lifetime, they may also be counted into your estate and taxed when you pass away. Not all gifts are taxable—currently you can give up to $14,000 annually to each person you want to provide for without triggering the tax. (There are other exemptions for tuition and medical expenses and political gifts). If you give gifts in excess of that, you can either report the gift and pay the tax the same year, or take advantage of the Unified Credit and have your estate and gift taxes combined. So in effect, the lifetime gifts you make (over the annual exemption amount) reduce your estate tax exemption—for example, if you gave away $2 million during your lifetime, your 2015 estate tax exemption may be reduced to $3.43 million.
Maryland Estate Tax
Besides the federal estate tax, some states also chose to impose their own estate taxes. In Maryland, an estate is considered taxable if it exceeds $1.5 million for 2015. However, the state plans to gradually move this threshold up, so that by 2019 the Maryland exemption will match the federal. The Maryland estate tax is 16%.
Maryland Inheritance Tax
Even if you’ve dodged the federal and Maryland estate taxes, your estate may still be subject to tax. Maryland also has an inheritance tax in addition to the estate tax. (Only two states, Maryland and New Jersey, impose both an estate tax and an inheritance tax). The inheritance tax applies to assets that are passed to people other than linear descendants and ancestors. In other words, you can leave your money or property tax-free to your spouse, children, siblings, parents, grandparents and grandchildren. However, if you want to leave something to your best friend or uncle, there may be 10% inheritance tax due on the current market value of those assets.
There are many “traps for the unwary” to look out for when it comes to estate tax planning. It takes some strategy and preparation to transfer your estate in accordance with the law, make it easy for your heirs to claim their inheritance, and reduce or eliminates taxes as well as probate costs. Whether you have a small estate or one large enough to worry about estate taxes, you could benefit from a consultation with an experienced Maryland estate planning attorney. Give DK Rus Law a call or contact us online to get professional advice.
