When it comes to estate planning, we get a lot of questions from our clients about estate taxes: Who is responsible for paying estate taxes? What is the amount I have to pay? Should I start worrying about it now? Estate taxes may be collected on several levels, depending on where you live and where your assets are located. These taxes are imposed on the total value of your taxable estate. While they won’t concern you personally after you’re gone, these taxes may significantly reduce the assets you want to pass along to your loved ones. To avoid this, it’s a good idea to talk with your Maryland estate planning lawyer who can help you understand if and when you should plan for estate taxes.
3 Important Estate Planning Considerations
Size of Your Estate
The federal estate tax exemption for 2016 is $5.45 million per person. What does that mean? It means that as long as the value of your estate doesn’t exceed this amount, it is not subject to the federal estate tax. However, keep in mind that Maryland also has its own estate tax that gets triggered at the $2 million threshold for 2016 (set to rise each year until it eventually equals the federal exemption). If you are not sure what your estate is worth, contact an estate planning lawyer to help you determine what would be taxable. While $2 million sounds like a lot, it’s not really much if you own a few real estate properties or run a business.
Even if you don’t meet any of the estate tax thresholds right now, think about what may change in the future. If you expect to make more money or get an inheritance, you may want to consult with your attorney on the best strategy to eliminate or minimize any future estate taxes.
Who Your Heirs Are
While spouses and children are the most common heirs, you are free to leave your estate to whomever you wish. You can leave a portion of your assets to your best friend, a significant other, a coworker, a charity, or even a stranger. But keep in mind that Maryland has a 10% inheritance tax that is applied to any assets left to a non-relative or a “non-linear” ancestor or descendants. A linear relative is a child, parent, sibling, spouse, grandparent, or grandchild. The tax is imposed on nieces and nephews, cousins, aunts and uncles, and non-relatives, including fiancés or significant others.
Besides your relationship to your heirs, you should also consider their legal status in the U.S. You may run into tax issues trying to leave assets to a spouse or other relative who is not a U.S. citizen. U.S. Citizen spouses qualify for an “unlimited marital deduction” that allows tax-free transfer of assets between the two parties, no matter how much. Assets going to a non-citizen spouse will be subject to federal and state estate taxes if they exceed the exemption amount. However, there is planning that can be done to minimize these taxes.
Location of Your Assets
If your assets are located or registered in a state that has an estate tax, that portion of your estate may be subject to taxes there. For example, if you live in Maryland and have a vacation home in Florida or another state, your out-of-state real property may be subject to that state’s taxes upon your passing. Also, federal estate taxes are calculated on the total value of your estate—not just the value of your Maryland property. So even if your Maryland estate is below the exemption threshold, you may still end up paying taxes. (You may also have to go through probate in more than one state.) Having assets in multiple states can complicate estate planning—be sure to have an experienced estate planning attorney by your side to help you avoid costly mistakes.
Not everyone has to worry about estate taxes, but residents of Maryland may have extra estate planning to do. There are unexpected issues and hidden traps that may apply to your personal situation. Even if you think that your planning needs are straightforward and that your estate probably won’t be subject to taxes, it is a good idea to speak with an experienced estate planning attorney—the potential savings in estate taxes can far outweigh any estate planning costs. Call us or contact online today for a consultation.