Estate planning may involve considerations of multiple types of taxes. Maryland residents should understand whether their estates may be subject to state inheritance tax, state and federal estate tax, and should also consider whether certain state and Federal income tax issues should be addressed in their estate planning documents.
In Maryland, anyone who is outside of your immediate family will incur a 10% inheritance tax starting on dollar one from assets they receive due to your death. The state’s definition of immediate family is limited to spouses, children, parents and siblings. Without proper planning, the recipient will be forced to pay the taxable amount from their bequest, so if you leave them $10,000, they will only receive $9,000. If this is not the intended result, you may restructure the source of the payment of this tax with proper estate planning.
Federal estate taxes are levied on a decedent dying with over $5,430,000 in assets in 2015. The Maryland estate tax is currently applied to estates over $1,500,000 in 2015; however, this threshold is set to increase each year until it matches the Federal threshold in 2019. There is a common misunderstanding that when calculating a decedent’s total estate, certain nonprobate assets like life insurance are left out of the determination. While this is generally not the case, a well thought through estate plan may be able to decrease and even eliminate these taxes in certain instances.
Lastly, proper estate planning involves careful consideration of the income tax consequences of inheriting certain assets. As a general matter, the recipient of an asset due to the death of an individual allows the recipient to establish a basis equal to the fair market value on the decedent’s date of death. This is referred to as a “step up” in basis. Certain assets, however, do not share this feature. For instance, qualified retirement accounts may be required to be paid out within 5 years of the decedent’s death, depending on the identity of the beneficiary. Under the current tax law, this result may be avoided with proper planning.
An estate and trust attorney can help you to plan effectively to avoid negative tax consequences to the greatest extent possible.