Maryland Trust And Estate Administration
Estate & Trust Administration is the process of settling the estate of a decedent. The person responsible for handling the estate and/or trust has duties to the heirs, beneficiaries, and creditors of the estate.
The Will or trust document establishes the rules for distributing the assets to the beneficiaries . If a person dies without a Will or trust, state law controls distributions.
In Maryland, the person responsible for administering a probate estate is called the personal representative. Elsewhere the person may be called an executor or executrix. Trusts, on the other hand, are administered by a trustee. In either event, the person charged with administering the estate must make sure any taxes are paid and other bona fide creditors satisfied., The possible death taxes for Maryland decedents are (1) the Maryland estate tax, (2) the federal estate tax, and (3) the Maryland inheritance tax. Other creditors may be credit card providers, medical expenses and mortgages and other items.
Estate and Trust administration largely proves the old adage that “the devil is in the details.” The personal representative or trustee must keep exact records so if challenged they can track every transaction. Even if not challenged, family harmony requires a large degree of transparency in order to reassure all that they are being treated fairly.
The lawyers and other professionals at Franke, Sessions & Beckett LLC have helped many fiduciaries navigate estate and trust administration. We provide full services, including in house accounting services.
Maryland Trust And Estate Administration:
When a person dies, her/his financial affairs need to be settled and the property distributed to the heirs. Although this process may sound straightforward, even easy, it is not. The administration of an estate includes a myriad of details and may appear to be a task of overwhelming complexity. There is no way to escape these details. However, this white paper is designed to take the proverbial 30,000-foot view of the process in order to try to organize the seemingly endless minutia into a digestive whole.
What Is The Difference Between Probate And Non-Probate?
First, it is important that we define the term “estate administration.” This term may refer to the administration of a decedent’s “probate estate” or administration of “non-probate property,” or both. Probate is the process of administering and changing the title of assets held solely in the name of the decedent to the designated recipient of the property under court supervision. Probate assets pass under a decedent’s will, or if the decedent’ did not have a will, by the terms of Maryland intestacy law.
In contrast, non-probate assets are typically not governed by a will, but instead pass in accordance with the governing instrument. Examples of non-probate transfers include transfers by title of a deed (if it contains rights of survivorship), by a beneficiary designation on an account, under the terms of a revocable trust, or by virtue of some other arrangement associated with the asset.
Thus, for this paper, the term “estate administration” includes the process of passing a decedent’s assets to legatees or beneficiaries regardless of whether those assets are probate or non-probate assets.
What Does Being A “Fiduciary” Mean?
Reduced to its simplest elements, the administration of an estate involves gathering a decedent’s assets, paying the decedent’s debts, and distributing the remaining property to the estate’s beneficiaries or legatees.
The individual responsible for this process is called a fiduciary. If the fiduciary is named under a will, the fiduciary is called the personal representative (also commonly known as an executor/executrix in other jurisdictions). If the fiduciary is appointed over a trust, the fiduciary is called a trustee. “Being a fiduciary for a trust or estate is an honor but it comes with serious obligations to those interested in the estate — both beneficiaries and creditors. If you have never administered an estate before, you may be surprised how much responsibility and work is involved,” says Anne Franke, a CPA who assists in estate administration with the Annapolis estates and trusts law firm of Franke, Sessions & Beckett, LLC.
A Fiduciary’s First Steps
The fiduciary’s main obligation in estate administration is to preserve the deceased individual’s assets. Thus, it is important that a decedent’s home and possessions are secured. Mail should be collected and processed. The decedent’s papers should be gathered. Even uninteresting papers that may not seem “relevant” can become useful to the administrative process.
During this process, the fiduciary should keep detailed records so all expenses incurred for the administration of the estate, including all funeral and burial costs, are paid properly out of the estate or reimbursed to the individuals who covered the expenses.
How Is A Personal Representative Appointed In Probate?
The Orphans’ Court appoints the personal representative by granting that individual “letters of administration.” If the decedent died with a will, the document generally names the personal representative and the person named is generally appointed by the court. The person named in the will as personal representative has the highest priority to be appointed as fiduciary of the estate under Maryland law. If there is no will, or the will fails to name a personal representative who can serve, Maryland statutory law sets out the priority of those entitled to be personal representative.
To open a probate estate, the person entitled to be named personal representative files a petition for probate with the Register of Wills in the county where the decedent had her domicile or had most of her property if not domiciled in Maryland at the time of death. Once the letters of administration are issued, the personal representative has authority to stand in the shoes of the decedent in order to wind up the decedent’s affairs. Under some circumstances, a special administrator is appointed instead of a personal representative or a personal representative is changed into a special administrator. This is done because the powers of a special administrator are different than those of a personal representative.
Unlike the appointment of a personal representative in a probate proceeding which requires the oversight of the probate court, a trusteeship is controlled by the terms of a trust and generally done without court involvement. Indeed, one reason revocable trusts are used in lieu of wills is to avoid involvement of the probate process at death. This works only if a person’s assets are either transferred to the revocable trust during the settlor’s life or are held in other non-probate structures (like a joint tenancy deed or pay-on-death account). Although, if something goes wrong, a court can become involved if a beneficiary or the trustee petitions for relief.
Different Oversight For Probate And Trust Estate Administration
Unlike some other jurisdictions, the Maryland probate court (the Orphans’ Court) does not have jurisdiction over non-probate arrangements, including trusts. If a question arises about a person representative’s conduct or how distributions should be handled, those issues go before the Orphans’ Court. If a question arises concerning non-probate arrangements, those issues are resolved in the Circuit Court not the Orphans’ Court. “The separate procedures governing probate and non-probate property transmittal at death can cause confusion. This confusion is magnified by the ambiguous messaging by some promoters of revocable trusts which implies that you automatically avoid estate taxes by avoiding probate. Although a revocable trust is very useful estate planning tool and can provide clients with great benefits, it does not automatically let you side-step estate or inheritance taxes. For inheritance and estate tax purposes, property transfers from a will or a revocable trust are treated the same,” says David Sessions, a principal of the Maryland estates and trust law firm of Franke, Sessions & Beckett, LLC.
Marshalling Assets And Paying The Fiduciary
Once the personal representative has been appointed or a trusteeship is filled, the fiduciary can begin to marshal assets. This is a process of learning what assets are included in the fiduciary estate and retitling those assets into the name of the fiduciary estate. For example, a personal representative may need to retitle a brokerage account from the name of the decedent to the estate.
For the probate estate, the Register of Wills office or the Orphans’ Court monitors this process by requiring the personal representative to file an inventory of assets and accountings of estate financial activity. The personal representative is charged with establishing the value of all assets and with paying all lawful debts. Additionally, the personal representative must file information about assets passing outside of the formal probate estate (for example, property transferring by joint tenants or property titled to the revocable trust). One purpose of this reporting is to insure inheritance taxes are properly collected.
The trustee for a revocable trust is responsible for the property under his or her control. Even though the formal oversight performed by the Register of Will or Orphans’ Court does not apply to a trust, the trustee is still required to account for the value of the property and the trust’s financial activity. In this vein, the Maryland Trust Act governs the duties of the trustee and the rights of the trust beneficiaries.
A fiduciary generally has a duty to satisfy the debts enforceable against a fiduciary estate. Under the probate system, creditors of the decedent have 6 months from the decedent’s date of death to file a claim against the probate estate. Secured creditors, however, may rely on the mortgage or other security instrument for payment. A secured creditor who fails to file a claim against the probate estate will forfeit their right to collect from the general assets of the estate if the security is insufficient to cover the debt. In the first years after the financial crash of 2008, many secured creditors discovered that their security interest was insufficient to cover the debt and they failed to file a timely claim against an estate. Thus, they incurred a loss on the loan. It is now common practice for secured creditors to file a protective claim.
The process of filing a claim against a revocable trust is more complex then filing a claim against a probate estate. The Maryland Trust Act states that if a regular probate estate is filed, then a creditor has 6 months to file a claim against the probate estate, and the Maryland Trust Act makes clear that the assets in the revocable trust may be reached by probate creditors to satisfy unpaid claims. If no regular estate is opened, however, a trustee may shorten the statute of limitations by running a notice in the appropriate newspaper. Otherwise the Maryland Trust Act suggests that a longer statute of limitations applies.
Tax Obligations In Maryland
A fiduciary estate is generally subject to several different taxes, including the Maryland inheritance tax, the Maryland estate tax, the federal estate tax and the Maryland and federal income taxes. A governing document generally dictates how these taxes are paid.
If the estate is large enough to be taxable for federal tax purposes, the personal representative files a federal tax return and makes arrangements for the payment of whatever tax is due. This tax return is due nine months from the date of death. This would also apply to the federal estate tax.
If the estate assets earn interest or other income during the period of administration, a federal income tax return and a Maryland income tax return for the fiduciary estate is likely required. The personal representative is also responsible to file the decedent’s last personal income tax return.
A Maryland Estate Administration Attorney Will Help Guide You Through the Process
This is a brief overview of the Maryland estate administration process. It is not meant to be comprehensive, but a simple roadmap as to what can be expected in the process. Because the administration of an estate can be so complex and detail oriented, you will likely have specific questions and concerns.
For over 35 years, the law firm of Franke, Sessions & Beckett, LLC has concentrated on the law of estates and trusts – including helping hundreds of clients with estate and trust administration. Often this means winding up a decedent’s financial affairs and implementing the plan contained in the will or trust. Sometimes a decedent dies without an estate plan in place so the estate needs to be settled in accordance with the intestacy rules set out by state law. We prepare estate and trust federal and Maryland tax returns in-house so we can offer seamless administration services from beginning to end. Our Maryland estate administration attorneys and staff have the experience, training and knowledge to guide clients through the process to ensure that Maryland estates and trusts are administered properly. In order to schedule a consultation, call 410-263-4876 to get in touch with our Annapolis office.
Fine-Tuning During Estate or Trust Administration
Disclaimers provide a useful post-mortem technique to fine tune an estate during its administration. On every estate or trust administration lawyer’s check list ought to be a reminder to see if a disclaimer should be used.
Disclaimer Are Increasingly Built Into The Estate Plan
Good estate planning requires structuring wills and trusts with sufficient flexibility to address the various potential situations that may exist at the client’s death. One technique often used by estate planning lawyers to maintain this flexibility is to build into the estate planning document alternative dispositional structures to address different circumstances. When the death occurs and the plan becomes operative, a disclaimer may enable the primary heir, generally designed to be the surviving spouse, to determine the best alternative and essentially pick the appropriate structure to control the disposition of the assets. The reason disclaimers are often designed for the surviving spouse is because under the federal tax code, only a surviving spouse can use a disclaimer to restructure a bequest that then continues for the primary benefit of the disclaiming spouse.
The mechanism used is to permit the surviving spouse to “select” how the property should flow at death is by making a qualified disclaimer. If the estate planning documents contemplate using a disclaimer to ultimately determine disposition of assets, it is important that an informed decision be made to disclaim or not disclaim early in the estate or trust administration.
Because of its importance in estate tax and asset protection planning, anyone administering an estate or trust should carefully examine the planning document to see if disclaimer planning is a feature of the plan. If so, you should discuss with your estate administration lawyer the pros and cons of exercising a disclaimer. A timely decision must be made to use or not use the disclaimer.
What is a Disclaimer and why is it useful?
In the world of estates and trusts, a disclaimer is a refusal to accept a gift or a bequest. It may sound strange to refuse a gift but a disclaimer is a useful tool for tax, asset protection and estate planning. A disclaimer is when the recipient (called the “donee”) refuses a bequest, for example, the donee refuses an inheritance left in a will or trust, refuses the proceeds from an account labeled as pay-on-death account when the original owner dies, or refuses the surviving interest in jointly owned property when one joint owner dies.
To implement a disclaimer, one needs to apply a mix of federal tax regulations and Maryland substantive law provisions. The two are not the same. The most important difference is that under federal tax regulations a qualified disclaimer must be made within nine months of the transfer. Under Maryland law, no period of time limits the exercise of a disclaimer, but the exercise is prohibited once the donee accepts benefits from the transferred property.
To be effective, a donee when exercising a disclaimer must make a pure refusal to accept the bequest. A donee cannot “refuse” a bequest and, at the same time, direct where the bequest should go as a result. A will or trust may include a disclaimer clause which controls a disclaimed bequest. If a clause is not included, a disclaimed bequest is typically distributed under the governing instrument as if the recipient predeceased the testator (for Wills) or settlor (for trusts).
Qualified Disclaimers Under Federal Tax Law
Federal tax regulations defines a “qualified disclaimer” and requires that a qualified disclaimer must generally be made within nine months of the death of the testator or within nine months after the occurrence of the transfer creating the property interest being disclaimed. A qualified disclaimer is not a gift from the donee making the disclaimer so the bequest will not be subject to federal gift taxes against the disclaimant.
Under Maryland law, and generally under the common law, creditors of a disclaimant cannot attach disclaimed property. This flows from the premise the disclaimant never receives the property in the first place. Under both federal qualified disclaimer rules and under Maryland statutory law a disclaimer must take place before the disclaimant accepts an interest in or benefit from the property.
A potential disclaimant should make a decision whether to disclaim property early in the estate administration process. It is a conversation that you need to have with your estate administration lawyer before you inadvertently take a disqualifying action. In one case, the IRS held that the disclaimer was not qualified for federal tax purposes because the surviving spouse listed the asset on a loan refinance application as “his” asset. That violated the requirement that a qualified disclaimer must be made before taking a benefit from the interest intended to be disclaimed.
A disclaimant generally makes a disclaimer for two reasons: tax and/or asset protection purposes. Both are usually tied to whom has access to the property after the disclaimer is effectuated.
Disclaimers For Tax Planning Purposes
A donee may want to make a disclaimer for tax purposes. Many estate plans provide that in the event of a qualified disclaimer, the gift falls into trust for the benefit of the surviving spouse. If properly constructed, the disclaimed property goes into trust for the surviving spouse, which then avoids being included in the surviving spouse’s estate for tax purposes. While both Maryland estate tax and federal estate tax laws permit a surviving spouse to use “portability” (which is an estate tax election used to preserve the estate tax benefits or credit amount attributable to the deceased spouse), a qualified disclaimer and a spousal trust can also be used to preserve those tax benefits. If a governing instrument provides both of these tax planning procedures to a surviving spouse, it is best to review the pros and cons of each tax planning mechanism.
Disclaimers for Creditor Protection Purposes
A donee may want to consider making a disclaimer for creditor protection purposes. For example, if there is a properly drafted governing instrument that provides for disclaimed property to be held in a marital or spousal trust, and the surviving spouse exercises the disclaimer, the property disclaimed may avoid the creditor claims of the surviving spouse. Even in the absence of a marital or spousal trust, a disclaimer may be used to offload assets to the deceased spouse’s other family members if the original donee has creditors ready to jump at the assets. Under Maryland law, a disclaimer, if made for creditor purposes, does not need to be made within the nine-month window (which is imposed by federal regulations). It only need be made before the disclaimant receives a benefit from the property.
Discuss Disclaiming With Your Estate Administration Lawyer
Disclaimers can be useful for post-mortem planning, whether for tax-focused or creditor protection focused planning. It is another planning tool that can be used during the admistration of an estate or trust.
For over 35 years, the law firm of Franke, Sessions & Beckett, LLC has concentrated on the law of estates and trusts – including helping hundreds of clients with estate and trust administration. Sophisticated estate planning documents may provide that a disclaimer be used to deflect assets into a trust instead of outright to a surviving spouse. Whether to use the disclaimer mechanism is not an automatic decision but one that requires thought and consideration. Our Maryland estate administration attorneys and staff have the experience, training and knowledge to guide clients through the process of making such a decision as well as to generally ensure that Maryland estates and trusts are administered properly. To schedule a consultation, call 410-263-4876 to get in touch with our Annapolis office.
Maryland Estate and Inheritance Taxes
Potential death taxes need to be addressed in any Maryland estate or trust administration after the death of the testator/settlor. If any of the various potential taxes apply, the personal representative of the probate estate and/or the successor trustee of a revocable trust must deal with the issue promptly. The failure to assure that any tax due is, in fact, paid can lead to nasty surprises, including the possibility that a tax lien will cloud the title of estate and trust assets.
A Maryland estate may be subject to three separate death taxes regardless of whether the transfer of property takes place in the probate court or outside the probate court. These three potential death taxes are the Maryland inheritance tax, the Maryland estate tax, and the federal estate tax.
Determining Maryland Inheritance Taxes
Maryland is one of a few states with an inheritance tax. The tax focuses on the privilege of receiving property from a decedent. The Maryland inheritance tax rate is 10% of the value of the gift. It is currently only imposed on collateral heirs like a niece, nephew or friend. Certain heirs, like parents, grandparents, children, stepchildren, children’s spouses, brothers or sisters, are not currently taxed, although they have been taxed in the past.
“The list of those subject to the Maryland inheritance tax and those not is not intuitive. Originally the distinction was between lineal heirs and a surviving spouse who were exempt, on the one hand, and all others who were subject to the tax. Over time, the Legislature added to the list of those exempt from the tax to include more family members. Stepchildren and siblings of the decedent were added to the list of those exempt. But why are siblings exempt but not nieces and nephews? The distinction is arbitrary,” says David Sessions, a principal of the Maryland estates and trusts law firm of Franke, Sessions & Beckett, LLC.
Because the inheritance tax is seen as a tax for the privilege of receiving property, the tax due from and paid by the recipient, unless otherwise directed by the governing document. Thus, if the governing document directs a specific bequest of $10,000 to a niece, and the document pays the inheritance tax in the same manner as defined by law, the niece receives $9,000, the net value of the gift and inheritance tax. This result can be changed. A governing document may direct that the residuary estate to pay the inheritance tax. In such a situation, the niece would receive the full $10,000 and the estate or trust would pay an additional $1,1111 in inheritance tax. The tax rate increases from 10% to 11.1111% because the payment of tax by the estate or trust is deemed to also be a gift to the recipient and additional inheritance tax is due on the additional gift.
Calculating The Maryland Estate Tax
Maryland also has a state estate tax. This tax operates under rules similar to the federal estate tax. The tax casts a wide net in order to define what property is includable in the taxable estate. For example, a term life insurance property that had no little surrender value to the decedent during her lifetime is includible in the decedent’s estate at the value of the death benefit (although the death benefit may or may not be subject to the inheritance tax). Like with the federal estate tax, the inclusion of the death benefit of a life insurance policy for Maryland estate tax purposes can be mitigated with an irrevocable life insurance trust.
The threshold for the Maryland estate tax is currently $5 million. Unlike the federal estate tax, the credit amount is not indexed for inflation. Under current law, the threshold will only be adjusted by future legislation. Since 2019, the Maryland estate tax allows any unused credit amount to be transferred to a surviving spouse. This is called “portability.” This means that if a timely Maryland estate tax return (MET1) is filed, the surviving spouse may carry forward the unused portion of the $5 million shield until the surviving spouse’s death, whereupon it is used on the surviving spouse’s estate. This permits a couple to double up their estate tax threshold and shield $10 million from the Maryland estate tax.
“Portability is an important right which can only be preserved by the filing of a timely Maryland estate tax return. It is a take it or lose it situation. Because of the unlimited marital deduction under both Maryland and federal estate tax rules, it may not be obvious that you should file a tax return when there is no current tax due. If the combined estate is, or may become, over $5 Million at the second death, not filing the return exposes the estate to a Maryland estate tax at the surviving spouse’s death,” says Anne Franke, a CPA who assists in estate administration, including preparing estate and trust tax returns, for the Annapolis estates and trusts law firm of Franke, Sessions & Beckett, LLC.
The tax rate for the Maryland estate tax is graduated. It starts at 8% and tops out at 16%. The tax rate is ultimately dependent on the size of the estate. Furthermore, the state of Maryland does not track lifetime gifts under its estate tax law and thus does not include the value of lifetime gifts for estate tax purposes. This contrasts with federal law which has unified its gift and estate taxes.
The Impact Of The Federal Estate Tax On Maryland Estates
Maryland’s estates and trusts are also subject to the federal estate tax. Under current federal law, the threshold for taxability is $11 million indexed for inflation. In 2019, inflation increased the credit amount so that an individual can shield $11.4 million for 2019. As with the Maryland estate tax, the federal estate tax provides for portability of any unused unified credit amount. To elect portability, a surviving spouse must file a timely federal estate tax return making the election to carry forward the unused credit. The tax rate for the federal estate tax is 40%. When combined with the Maryland estate tax, the combined rate approximates about 50% of the value of the taxable assets.
Income Taxes Apply To Estates And Trusts
Maryland estates and trusts are also subject to income taxes, which taxes are separate and apart from death taxes. The income generated by the principal of the estate or trust is subject to income taxation. For example, a stock held by an estate receives a dividend. That divided may be subject to both the Maryland and federal income tax. Accordingly, Maryland fiduciaries may need to file Maryland and federal estate/trust income tax returns (IRS Form 1041 and Maryland Form 504).
An Estate Administration Lawyer Can Help You
Navigate Through the Various Estate/Trust Taxes
During the estate or trust administration, the personal representative of the probate estate and/or the successor trustee of a revocable trust serving as a will substitute makes decisions on how various taxes are handled. Some of the taxes are interrelated. Therefore, a decision made on one tax issue may influence the tax due on a different issue. Furthermore, the tax rates for the various taxes vary widely and it may be cheaper, for example, to pay income taxes then pay estate taxes. Thus, it is important that the person handling the estate or trust administration obtain competent counsel for guidance on these issues.
For over 35 years, the law firm of Franke, Sessions & Beckett, LLC has concentrated on the law of estates and trusts – including helping hundreds of clients with Maryland taxes during estate and trust administration. We prepare estate and trust federal and Maryland tax returns with our in-house CPA so we can offer seamless administration services from beginning to end. Our Maryland estate administration attorneys and staff have the experience, training and knowledge to guide clients through the process to ensure that the Maryland estate and trust administration is handled properly. In order to schedule a consultation, call 410-263-4876 to get in touch with our Annapolis office.