In a perfect world, we would all have a refined, comprehensive estate plan, so that when we die, we know exactly what will happen to our assets. Dealing with death is not easy, and having to clear up a poorly written estate plan can make it worse. At our trusts and estates law firm, we make it our business to prevent confusion. We engage in estate planning by looking ahead and planning for the future so that our clients can have clarity, knowledge, and peace of mind that their loved ones will be cared for in the manner they wanted.
Our firm, however, does more than estate planning. We also have a robust practice involving estate and trust administration. If you have been appointed as a personal representative of a loved one’s estate or as a trustee of a trust, you may not know what to do and it is easy to feel helpless. We can guide you through the administration process and help you navigate the probate court, taxing authorities, and other hurdles of administration.
If you are looking for an attorney who can help you administer an estate or a trust, there are many things with which you are probably unfamiliar. This page explains some basic terms that you will undoubtedly hear as you begin the process of administering the estate or trust that your loved one left behind. The more prepared you can be going into this process, the better off you will be.
What is a fiduciary?
A fiduciary is a person who has a legal duty to manage property for the benefit of another person or persons. There are several types of fiduciaries, including an executor or personal representative appointed under a will, a trustee appointed in a trust agreement, or an agent appointed by a power of attorney.
If you have been appointed as the fiduciary of a loved one’s estate, you typically do not have power to administer the estate until the state probate court officially grants you legal power. In Maryland, the county Orphans’ Court issues a Letter of Administration that gives the fiduciary legal power to deal with the assets in an estate. If you have been appointed as a personal representative, we recommend seeking professional legal counsel from an estates and trusts attorney located in Maryland or Annapolis. The legal process of administering an estate can be foreign, very complex, and quite costly if done incorrectly. Here at Franke Beckett LLC we work with you so that the administration of your loved one’s estate is streamlined and cost-effective.
What is a beneficiary?
A beneficiary is the person for whom the fiduciary manages property. For example, it is the trustee’s job to manage and invest trust principal so that it benefits the beneficiary. If the trustee does not do his or her job correctly or decides to abscond with the trust property, the beneficiary can sue the trustee for breaching his or her fiduciary duty. Thus, the beneficiary has enforceable rights in the trust property.
It is important to keep in mind that in the realm of trust law, there are no policemen patrolling the actions of trustees. In other words, if you are a beneficiary of an estate or trust and suspect that the fiduciary is doing something incorrectly, you may want the help of an attorney who can look into the matter to make sure that the fiduciary is acting on your behalf. If the fiduciary is failing in their duties, it may be appropriate to ask a court to remove them and recover any amounts wrongfully distributed from the trust or estate. This area of estate and trust law is known as fiduciary litigation, which is yet another branch of our firm.
Will you be taxed on your inheritance? If so, how much and when will you be taxed?
Many people are surprised to learn that they might have to pay taxes on their inheritance. It is important to understand that taxes come in different types. There is a federal income tax, a federal estate tax, and a federal gift tax. States also have their own tax schemes. Maryland, for example, has an income tax, an estate tax, and an inheritance tax. All or some of these taxes may be important to the administration of an estate or trust.
Many people are familiar with income taxes because we must file an income tax return every year. The income tax is levied on money that is earned by a taxpayer during a calendar year. This can also be true for estates and trusts. An estate or trust may have to pay income tax on income earned each calendar year during its existence. Thus, if a trust earned $50,000 through its investments and added that income to the principal of the trust, the trust may have to pay income tax on the $50,000.
Income taxes are also important for beneficiaries. If a trust makes a distribution to a beneficiary, that distribution may be counted as income to the beneficiary. Thus, a distribution from a trust can cause a beneficiary to cross over into a higher income tax bracket. Because trusts reach the highest income tax bracket at a very low income threshold, it is important for the trustee to understand how trust distributions affect that taxation of the beneficiary and the trust before distributions of income are made, if such distributions are allowed under the terms of the trust.
The capital gains tax is an income tax. When a taxpayer sells property that has appreciated in value since the time of purchase, the taxpayer has income to the extent of the appreciation, and the taxpayer is required to pay a capital gains tax on that appreciation. A taxpayer, however, can avoid the capital gains tax through careful estate planning with a benefit known as the “step up” in basis rule. Under this rule, a taxpayer can hold onto an asset until death and then pass the asset to his or her beneficiary. When the asset is passed on to the beneficiary, the asset’s basis is “stepped up” to its full market value as of the date of death of the decedent-owner; this “step up” in basis causes the appreciation contained in the asset to be erased. Therefore, when the asset lands in the hands of the beneficiary, the basis of the asset equals the fair market value of the asset, and the beneficiary can sell the asset without having to pay a capital gains tax on the asset. This planning technique can be very important when a taxpayer has held real estate or stock for a very long period of time. However, it might also be detrimental under the estate tax for the decedent to retain assets. Therefore, it is important to seek the advice of a competent attorney before creating an estate plan.
Income taxes are becoming more important in estate planning because the federal and state estate tax credit amounts are increasing. Under federal law, the estate unified credit amount is $5.43 million dollars. This means that your estate must exceed $5.43 million dollars before it will be taxed. Maryland’s estate tax credit is quite a bit lower. In 2015, it equals $1.5 million. However, by 2019, Maryland’s estate tax credit amount will equal the federal credit amount. The estate tax is only imposed if the value of your assets exceeds the credit amount in the year you die.
In addition to the income and estate tax, Maryland imposes an inheritance tax. The inheritance tax is levied according to the relationship between the beneficiary and the decedent, or the person who died. Lineal descendants, spouses, ancestors, brothers, and sisters of the decedent do not pay inheritance tax. However, friends, cousins, nephews, and nieces of the decedent are subject to the inheritance tax, which is 10 percent of the asset’s value. Thus, if you give $50,000 to your cousin living in Ocean City, your cousin will be required to pay $5,000 to the Register of Wills in inheritance tax. This amount can be paid from the bequest itself or from other funds of the recipient. This is especially important to remember when gifting real estate or illiquid assets. If you decide to gift your home to your nephew, he may have to sell the home in order to cover the inheritance taxes due on the bequest.
Taxes can be extremely confusing. If you are concerned about what taxes your estate or your loved one’s estate may be exposed to, you should consult with an estate and trust attorney. If you live in or near Annapolis, Maryland, the lawyers at Franke Beckett LLC can help you. We are an estates and trusts law firm in downtown Annapolis, proficient in all aspects of estate and trust law, from planning to administration to litigation to consulting.