One of the most frequent questions asked by potential clients is “how much tax am I going to have to pay on my estate”? While tax mitigation is certainly a consideration, the vast majority of people worry about this issue far too much in my opinion when it comes to estate planning. And notice how I used the phrase tax mitigation as opposed to tax avoidance. Most of us want to reduce the amount of taxes we pay. We want to pay our fair share but we would like to have that amount be as low as possible. This is different from tax avoidance where people manipulate their financial circumstances, sometimes illegally, to avoid paying taxes altogether.
One more word of caution. A short blog post like this can not take into account all of your tax liability issues. It would be a good idea to consult with a certified tax planner or tax attorney – particularly if your estate is something more than modest or complicated. With that said, there are essentially two categories of taxes involved in estate planning: estate tax and inheritance tax. So why do I say that most people worry too much about them? Because for most people they won't apply.
The Maryland estate tax is a state tax imposed on the transfer of property in a decedent's estate. The payment of the Maryland estate tax is due nine (9) months after the decedent's date of death. Importantly, the tax is levied on the gross estate which includes both probate and non-probate property. In other words, it does not matter if the property passes by virtue of a Will, a Trust, or by a beneficiary statement, or other means. If you have an ownership interest, it counts towards your gross estate on which an estate tax is imposed.
Sounds worrisome, right? Well, a large part of that gross estate is exempt and not counted or taxable. In Maryland, the first $5 million is exempt and not taxed! Let's face it, how many of us if we liquidated everything we own would have a pile of cash that exceeds $5 million? It's fabulous if you do, but most of us do not. But what about the federal estate tax? The good news gets even better. The federal exemption is currently $11.58 million for an individual and $23.16 million for a married couple! Now I said currently. Could the exemptions be reduced if a new administration is elected? Possibly. But the estate tax exemption has been such that the vast majority of people have not had to worry about it because their total gross estate has been less than the exemption. And that is likely to continue to be the case regardless.
The Maryland inheritance tax is a tax imposed on the privilege of receiving property. The tax is collected by the Register of Wills located in the county where the decedent either lived or owned property and is not due until the property is distributed from the estate. Such tax is levied on any transfer of property (Will, Trust, joint ownership, or otherwise). So who is the inheritance tax levied upon?
Currently, inheritance tax is NOT imposed on property passing to a child or other lineal descendant, spouse of a child or other lineal descendant, spouse, parent, grandparent, stepchild or stepparent, siblings, or a corporation having only certain of these persons as stockholders. Such a transfer is exempt from taxation. A tax of 10% is imposed on property passing to other all individuals. I like to say, that generally speaking if you leave an inheritance to a blood relative or their spouse it is exempt from inheritance tax. If you leave it to a neighbor, they have to pay the 10% tax. That's not exactly correct because a step-child or step-parent or closed corporation is not a blood relative. But you get the idea. One other thing, you can have the estate pay the inheritance tax off the top on behalf of the recipient so that their tax is paid for them. But you have to put that stipulation in your Will or Trust.
That is not the complete tax picture. As I said, you should consult with a tax professional for more detail. But that is the big picture and pretty sufficient understanding for most people. And it is why I say that most folks do not have to worry too much about the amount of taxes they will have to pay on their estate.
If you want to know how to set up your estate to mitigate the taxes your estate will have to pay, check with an estate planning attorney like The Tyra Law Firm, LLC. We would be happy to assist you.