Taxes Involved in the Maryland Probate Process
When an individual who resided in the state of Maryland passes away there are three types of taxing that are considered. Clients may wish to hire an attorney to understand the interplay between the tax systems, to analyze the tax exposure, and to prepare estate tax returns. While our office does not prepare income tax returns, we do work with accountants and clients regarding post-mortem election that concern both income and estate taxes. If you would like to understand the post-mortem tax process more clearly, get in contact with an experienced Maryland probate attorney who can discuss your case with you in detail.
Income Tax
At the death of a Maryland resident there are three tax systems that may apply pursuant to the estate – inheritance tax, estate tax and income tax.
The first taxing system is income taxes. Federal and/or state income taxes may be due with the decedent’s final income tax returns and any fiduciary income tax returns may need to be filed.
The second type of possible federal tax implications are of course federal income taxes. Keep in mind, our office generally does not prepare income tax returns; however, income that accrued from January 1st to the date of the decedent’s death is taxed on the decedent’s final tax return which is due April 15th of the following year just as if the decedent had been alive. From the date of death forwards that income is reported on a fiduciary income tax return.
Estate Tax
The second taxing system is the estate tax. Estate taxes are commonly known as death taxes. Estate tax is essentially taxes on the right to pass your assets after your death. The most recent federal law enacted in 2013 provides for a $5 million exemption for each decedent. The exemption is indexed every year for inflation and currently for decedents dying in 2016, it is $5,450,000. The maximum tax rate is 40%.
Inheritance Tax
The third type of tax considered at the death of the decedent is inheritance tax which is specific to Maryland and is basically a tax on the right to inherit property. Inheritance tax is collected by the county where the estate is being administered.
Inheritance tax is a state tax and not a federal tax, but may have some effect on the federal taxes owed. Estate tax and income tax, however, have both Maryland and/or federal implications. The biggest tax that individuals are most familiar with and concerned with is the federal estate tax.
Federal Tax Exemptions
The federal state tax became permanent in 2013 and provides for a $5 million exemption per individual. This is indexed for inflation every year and currently for decedents dying in 2016, the exemption is $5,450,000.
When the law came back in 2013, a concept of portability was also enacted. The concept of portability is that the deceased spouse’s unused exemption can be preserved for the surviving spouse or ported to the surviving spouse for use.
For example, if there was a decedent that passed away that only used a million dollars of his or her exemption in 2016 then the remaining $4,450,000 may be used by his or her surviving spouse at the surviving spouse’s death. The surviving spouse would get both his and her individual exemption. For example, if the surviving spouse died later in 2016 then there would be $5,450,000 plus the $4,450,000 from the first spouse’s unused exemption.
There are limitations and the federal estate tax return must be filed timely to preserve the portability election.
Maryland Tax Exemptions
Maryland currently does not follow federal taxes and only offers an exemption of $2 million for the 2016 tax year. Legislation was recently passed to match the Maryland exemption to the federal exemption, but the match is not anticipated until 2019. The Maryland exemption is slated to increase incrementally until the 2019 tax year in which case it will match whatever the federal exemption rate is for decedent’s dying in that tax year.
In summary, both federal estate and federal income taxes may be due, that may be in conjunction to other state estate or state income taxes that are due as well.
Ways a Maryland Probate Attorney Can Help
A probate attorney assists with valuing all of the assets of the estate as of the date of the death to determine what the gross federal taxable estate is and to see what the exposure of the estate is to both federal and Maryland estate taxes. An attorney can value the assets and also prepare the federal or estate tax returns that may be due.
Federal and Maryland estate taxes are due 9 months from the decedent’s death so it is possible to apply for an extension to file the return but it is not possible to apply for an extension to pay the taxes in most cases. Therefore, it is important that as soon as possible after the decedent dies, you speak with an estate planning or probate attorney because that time starts to tick away from the date of death from when the return is due.
Minimizing Taxes the Beneficiary will Pay
There are several estate planning techniques that are used to minimize exposure to taxes that can be planned for during the lifetime of the decedent.
A common technique includes removing assets from a decedent’s estate. For example, during your lifetime, you may choose to give assets to charities, or gift assets up to the annual exclusion amount which is currently $14,000 to family members or friends in order to reduce the size of your estate.
Another common technique is to freeze assets at their current basis. There are several planning techniques that are used to do that; such as trusts, that are used to freeze assets at their current values so that the current value is included in the decedent’s estate taxes but any accumulated or accelerated value passes outside of the estate tax.
In general, estate planning can be a tool to minimize the amount of taxes that may be due and comprehensive estate planning may contemplate a decedent’s possible estate tax exposure.