Probate and Estate Taxes in Bethesda

During the administration of an estate in Bethesda, often, the gross taxable estate and the probate estate are discussed. The gross taxable estate or the assets that are subject to the estate tax are all of the assets in a decedent’s control on the date of death regardless of titling or beneficiary designation. The probate estate is those assets that are only in the decedent’s sole name on the date of death.

If you are going through the probate process in Bethesda and are looking for legal guidance on how estate taxes are relevant in your case, it is critical that you contact a lawyer immediately.

Inheritance Tax

While all assets are part of the gross taxable estate, not all assets may be part of the probate estate in Bethesda. Currently, there are two estate taxes that are reviewed along with inheritance tax. Inheritance tax is collected by the Register of Wills office for Montgomery County. Inheritance tax is a tax dealing with the right to receive assets. Generally, the tax is 10 or 11%, but many individuals may be exempt from inheritance tax.

All lineal heirs such as children, grandchildren, spouse, brothers, and sisters are exempt from inheritance tax along with charitable institutions. However, nieces, nephews, and friends are not exempt. The inheritance tax is a one-time tax that is taxed on the amount of distribution that goes to the non-exempt individual. The estate tax is a tax on the right to distribute their assets at death.

Federal Estate Tax

The Federal Estate Tax was made permanent in 2013 by the American Tax Payer Relief Act. The American Tax Payer Relief Act or ATRA reinstituted the estate tax in Bethesda but only for estates that are 5 million dollars and above. Generally, there is only 0.02% of the country that is subject to the Federal Estate Tax.

When the tax was made permanent in 2013, the congress also instituted a concept called portability. Portability allowed for a surviving spouse to use their last deceased spouse’s unused exemption in the event that they were married at the time of death and the surviving spouse is a US citizen. Generally, this means that at a death of one spouse, the surviving spouse may be able to preserve any exemption not used.

The Federal Estate tax is indexed every year for inflation. For the year of 2017, each individual is allotted an exemption of $5,490,000 which often allows for almost $11 million in assets to pass free of the Federal Estate Tax if portability is utilized. If a Federal Estate tax is due, however, the maximum tax rate is 40%. Maryland passed its own law to increase the estate tax from million dollars to the Federal estate filing threshold by 2019. Therefore, in 2017, that amount is three million and it will incrementally increase until the 2019 year. Until 2019, Maryland does not recognize the concept the portability, a wrinkle in the estate tax system currently.

The new administration has proposed repealing the Bethesda estate tax in its entirety and instead introducing a capital gain tax system. With limited knowledge on how this will operate, it is hard to predict how the State of Maryland may address or move forward with its estate tax. Currently, the Maryland Estate tax is based in part on the Federal Estate tax system.  For example, the Federal form 706 must be completed and filed along with the Maryland Estate Tax Return, even if it is not required to be filed with the United States Treasury.

Life Insurance

Many individuals use life insurance as a wealth generator at death to provide for the financial future of their loved ones and their families. It is not uncommon, especially in this area for individuals, to have fairly large life insurance policies.

If, for example, an individual may have died leaving a 5 million or 6 million dollar life insurance policy to their spouse and that was the only asset of the estate.  In that case, there would be no probate estate because the life insurance policy had a beneficiary designation and so that the policy would pass by operation of law directly to the surviving spouse who was the named beneficiary and there would be no assets subject to the probate administration procedure.

However, because the asset exceeded the 5 million dollar Federal Estate Tax filing threshold, there would be a Federal Estate Tax return due nine months from the date of death and in that particular case there may be no taxes due because of the benefits of a concept called the marital deduction at the death of the first spouse. But a return would be required because the estate exceeded to a 5 million dollar filing for the $5,490,000 filing threshold and it may be a benefit to the surviving spouse to file said return because then they could preserve any unused portability.

Paying the Tax

One of the ways that the estate tax relates to the probate estate or the taxable estate in Bethesda is a concept of liquidity. It is not uncommon for an estate to be subject to an estate tax and without proper planning, the estate may not have sufficient assets available to pay any of the required taxes. Both the Federal estate and the Maryland estate tax is due nine months from the date of death, which is not a very long time to liquidate assets if that is a requirement to pay a tax burden.

While an individual can request a six-month extension to file the return for both the United States Treasury and the Comptroller of Maryland, there is limited availability to extend the payment of the taxes due. Generally, the probate administration in Bethesda is somewhat separate from the filing of a tax return and in fact tax returns may be due even in the event that there is no probate estate.

Minimizing Payment

One easy way to plan to reduce exposure to estate taxes is with proper estate planning long before an individual passes away. Estate planning attorneys can help analyze anticipated tax exposure at death. Attorneys can usually offer a number of strategies to minimize the estate tax whether that be gifting assets or freezing assets at a lower cost basis or just using very flexible techniques to maximize each spouses’ assets.

All of that typically should be done prior to someone’s passing while there are some opportunities available for the surviving spouse. Those opportunities become far more limited where estate planning has not been done long before the death of a first spouse.

Benefit of an Attorney

It may be helpful to speak with an estate planning attorney long before death so that planning for taxes can be done through the use of a complete and comprehensive estate plan. A probate attorney can assist after death in reviewing estate assets and determine whether an estate tax is due.

A probate attorney can also assist with preparing and filing the estate tax return and advising on whether there are any post-mortem opportunities for the surviving spouse or surviving loved one to reduce the exposure to estate taxes.  A probate attorney may also assist with marshaling the assets and creating a complete inventory of the assets so that the estate tax return can be properly prepared.