When newspapers reported about the demise of Mark Twain, the American author and humorist quipped that “rumors of my death have been greatly exaggerated.” More than a century later, the same could be said of the federal estate tax, which is effectively defunct for all but the richest Americans.
Under the tax bill signed into law on December 22, 2017, individuals can leave behind more than $11.2 million in wealth without triggering the tax. For them, the “death tax” is dead, at least until the law sunsets in 2026. But even for those of us who aren’t exactly rich, other death taxes may still be due once we are out of the picture. Careful planning can keep them to a minimum.
In Maryland, a 10 percent inheritance tax applies to any bequest left to a friend, an unmarried partner, or a distant relation (including a niece or nephew). Same-sex couples and other members of Maryland’s LGBT community tend to be disproportionately affected by this tax. With proper planning, however, the tax can sometimes be avoided.
For example, if you and your partner are not married and own a house together as joint tenants, you can prepare an Affidavit of Domestic Partnership to exempt the property from the inheritance tax. Without the affidavit to verify the partnership, the survivor would have to pay a tax of 10 percent of half of the value of the house when one partner dies. That would mean a hefty $20,000.00 tax bill on a $400,000.00 property.
Most of us will now avoid the federal estate tax, but other “death taxes” may still apply.
For bequests to nieces and nephews, the simplest way to sidestep the inheritance tax is to leave the bequest to their parents—your siblings—rather than the children directly. These bequests can be made with the understanding that they are intended to benefit the children, but there is of course no guarantee that this will happen.
A more effective option is to set up a “Crummey trust” for a niece and nephew you wish to benefit. After the trust is established, you can transfer up to $15,000.00 a year into it. (Each transfer is considered a gift, and annual gifts of up to $15,000.00 are exempt from the federal gift tax.) Provided that the beneficiary leaves the money in the trust, the assets will accumulate over the years and then pass to the niece or nephew tax-free upon your death.
The other death tax that may still apply is the Maryland estate tax. This year at least, estates that are small enough to avoid federal taxation may still be subject to taxes in Maryland. The Maryland exemption is $4 million in 2018—a substantial amount, but considerably less than the federal exemption of $11.2 million. In 2019, Maryland’s exemption will increase to match the federal exemption and will remain “coupled” thereafter.
With proper planning, married couples can effectively double the federal estate-tax exemption under a rule called “portability.” And of course this rule applies to married same-sex and opposite-sex couples alike. Portability will take effect in Maryland starting in 2019.
When estate taxes do apply, the rates can be steep. In Maryland, they run up to 16 percent, and the federal rate is a whopping 40 percent.
Reports of Mark Twain’s demise were in fact exaggerated (it was actually Twain’s cousin who was ailing). But new tax laws aside, the importance of having your estate plan prepared by a professional simply cannot be overstated.