Read more about the article Why You Need to File an Estate Tax Return – Annapolis and Towson Estate Planning
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Why You Need to File an Estate Tax Return – Annapolis and Towson Estate Planning

Even if your spouse has died and left all their assets to you and no estate tax is due, you still need to file an estate tax return. Doing so may save your family significant sums in estate taxes after your death, according to a recent article from Forbes, “5 Reasons You Must File An Estate Tax Return (Even When No Tax Is Due).”

The estate tax is a one-time tax due nine months after the date of death. The federal threshold in 2023 is $12,920,000 for an individual. Many states have their own estate taxes, with thresholds ranging from $1 million in Oregon and Massachusetts to $12,920,000 in Connecticut. Your estate planning attorney can advise which assets are included in calculating this amount. For example, many people are surprised to learn that proceeds from their life insurance policies are taxable on their death, unless the policy is owned in an irrevocable trust.

No estate tax is due if your assets are left to your surviving spouse because of the unlimited marital deduction. You get an unlimited deduction for the assets left to your spouse. Spouses can leave any amount to their surviving spouse tax-free, whether $2 or $2 million. However, there are reasons to file an estate tax return. The law requires it, even if the value of your estate assets is below the filing threshold.

If you’ve done estate planning, your spouse most likely has a trust that will break into various sub-trusts upon her death. As the surviving spouse, you’ll need to fund those trusts and apportion assets to them, which is done through the estate tax return. The estate tax return establishes the value of what those trusts are funded with.

Critical tax elections. When you file an estate tax return for your spouse, you’ll make certain elections to determine what assets are included in your estate when you die.

Tax savings for heirs. If your spouse has not used up all their $12,920,000 exemption, you can lock in their unused portion and port it to your estate tax return when you die. The portability of the deceased spouse’s unused exemption could potentially save your children millions of dollars in estate taxes in the future.

The combined exemption for two spouses is currently $25,840,000. The federal estate tax rate can be as high as 40%. By locking in the unused exemption, you could save more than $5 million in estate taxes that would otherwise be due on your death. Even if your assets are not in the $12 million to $25 million range, this is still smart because your assets could increase in value, and the estate tax thresholds are scheduled to drop to $5 million in 2026 (adjusted for inflation).

More tax savings for grandchildren. If your spouse has yet to use all of their general-skipping transfer tax (GST Tax) exemption, you can lock in their remaining GST Tax exemption. The GST Tax is a 40% tax on assets, if you “skip” your children and leave them directly to your grandchildren or in a trust that will eventually be distributed to them. The amount of GST Tax exemption is the same as the estate tax exemption, $12,920,000 per person in 2023. Therefore, the amount is the same, but they are different taxes.

Questions? Contact us to schedule a call with one of our experienced estate planning attorneys.

Reference: Forbes (May 10, 2023) “5 Reasons You Must File An Estate Tax Return (Even When No Tax Is Due)”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article What You Need to Know About Estate Taxes – Annapolis & Towson Estate Planning

What You Need to Know About Estate Taxes – Annapolis & Towson Estate Planning

Most Americans don’t have to worry about federal estate and gift taxes. However, if you’re even moderately wealthy and want to transfer wealth to your children and grandchildren, you’ll want to know how to protect your ability to pass wealth to the next generation. A recent article from Woman’s World, “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance” provides a good overview of estate taxes. If any of these issues are relevant to you, meet with an experienced estate planning attorney to learn how your state’s tax laws may impact your children’s inheritance.

A well-created estate plan can help you achieve your goals and minimize tax liability. There are three types of taxes the IRS levies on gifts and inheritances.

Few families worry about federal estate taxes for now. However, this will change in the future and planning is always wiser. In 2023, the federal estate tax exemption is $12.92 million. Estates valued above this level have a tax rate of 40% on assets. People at this asset level usually have complex estate plans designed to minimize or completely avoid paying these taxes.

An estate not big enough to trigger federal estate taxes may still owe state estate taxes. Twelve states and the District of Columbia impose their own state taxes on residents’ estates, ranging from 0.8 percent to 20 percent, and some have a far lower exemption level than the federal estate tax. Some begin as low as $one million.

Six states impose an inheritance tax ranging between 10 percent and 18 percent. The beneficiary pays the tax, even if you live out of state. Spouses are typically exempt from inheritance taxes, which are often determined by kinship—sons and daughters pay one amount, while grandchildren pay another.

Taxpayers concerned about having estates big enough to trigger estate or inheritance taxes can make gifts during their lifetime to reduce the estate’s tax exposure. In 2023, the federal government allows individuals to make tax-free gifts of up to $17,000 in cash or assets to as many people as they want every year.

A couple with three children could give $17,000 to each of their children, creating a tax-free transfer of $102,000 to the next generation ($17,000 x 3 children x 2 individuals). The couple could repeat these gifts yearly for as long as they wished. Over time, these gifts could substantially reduce the size of their estate before it would be subject to an estate tax. It also gives their heirs a chance to enjoy their inheritance while their parents are living.

It should be noted that gifts over $17,000 in 2023 count against the individual estate tax limit. Therefore, your federal estate tax exemption will decline if you give more than the limit. This is why it’s essential to work with an estate planning attorney who can help you structure these gifts and discuss other estate tax and asset protection strategies.

Questions? Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Woman’s World (April 5, 2023) “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article Do I Need an Estate Planning Attorney? Annapolis and Towson Estate Planning

Do I Need an Estate Planning Attorney? Annapolis and Towson Estate Planning

Sound estate planning can help minimize taxes and expenses associated with transferring your assets and property after your death, says Urban Asia’s recent article entitled “Why Is It Important To Hire An Estate Planning Attorney.”

An experienced estate planning attorney can help you with your estate planning goals efficiently, avoiding legal processes that can be time-consuming and costly. Estate planning through an attorney can help you, and your loved ones avoid legal complications or unwanted delays.

What are the benefits of hiring an experienced estate planning attorney?

  • Legal expertise: They have specialized knowledge of the laws and regulations governing probate and estates. They can advise you on the best plan to suit the utilization of your assets and needs, and make sure that your estate planning complies with all applicable laws.
  • Tax implications: Estates can have tax implications. An experienced estate planning attorney can advise you on how to structure your estate plan to minimize taxes and maximize the benefits for your beneficiaries.
  • Customization: They can help customize your estate plan to suit your individual needs and goals.
  • Protection of beneficiaries: Estate planning attorneys can help protect your heirs’ interests by ensuring that your will and trust are administered correctly. They can help assure that all your assets are protected from creditors and other legal claims.
  • Charitable giving: An estate planning attorney can advise you on how to make philanthropic gifts, either during your lifetime or at death, through charitable trusts or other charitable giving vehicles.
  • Incapacity planning: They can help you plan for incapacity by creating a power of attorney or living will to let you specify how your assets and property should be managed, if you are unable to decide for yourself.

Finding the right attorney for estate planning can be a challenging task. Estate planning can be complex, and selecting an attorney with experience and expertise in this discipline is essential. Therefore, look for an attorney with plenty of experience in estate planning.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Urban Asia (Jan. 22, 2023) “Why Is It Important To Hire An Estate Planning Attorney”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article Giving to My Favorite Charity in Estate Plan – Annapolis and Towson Estate Planning

Giving to My Favorite Charity in Estate Plan – Annapolis and Towson Estate Planning

If you’d like to leave some or all of your money to a charity, Go Banking Rates’ recent article entitled “How To Leave Your Inheritance to an Organization” provides what you need to know about charitable giving as part of your estate plan.

  1. Make Sure the Organization Accepts Donations. Unless you have a formal agreement with the charity stating they’ll accept the inheritance, the confirmation isn’t a binding commitment. As a result, you should ask the organization if there’s any form language that they may want you to add to your will or trust as part of a specific bequest. If the charity isn’t currently able to accept this kind of donation, look at what they will accept or if other charities with a similar mission will accept it.
  2. Set the Amount You Want the Charity To Receive. Some people want to leave the estate tax exemption — the maximum amount that can pass without tax — to individuals and leave the rest to charity. Because the estate tax exemption is subject to change and the value of your assets will change, the amount the charity will get will probably change from when the planning is completed.
  3. Have a Plan B in the Event that the Charity Doesn’t Exist After Your Death. Meet with your estate planning attorney and decide what happens to the bequest if the organization you’re donating to no longer exists. You may plan ahead to pass along the inheritance to another organization and make sure it receives the funds. You could also have the inheritance go back into the general distributions in your will.
  4. State How You Want Your Gift to Be Used. If there is a certain way that you’d like the charity to use the inheritance, you can certainly inquire with the organization and learn more. Find out if the charity accepts this type of restriction, how long it may last and what happens if the charity no longer uses it for this purpose.

As you draft charitable planning provisions, make sure you do so alongside an experienced estate planning attorney.

The provisions in your will should be specific about your desires and provide enough flexibility to your personal representative, executor, or trustee to be modified based on the conditions at the time of your death.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Go Banking Rates (August 26, 2022) “How To Leave Your Inheritance to an Organization”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article What’s a Bequest? Annapolis and Towson Estate Planning

What’s a Bequest? Annapolis and Towson Estate Planning

 

Yahoo’s recent article entitled “Bequests vs. Gifts: Which One Do I Need?” explains that a bequest is the personal property given to beneficiaries through the terms of a will when the original owner dies. A bequest can be cash, stocks, bonds, art, jewelry, or other personal items. However, it can’t be real estate: when real estate is given to another person through a will or trust, it’s known as a devise.

There are four distinct types of bequests: specific, general, demonstrative and residuary. A specific bequest is the transfer of a particular asset, like jewelry, artwork, or automobiles, to a specific person. A general bequest is a gift, typically money, given from the person’s general assets (rather than from a specific asset). A demonstrative bequest is a gift that comes from a stated source like a bank account or retirement fund. Finally, a residuary bequest is a gift made after all debts are paid by the estate and other bequests are made.

You can also direct assets to be left to a nonprofit organization, like a religious or educational institution, as a charitable bequest. Charitable bequests can be specific, general, demonstrative, or residuary.

What distinguishes a bequest from a gift is when and how it’s given. While a bequest is property a person leaves to a beneficiary through a will following their death, a gift is given when someone is still alive.

When a person dies, their estate may be subject to one or more taxes called “death taxes.” These include the federal estate tax, state estate taxes and state inheritance taxes. However, most Americans don’t have to worry about paying federal estate taxes because they only apply to estates worth more than $12.92 million per individual ($25.84 million for married couples). Estates below this are exempt from this tax. Estates that exceed the exemption limit are taxed based on how far over the cap they go.

In addition to the federal taxes, some states charge their own estate taxes with separate exemption limits and rates. These states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington and the District of Columbia.

Finally, a few states have inheritance taxes, which are paid by beneficiaries who inherit property. This is different from estate taxes, which are paid by the estates themselves before property is transferred to beneficiaries. The states with inheritance taxes are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The Iowa state legislature voted to repeal its inheritance tax in 2021, and the tax will be gradually phased out until it is fully repealed in 2025.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Yahoo (Jan. 16, 2023) “Bequests vs. Gifts: Which One Do I Need?”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Is Included in an Estate Inventory? – Annapolis and Towson Estate Planning

The executor’s job includes gathering all of the assets, determining the value and ownership of real estate, securities, bank accounts and any other assets and filing a formal inventory with the probate court. Every state has its own rules, forms and deadline for the process, says a recent article from Yahoo! Finance titled “What Do I Need to Do to Prepare an Estate Inventory for Probate,” which recommends contacting a local estate planning attorney to get it right.

The inventory is used to determine the overall value of the estate. It’s also used to determine whether the estate is solvent, when compared to any claims of creditors for taxes, mortgages, or other debts. The inventory will also be used to calculate any estate or inheritance taxes owed by the estate to the state or federal government.

What is an estate asset? Anything anyone owned at the time of their death is the short answer. This includes:

  • Real estate: houses, condos, apartments, investment properties
  • Financial accounts: checking, savings, money market accounts
  • Investments: brokerage accounts, certificates of deposits, stocks, bonds
  • Retirement accounts: 401(k)s, HSAs, traditional IRAs, Roth IRAs, pensions
  • Wages: Unpaid wages, unpaid commissions, un-exercised stock options
  • Insurance policies: life insurance or annuities
  • Vehicles: cars, trucks, motorcycles, boats
  • Business interests: any business holdings or partnerships
  • Debts/judgments: any personal loans to people or money received through court judgments

Preparing an inventory for probate may take some time. If the decedent hasn’t created an inventory and shared it with the executor, which would be the ideal situation, the executor may spend a great deal of time searching through desk drawers and filing cabinets and going through the mail for paper financial statements, if they exist.

If the estate includes real property owned in several states, this process becomes even more complex, as each state will require a separate probate process.

The court will not accept a simple list of items. For example, an inventory entry for real property will need to include the address, legal description of the property, copy of the deed and a fair market appraisal of the property by a professional appraiser.

Once all the assets are identified, the executor may need to use a state-specific inventory form for probate inventories. When completed, the executor files it with the probate court. An experienced estate planning attorney will be familiar with the process and be able to speed the process along without the learning curve needed by an inexperienced layperson.

Deadlines for filing the inventory also vary by state. Some probate judges may allow extensions, while other may not.

The executor has a fiduciary responsibility to the beneficiaries of the estate to file the inventory without delay. The executor is also responsible for paying off any debts or taxes and overseeing the distribution of any remaining assets to beneficiaries. It’s a large task, and one that will benefit from the help of an experienced estate planning attorney.

Reference: Yahoo! finance (Dec. 3, 2022) “What Do I Need to Do to Prepare an Estate Inventory for Probate”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article Why Do I Need an Estate Plan? – Annapolis and Towson Estate Planning

Why Do I Need an Estate Plan? – Annapolis and Towson Estate Planning

Money Talks News’ recent article entitled “Why Everyone Needs an Estate Plan” reminds us that estate plans aren’t just for the wealthy. People of all ages and income levels can benefit from drafting an estate plan. An estate plan provides instructions about how your assets will be distributed, as well as how you’ll pay for your debts, final arrangements and even your medical care if you become incapacitated.

With everything stated explicitly in an estate plan, your family can work through their grief after your death instead of battling each other about who gets what.

An estate plan describes your wishes regarding how assets such as your house, vehicle bank accounts, investments and valuables will be transferred to your beneficiaries after you die. Most of this is included in your will. You’ll also name the executor of your estate in your will, as well as a guardian for your minor children, and even someone to take care of your pets when you’re no longer here.

Many people will confuse an estate plan with a will. However, that’s just a part of a comprehensive estate plan. There is much more involved in an estate plan than just who gets what after you die. An estate plan can also include your wishes, if you’re medically unable to manage your own affairs. Your plan can designate your durable power of attorney (DPA), who can make medical and financial decisions in your stead, along with medical directives on what medical procedures you do or don’t want to prolong your life.

One of the most compelling reasons to have an estate plan is that it can help avoid probate and prevent your family from winding up in court to access the assets you’ve left behind for them. Another reason to have an estate plan is to help reduce any estate or inheritance taxes imposed on your estate when your assets are transferred to your beneficiaries.

Federal estate taxes typically only apply to the very wealthy. In 2022, the threshold, or estate tax exemption, is $12.06 million, for 2023 that number is $12.93 million.

Unless your assets are valued over the applicable exemption in the year of death, you’re exempt from federal estate taxes. However, while you may be exempt from federal-level estate taxes, the state you live in may impose its own estate taxes. Some states also levy inheritance taxes on beneficiaries who receive assets from your estate.

If you are interested in designing your estate plan, contact us to speak with one of our experienced estate planning attorneys.

Reference: Money Talks News (Oct. 21, 2022) “Why Everyone Needs an Estate Plan”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

The Difference between Revocable and Irrevocable Trust – Annapolis and Towson Estate Planning

A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” And not everyone needs a trust. For some, a will may be enough. However, if you have substantial assets you plan to pass on to family members or to charity, a trust can make this much easier.

There are many different types of trusts you can establish, and a revocable trust is a trust that can be changed or terminated at any time during the lifetime of the grantor (i.e., the person making the trust). This means you could:

  • Add or remove beneficiaries at any time;
  • Transfer new assets into the trust or remove ones that are in it;
  • Change the terms of the trust concerning how assets should be managed or distributed to beneficiaries; and
  • Terminate or end the trust completely.

When you die, a revocable trust automatically becomes irrevocable, and no further changes can be made to its terms. An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust must stay in the trust. You can’t add or remove beneficiaries or change the terms of the trust.

The big advantage of choosing a revocable trust is flexibility. A revocable trust allows you to make changes, and an irrevocable trust doesn’t. Revocable trusts can also allow your heirs to avoid probate when you die. However, a revocable trust doesn’t offer the same type of protection against creditors as an irrevocable trust. If you’re sued, creditors could still try to attach trust assets to satisfy a judgment. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die.

In addition to protecting assets from creditors, irrevocable trusts can also help in managing estate tax obligations. The assets are owned by the trust (not you), so estate taxes are avoided. Holding assets in an irrevocable trust can also be useful if you’re trying to qualify for Medicaid to help pay for long-term care and want to avoid having to spend down assets.

But again, you can’t change this type of trust and you can’t act as your own trustee. Once the trust is set up and the assets are transferred, you no longer have control over them.

Contact us to speak with one of our experienced estate planning attorneys to see if a revocable or an irrevocable trust is best or whether you even need a trust at all.

Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Will Making a Gift Conflict with Medicaid? – Annapolis and Towson Estate Planning

People usually make gifts for three reasons—because they enjoy giving gifts, because they want to protect assets, or minimize tax liability. However, gifting in one’s elder years can have expensive and unintended consequences, as reported in the article “IRS standards for gifting differ from Medicaid” from The News-Enterprise.

The IRS gift tax becomes expensive, if gifts are large. However, each individual has a lifetime gift exemption and, as of this writing, it is $12.06 million, which is historically high. A married couple may make a gift of $24.12 million. Most people don’t get anywhere near these levels. Those who do are advised to do estate and tax planning to protect their assets.

The current lifetime gift tax exemption is scheduled to drop to $5.49 million per person after 2025, unless Congress extends the higher exemption, which seems unlikely.

The IRS also allows an annual exemption. For 2022, the annual exemption is $16,000 per person. Anyone can gift up to $16,000 per person and to multiple people, without reducing their lifetime exemption.

People often confuse the IRS annual exclusion with Medicaid requirements for eligibility. IRS gift tax rules are totally different from Medicaid rules.

Medicaid does not offer an annual gift exclusion. Medicaid penalizes any gift made within 60 months before applying to Medicaid, unless there has been a specific exception.

For Medicaid purposes, gifts include outright gifts to individuals, selling property for less than fair market value, transferring assets to a trust, or giving away partial interests.

The Veterans Administration may also penalize gifts made within 36 months before applying for certain VA programs based on eligibility.

Gifting can have serious capital gains tax consequences. Gifts of real estate property to another person are given with the giver’s tax basis. When real property is inherited, the property is received with a new basis of fair market value.

For gifting high value assets, the difference in tax basis can lead to either a big tax bill or big tax savings. Let’s say someone paid $50,000 for land 40 years ago, and today the land is worth $650,000. The appreciation of the property is $600,000. If the property is gifted while the owner is alive, the recipient has a $50,000 tax basis. When the recipient sells the property, they will have to pay a capital gains tax based on the $50,000.

If the property was inherited, the tax would be either nothing or next to nothing.

Asset protection for Medicaid is complicated and requires the experience and knowledge of an elder law attorney. What worked for your neighbor may not work for you, as we don’t always know all the details of someone else’s situation.

Reference: The News-Enterprise (Aug. 6, 2022) “IRS standards for gifting differ from Medicaid”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Some States Have Tough Estate and Inheritance Taxes – Annapolis and Towson Estate Planning

For now, most people don’t have to be scared of federal estate taxes. In 2022, only estates valued at $12.06 million or more for an individual ($24.12 million or more for a married couple) need to pay federal estate taxes. Even better for the very wealthy, there’s no federal inheritance tax for heirs who reside in such lofty economic brackets, notes the recent article titled “States with Scary Death Taxes” from Kiplinger.

By definition, estate taxes are paid by the estate and based on the estate’s overall value, while inheritance taxes are paid by the individual who inherits property, assets, or anything else of value. This isn’t to say “regular people” don’t need to worry about death taxes. We do, because states have their own estate taxes, and a few still have inheritance taxes.

A number of states eliminated estate taxes in the last ten years or so, in an effort to keep retirees from leaving and heading to places like Florida, where there’s no estate tax. However, a dozen states and the District of Columbia still have estate taxes, six states have an inheritance tax and one has both an estate and inheritance tax: Maryland.

Here’s how some state taxes look in 2022:

Connecticut has an estate tax, with an exemption level at $7.1 million. However, there is no inheritance tax. The Nutmeg state is the only state with a gift tax on assets gifted during one’s life.

The District of Columbia has an estate tax, with an exemption level of $4 million.

Hawaii’s estate tax exemption level is $5.49 million., one of the higher state estate tax exclusions, and is not adjusted for inflation.

Illinois’s estate tax is $4 million, but there’s no inheritance tax. It’s known as one of the least taxpayer friendly states in the country for retirees.

Iowa is phasing out inheritance taxes, but this doesn’t take effect until 2025. In the meantime, there’s no estate tax, and if the estate is valued at less than $25,000, there’s no inheritance tax. No taxes are due on property inherited by a lineal ascendent or descendent, but for other family members, the taxes range from 8%—12%.

There’s no estate tax in Kentucky. However, depending upon your relationship to the person who died and the value of the property, the inheritance tax is 4% to 16%.

Maine has an estate tax exemption of $5.87 million, but no inheritance tax.

Maryland’s has both an estate tax exemption of $5 million and a flat 10% inheritance tax (on transfers to individuals who are not direct relatives (e.g. – cousins, nephews, friends, etc.)

Massachusetts has no inheritance tax and a $1 million estate tax exemption.

Minnesota has a low estate tax exemption of $3 million. Any taxable gifts made three years prior to death are included.

New York, New Jersey, Rhode Island, Oregon, Vermont and Washington have no inheritance taxes, while Pennsylvania has no estate tax but does have an inheritance tax.

It’s not necessary to move purely to avoid estate or inheritance taxes. An experienced estate planning attorney uses strategic tax planning as part of an estate plan, minimizing tax liability and preserving assets.

Contact our office to schedule a preliminary call with one of our experienced estate planning attorneys to review your estate plan and determine whether there are strategies to reduce or eliminate estate or inheritance taxes.

Reference: Kiplinger (July 29, 2022) “States with Scary Death Taxes”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys