Blog Taxes

You may have heard that last December Congress passed and President Obama signed the “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Authorization Act,” which made substantial changes to Federal Estate and Gift Tax laws.    The Act increased the unified Estate Tax credit resulting in an increase of the exemption equivalent (i.e. the amount under which an estate would not be subject to the Estate Tax) from $3.5 Million to $5 Million per decedent and for the first time introduced the concept of “portability.”   These changes are effective at least through 2012, at which time Congress must act if it wishes to extend the law.

Consequently, married couples may now shelter as much as $10 Million from the imposition of Federal Estate Taxes without implementing significant tax avoidance measures.   While this is certainly good news, one should not yet consider themselves safe from the specter of Estate Taxes.  Most states, including Maryland, decoupled their state Estate Tax regimes from the federal system ten (10) or more years ago and have retained significantly lower exemption equivalents.

For instance, Maryland imposes Estate Tax for estates in excess of $1 Million. And while Maryland estate tax rates are much lower than federal rates (Maryland’s maximum marginal estate tax rate is 16% and the federal rate is 35%), the difference in starting points means that significantly more Maryland decedents will pay Maryland Estate Taxes than Federal Estate Taxes. Since there is no portability for exemptions from Maryland Estate Taxes, the lack of planning may subject the estate of an unwary couple to an unnecessary level of taxation on the second $1Million left to its children.

This situation may be addressed by appropriate estate planning to avoid Maryland Estate Taxes by either leaving a significant inheritance to the next generation upon the death of the first spouse or by having the personal representative elect to treat a portion of the estate left in a trust for the surviving spouse (and ultimately to the next generation) as “qualified terminal interest property” for the purposes of Maryland Estate Tax law.

Therefore, it is important that you review your estate plan with an estate planning professional. Severn O’Connor & Kresslein, P.A., will work with you and your accountants or financial advisors to review your estate plan and determine whether such planning might be appropriate for you and your family.