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New Tax Law Calls for An Estate Plan Review

When was the last time you reviewed your estate plan?

Don’t assume that the new tax law means that you don’t need an estate plan. If anything, you need to review your estate plan to make sure you’re not missing out on any new opportunities.

25543329453_9991c191f2_oWhen was the last time you reviewed your estate plan? If it’s been more than a few years, you could be risking making some big mistakes, in terms of taxes and what you leave behind for your loved ones.

The new tax law in effect doubles the federal estate-tax exemption to roughly $11.2 million per person. As a result, most people won’t be subject to federal estate tax. However, before you unfriend your estate planning attorney on social media, understand that the drastic increase in the federal exemption amount means that old wills and trusts may be in dire need of an update.

Kiplinger’s recent article, “Update Estate Plans in Light of New Tax Law,” notes that the 2017 tax reform gives new opportunities for estate planning techniques to reduce your taxes. You also still have the other benefits of estate planning to consider, such as creditor protection, strategies to protect against elder financial abuse, and maximizing bequests. However, remember that the new higher exemption amount sunsets at the start of 2026. That’s when the old $5 million exemption (adjusted for inflation) reappears.

For example, your estate plan may include a will and trust that applies formulas tied to the federal estate-tax exemption. With the new tax law, that could now have unintended consequences.

You should review your estate plan regularly, despite the legislative changes. That’s because life changes: your net worth changes, you or your children get married or divorced, grandchildren are born, and as a result, your old estate planning documents may not accurately reflect your wishes.

When you update your documents, remember your durable power of attorney. This type of gifting power may have made more sense when the federal estate tax exemption was much lower. However, with today’s higher exemption, broad gift provisions shouldn’t be included in some powers of attorney, because they leave seniors vulnerable to financial abuse.

The strategies that worked so well five or ten years ago when you last reviewed your estate plan, may be completely out of date. You may not need a complete overhaul of your estate plan, but if you haven’t reviewed your estate plan recently, including checking on all of your beneficiaries, you may be doing yourself and your loved ones more harm than good.

Reference: Kiplinger (April 28, 2018)“Update Estate Plans in Light of New Tax Law”

New Estate Tax Law Enacted in Maryland Not Tied to Federal Tax Rate

The state legislature of Maryland has passed a law following the new tax reform that will limit the state’s estate tax exclusion amount.

The ability of the state to set laws regarding estate taxes has been exercised by Maryland, which has put its own estate law in place, separate and apart from the IRS.

TaxThe state legislature of Maryland has passed a law following the new tax reform that will limit the state’s estate tax exclusion amount to $5 million. Recently passed legislation permits portability between spouses of the deceased spouse’s unused exclusion amounts. This lets the personal representative or executor of the deceased spouse make an election on the decedent’s estate tax return to port the deceased spouse’s unused exclusion amount to the surviving spouse.

LegiScannotes in “MD HB308” that Maryland's estate tax exclusion amount has been "de-coupled" from the federal estate tax applicable exclusion amount (known as the "estate tax exemption") since 2004. However, a law enacted in 2014 provided for the eventual re-coupling of the Maryland Estate Tax Exclusion Amount to the Federal Applicable Exclusion Amount. This was phased in from 2014 through 2019. Full re-coupling was to be effective for decedents dying on or after January 1, 2019.

In effect, the 2014 Maryland law provided that for decedents dying on or after January 1, 2019, the Maryland estate tax exclusion amount would equal the amount that could be excluded under the federal estate tax. Prior to the passage of the Tax Cuts and Jobs Act in December 2017, the indexed federal exclusion amount was scheduled to be $5.7 million in January of 2019.

 However, with the new tax reform, the federal exclusion amount was upped to $10 million per person, indexed for inflation, for decedents dying on January 1, 2018 or later, through December 31, 2025. After indexing for inflation, the per person exclusion amount will be roughly $11.18 million in 2018.

Starting on January 1, 2026, the $10 million per person federal exclusion amount will sunset and return to the prior exclusion amount of $5 million per person, indexed for inflation.

The maximum Maryland estate tax rate of 16% is not altered with the new legislation .

In addition, the state’s inheritance tax is also unchanged. That rate is based on how closely related the decedent was to the people who inherit from him or her, rather than on the size of the estate. The inheritance tax doesn’t apply to surviving spouses and the children of a decedent.

The prior 2014 law still applies to decedents who passed in 2018, so the exclusion amount remains at $4 million for them. Note that the 2014 amount is not indexed for inflation and portability between spouses is not permitted.

Every state has its own estate tax laws, so it is best to meet with an estate planning attorney in your state to map out your family’s plan.

Reference: LegiScan (April 5, 2018) “MD HB308”

Estate and Inheritance Taxes: How Do They Impact Entrepreneurs?

Does having to pay an inheritance tax discourage someone who might have built an empire, from doing so?

Does having to pay an inheritance tax discourage someone who might have built an empire, from doing so? Or does an estate tax make a business owner retire earlier?

MP900400332Forbes recently provided an analysis of a research paper examining the impact of estate, wealth transfer taxes and other inheritance taxes on entrepreneurs and those considering starting a business in “How Do Estate And Inheritance Taxes Affect Entrepreneurs?” Do entrepreneurs spend a lot of time worrying about the impact of federal estate tax on their life’s work? Does reducing the number of taxpayers who will need to pay federal estate taxes, which recently occurred, mean an increase in new start-ups? The answers are not that simple.

The research shows two primary effects of wealth transfer taxes. One, by reducing the size of after-tax bequests, it makes heirs less likely to start or maintain a business. Two, the prospect of future estate or inheritance taxes appears to speed up a business owner’s retirement date, but also discourages labor force participation for wage earners. This indicates that there’s no simple way to characterize the effect of the estate tax on entrepreneurship.

The estate tax might impact the decision to start a business or keep it going, if business owners are looking ahead and want to leave the company to their heirs. However, the evidence on this is surprisingly ambiguous.

For example, most wealthy people don’t take full advantage of opportunities to transfer limited amounts of wealth through tax-free gifts during their lifetimes, which is a very basic tax avoidance strategy. The estate tax also impacts heirs by decreasing the size of after-tax bequests.

The current federal estate tax applies to a fairly exclusive class with a generous exemption from the unified estate and gift tax—$11.2 million for singles and double that amount for couples. Many deductions reduce the amount of wealth subject to the tax, including unlimited deductions for charitable donations transfers to spouses and “valuation discounts” that reduce the amount of family-owned business and farm assets that are subject to the estate tax.  However, anything over the exclusion limit and deductions is taxed at 40%.

The research finds that receipt of an inheritance raises the likelihood of having active business income by about 13%. The size of the inheritance is also a major factor but is usually less important than the fact that an inheritance exists. In addition, the thought of future estate taxation reduces the likelihood of remaining self-employed, but not because people elect wage employment over self-employment.  It is actually because it makes employment less attractive. Taxing bequests reduces the payoff to working (and saving) for those with bequest motives, which makes both self-employed people and wage earners slightly more likely to retire.

Therefore, the research shows that the impact of wealth transfer taxes on entrepreneurship appear to be small.  However, the researchers point out that there are several important caveats to their conclusions. One is that self-employment is not the same as entrepreneurship, and most survey data can’t distinguish between entrepreneurs who innovate and take risks, from business owners who don’t.

There are other factors that must be considered before any real conclusions can be made. If your parents or grandparents were successful business owners, you would be more likely to consider starting a business than someone whose parents were employees. You might also have the option of entering the family business, which children of employees do not have.

It is not clear that estate and inheritance taxes are any more burdensome than any other taxes. Regardless of your economic bracket, an appointment with an estate planning attorney to review your tax liability under the new tax law should be on your to-do list for the first part of 2018.

Reference: Forbes (March 7, 2018) “How Do Estate And Inheritance Taxes Affect Entrepreneurs?”

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