Does Living Trust Help with Probate and Inheritance Taxes?

Estate Planning, Estate Tax, Inheritance, Trusts, Wills / Estate Planning, Estate Tax, Inheritance, Inheritance Tax, St. Petersburg Estate Planning Attorney, Trusts, Wills

A living trust is a trust that’s created during a person’s lifetime, explains nj.com’s recent article entitled “Will a living trust help with probate and inheritance taxes?”

For example, New Jersey’s Uniform Trust Code governs the creation and validity of trusts. A real benefit of a trust is that its assets aren’t subject to the probate process. However, the New Jersey probate process is simple, so most people in the Garden State don’t have a need for a living trust.

In Kansas, a living trust can be created if the “settlor” or creator of the trust:

Resides in Kansas
The trustee lives or works in Kansas; or
The trust property is located in the state.

Under Florida law, a revocable living trust is governed by Florida Statute § 736.0402. To create a valid revocable trust in Florida, these elements are required:

The settlor must have capacity to create the trust
The settlor must indicate an intent to create a trust
The trust must have a definite beneficiary
The trustee must have duties to perform; and
The same person can’t be the sole trustee and sole beneficiary.

Experienced estate planning attorneys will tell you that no matter where you reside, the element that most estate planning attorneys concentrate on is the first—the capacity to create the trust. In most states, the capacity to create a revocable trust is the same capacity required to create a last will and testament.

Ask an experienced estate planning attorney about the mental capacity required to make a will in your state. Some state laws say that it’s a significantly lower threshold than the legal standards for other capacity requirements, like making a contract.

However, if a person lacks capacity when making a will, the validity of the will can be questioned and challenged in court. The person contesting the will has to prove that the mental capacity of the person making the will impacted the creation of the will.

Note that the assets in a trust may be subject to income tax and may be includable in the grantor’s estate for purposes of determining whether estate or inheritance taxes are owed. State laws differ on this. There are many different types of living trusts that have different tax consequences, so you should talk to an experienced estate planning attorney to see if a living trust is right for your specific situation.

Reference: nj.com (Jan. 11, 2021) “Will a living trust help with probate and inheritance taxes?”

Some States Have No Estate or Inheritance Taxes

Estate Planning, Estate Tax, Inheritance / Estate Planning Attorney, Federal Exemption, Inheritance Tax, St. Petersburg Estate Planning Attorney

The District of Columbia already moved to reduce its estate tax exemption from $5.67 million in 2020 to $4 million for individuals who die on or after Jan. 1, 2021. A resident with a taxable estate of $10 million living in the District of Columbia will owe nearly $1 million in state estate tax, says the article “State Death Tax Hikes Loom: Where Not To Die In 2021” from Forbes. It won’t be the last change in state death taxes.

Seventeen states and D.C. levy their own death taxes in addition to the federal estate tax, which as of this writing is so high that it effects very few Americans. Florida isn’t one of those states. In fact, Florida doesn’t have an estate tax or an inheritance tax, which is one of the many reasons it’s such a popular place for older Americans to live.

In 2021, the federal estate tax exemption is $11.7 million per person. But in 2026, it will drop back to $5 million per person, with adjustments for inflation. However, that is only if nothing changes.

President Biden has already called for the federal estate tax to return to the 2009 level of $3.5 million per person. The increased tax revenue purportedly would be used to pay for the costs of fighting the “pandemic” and “infrastructure improvements”. It remains to be seen whether this will actually happen because many law makers believe such a move would potentially destroy the family businesses, farms and ranches that drive and feed the economy. President Biden has also proposed eliminating the step up in basis on appreciated assets at death.

Changes that take place at the federal level are likely to drive changes at the state level. States that don’t have a death tax may look at adding one as a means of increasing revenue, meaning that estate planning may become even more important in the near future. States with high estate tax exemptions could also reduce their state exemptions to the federal exemption, adding to the state’s income and making things simpler. Right now, there is a disconnect between the federal and the state tax exemptions, which leads to considerable confusion.

Five states have already made changes in 2021, in a variety of forms. Vermont has increased the exemption to $5 million in 2021. Connecticut’s exemption will be increased $7.1 million. And the states of Maine, Rhode Island and New York have increased their exemptions because of inflation.

The overall trend in the recent past had been towards reducing or eliminating state estate taxes. In 2018, New Jersey dropped their estate tax, but kept the inheritance tax. In 2019, Maryland added a portability provision to its estate tax, so a surviving spouse may carry over the unused predeceased spouse’s exemption amount.

As mentioned above, Florida doesn’t have an estate tax or an inheritance tax, so your clients living (and dying) here in the Sun Shine State, and their families, won’t be subject to these taxes. However, if you live in or plan to move to a state where there are state death taxes, talk with an estate planner to create a flexible estate plan that will address the current and future changes in the federal or state exemptions. While you’re at it, keep an eye on the state’s legislature for what they’re planning.

Reference: Forbes (Jan. 15, 2021) “State Death Tax Hikes Loom: Where Not To Die In 2021”

Which States Make You Pay an Inheritance Tax?

Estate Planning, Inheritance / Estate Planning Attorney, Heirs, Inheritance Tax, St. Petersburg Estate Planning Attorney, Surviving Spouses

Let’s start by defining “inheritance tax.” The answer depends on the laws of each state, so you’ll need to speak with an estate planning attorney to learn exactly how your inheritance will be taxed, says the article “States with Inheritance Tax” from yahoo! finance. There are six states that still have inheritance taxes: Iowa, Kentucky, Nebraska, New Jersey, Maryland and Pennsylvania.

In Iowa, you’ll need to pay the tax within nine months after the person dies, and the amount will depend upon how you are related to the decedent.

In Kentucky, spouse, parents, children, siblings and half-siblings do not have to pay inheritance taxes. Others need to act within 18 months after death but may be eligible for a 5% discount, if they make the payment within 9 months.

Timeframes are different county-by-county in Maryland, and the Registrar of Wills of the county where the decedent lived, or owned property determines when the taxes are due.

Only a spouse is exempt from inheritance taxes in Nebraska, and it has to be paid with a year of the decedent’s passing.

New Jersey gets very complicated, with a large number of people being exempted, as well as qualified religious institutions and charitable organizations.

In Pennsylvania, rates range from 4.5% to 15%, depending upon the relationship to the decedent. There’s a 5% discount if the tax is paid within three months of the death, otherwise the tax must be paid within nine months of the death.

As you can tell, there are many variations, from who is exempt to how much is paid. Pennsylvania exempts transfers to spouses and charities, but also to children under 21 years old. If one sibling is 20 and the other is 22, the older sibling would have to pay the tax, but the younger sibling does not.

There’s also a difference as to which property is subject to inheritance taxes. In Nebraska, the first $40,000 inherited is exempt. Pennsylvania exempts certain transfers of farmland and agricultural property. All six states exempt life insurance proceeds when they are paid to a named beneficiary, but if the policies are paid to the estate in Iowa, the proceeds are subject to the tax.

Note that an inheritance tax is different than an estate tax. Both taxes are paid upon death, but the difference is in who pays the tax. For an inheritance tax, the tax is paid by heirs and the tax rate is determined by the beneficiary’s relationship to the deceased.

Estate tax is paid by the estate itself before any assets are distributed to beneficiaries. Estate taxes are the same, regardless of who the heirs are.

There are twelve states and the District of Columbia (Washington D.C.) that have their own estate taxes (in addition to the federal estate tax). Note that Maryland has an inheritance, state and federal estate taxes. The rest of the states with an estate tax are Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Washington and Vermont.

The large variations on estate and inheritance taxes are another reason why it is so important to work with an experienced estate planning lawyer who knows the estate laws in your state.

Reference: yahoo! finance (Jan. 6, 2021) “States with Inheritance Tax”

Say This Five Times Fast: State Estate Tax Exemption

Estate Planning, Estate Tax, Tax Planning / Estate Planning, Estate Tax, Gift Tax, Inheritance Tax, Portability, St. Petersburg, Tax Planning

An unintended consequence of the Trump tax cuts basically eliminating the federal estate tax, is that several states that tied their state estate tax to the federal estate tax are running into problems.

States that used the federal estate tax to set their own estate tax rates have found that new tax law has hurt their estate tax revenue. According to this article from Forbes, “States Rebel, Won't Conform To Trump Estate Tax Cuts,” these states are rolling back exemption amounts.

Connecticut, a state that used to have one of the toughest estate tax structures, may have the most generous exemption out of the states that still impose their own death taxes. There are 17 states and the District of Columbia that continue to impose either an estate tax or inheritance tax, with Maryland being the one state with both. Let’s look at what some specific states are doing:

The District of Columbia. The estate tax exemption in DC would have gone up from just $2 million to $11 million (indexed) in 2018. However, the city council dropped the exemption to $5.6 million in June, retroactive to January 1, 2018. This change is part of the budget being reviewed by the DC mayor and is expected to be approved. The exemption will be indexed beginning next year, using a special formula.

Hawaii. The Aloha State’s estate tax exemption for 2018 will be $5,490,000. That’s identical to what it was for 2017. However, the state legislature has amended Hawaii’s estate tax law, so the threshold amount matches federal law as it existed on December 21, 2017 (before the tax cuts). That’s $5 million, adjusted for inflation from 2011. The revision was signed into law by the governor this past summer.

Maryland. To keep this state’s estate tax exemption from rising from $4 million this year to $11 million (indexed) in 2019, state legislators agreed to a new fixed dollar amount for the Maryland estate tax exemption for 2019 and beyond of $5 million. The legislation does add portability, which allows a surviving spouse take advantage of their late spouse’s unused exemption. Their inheritance tax remains the same.

Maine. The state’s House and Senate recently voted on a compromise that will tie the Maine estate tax exemption to federal law, as of December 31, 2017 ($5.6 million for 2018). The governor allowed the tax bill to become law without his signature. He explained that he wouldn’t sign it, because it didn’t abolish the estate tax. Therefore, the Maine estate tax threshold is $5.6 million for 2018, with inflation adjustments starting in 2019.

Connecticut. In the fall of 2017, just before the Republican tax cuts, Connecticut modified its estate tax law to phase in its estate and gift tax exemption to match the federal exemption by 2020. The latest change—signed into law in June—lengthens the phase-in to 2023.

Before the year is out, make an appointment with your estate planning attorney to be sure that your estate plan’s tax strategy still works in your favor.

Reference: Forbes (August 31, 2018) “States Rebel, Won't Conform To Trump Estate Tax Cuts”

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

Estate Planning, Estate Tax, Tax Planning, Trusts / Estate Planning, Estate Tax, Executor, GST Exemption, Inheritance Tax, Personal Representative, Portability, Tax Planning

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.

The 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”

Do I Have to Pay Taxes on an Inherited Annuity?

Asset Protection, Estate Planning, Estate Tax, IRA, Probate, Tax Planning, Wills / 401(k), Beneficiary Designations, Estate Planning, Executor, Inheritance, Inheritance Tax, IRA, Personal Representative, Wills

If it seems like everything is subject to an inheritance tax, well, that is often true.

Yes, there are taxes due on inherited annuities. The amount depends upon your relationship to the deceased and the value of the annuity.

If it seems like everything is subject to an inheritance tax, well, that is often true. In a recent article from nj.com, “Who pays inheritance tax on an annuity?” a beneficiary asks what happens when a Class D beneficiary inherits a qualified annuity.

In this case, which occurred in New Jersey, transfers for less than $500, life insurance proceeds, and certain state and federal pension payments are exempt. However, everything else is subject to the inheritance tax. This includes items controlled by beneficiary designations, instead of a will, like an IRA, 401(k) or annuity.

If it’s an annuity at issue, the date of death valuation must be listed on the New Jersey Inheritance Tax form (IT-R), which is for assets left to Class D beneficiaries. The personal representative (or executor or administrator) of the estate has a fiduciary duty to file the inheritance tax return (Form IT-R). The tax return, along with payment for any taxes owed, is due eight months from the date of death in that state.

The person responsible for paying the tax, depends on the deceased's will. For example, the will could state that all estate or inheritance taxes are paid out of the deceased's residuary estate, which is the part of a deceased's estate that remains after all debts have been paid and specific bequests have been distributed.

If the estate has sufficient funds to pay the tax, the beneficiaries won't owe anything. However, the will could state that all estate/inheritance taxes are paid proportionately by the recipient, even for assets not controlled by the will. That’s the default in New Jersey, when the will doesn’t say how death taxes get apportioned or the deceased died intestate (without a will).

There can be an issue when the beneficiary refuses to pay his or her share. In that case, the executor is still obligated to pay the tax with other estate funds, if any, which will negatively affect the inheritance of other beneficiaries under the will.

In that case, the executor can sue to recover the funds from non-paying beneficiary. If the executor can't pay the tax because there aren’t enough funds in the estate, the state of New Jersey will bring a delinquency claim directly against the non-paying beneficiary.

The best course of action is simply for the beneficiary to pay their share. An executor with an uncooperative beneficiary, should speak with an estate planning attorney to explore their options and protect the estate and the executor.

Reference: nj.com (May 14, 2018)“Who pays inheritance tax on an annuity?”

Does Living Trust Help with Probate and Inheritance Taxes?

Some States Have No Estate or Inheritance Taxes

Which States Make You Pay an Inheritance Tax?

Say This Five Times Fast: State Estate Tax Exemption

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

Do I Have to Pay Taxes on an Inherited Annuity?

We'd Love to Talk With You!

Mastry Law, P.A.

Route

Contact Us