So What Exactly Are Death Taxes Anyway?
A common misconception I come across in helping families create an estate plan is the notion of owing a substantial death tax. Believe it or not, the term ‘death tax’ is an overused political buzzword that refers to multiple taxes collected at or soon after one’s death. So, as a Maryland decedent, what different kinds of ‘death taxes’ should you be aware of?
The Federal Estate Tax is applied at a flat rate of 40% on assets exceeding a $5.60M gross estate in 2018. The gross estate is the sum of all the decedent’s assets minus certain deductions, including mortgages, loans, funeral expenses, medical bills, and expenses related to the administration of your estate such as attorney, accounting, and appraisal fees, among others. So, for example, a decedent with a $6.00M gross estate would owe a 40% tax on $400,000: a tax of $160,000. Additionally, if the decedent made any lifetime taxable gifts, then the exemption is further reduced by this amount. Using the prior example, if my decedent had made $1,000,000 of taxable lifetime gifts, then the 40% tax would apply to $1.40M, increasing the decedent’s tax liability to $560,000. Because the exemption amount is so high, fewer than one fifth of a percent of decedents end up owing a federal estate tax.
The Maryland Estate Tax is applied at a maximum rate of 16% on assets exceeding a $4.00M gross estate in 2018. Maryland’s Estate Tax exemption is set to match the federal exemption amount in 2019. This tax is paid directly to the comptroller and is usually due nine months after the decedent’s date of death.
The Maryland Inheritance Tax is applied at a flat rate of 10% on all assets passing at death from a Maryland decedent to nieces, nephews, or friends. Transfers from a decedent to a surviving spouse, children, parent, or sibling are exempt from the inheritance tax. This tax is collected by the Register of Wills in the county of residence of the decedent. Like the federal and state estate taxes, the inheritance tax applies to all assets passing at death, regardless of whether beneficiaries were listed.
Contrary to popular belief, the most likely tax a Maryland decedent will pay is income tax. Once you pass away, your estate continues to own your assets until they are properly administered to your heirs or legatees. During the administration of your estate, those assets, more often than not, produce income, taxable to your estate as a separate legal entity. The highest taxable bracket for both individuals and estates is 39.6%, however this bracket begins at $12,500 for an estate in 2017, versus $418,400 for an individual. What results is the estate pays a higher effective tax rate than if the assets were not part of the estate. For example, if an individual earned $30,000 of taxable income in 2017, they would owe roughly $4,033.75 in federal income taxes, whereas an estate earning $30,000 would owe a tax closer to $10,175.60.
For a better understanding of these taxes and how they might impact your family, contact an estate planning attorney at Stouffer Legal today!