What are the death taxes in Maryland

In Maryland there are two death taxes: One is a 10% inheritance tax if you leave assets to people who are not close relatives. Your spouse, parents, grandparents, descendants spouse’s parents and sibling are exempt from this tax, as are charities. Nephews, nieces and friends pay the tax. The second is an Estate tax, for which every deceased Maryland resident has an exemption of Three Million dollars in 2017. This is set to increase over the next several year to joint the Federal Estate Tax Exemption, which is 5.45 Million. This change in the death tax threshold means that older planning, which protected against this tax, should be revisited.

What is the cost of procrastination?

Studies show that most Americans have not planned their estate. Or if they have planned, that plan is so outdated that it can cause disastrous results.

“What would happen to your assets if you were gone tomorrow?” Many people cannot answer that question. It is ironic that we work a lifetime to accumulate assets but don’t plan for where those assets will go after we’re gone.

Do you want the assets in your name to pass to your spouse when you die? If you have no plan, your spouse may be forced to share ownership with your children. Do you think that by leaving everything in equal shares to your children in your will that is in fact how everything will be divided? Contrary to common belief, wills do not override beneficiary designations on life insurance, retirement and other accounts. This can often cause unequal inheritances and conflict amongst your loved ones. Making lifetime gifts to your children can have serious income tax ramifications for both parents and children, particularly if the gifted property has appreciated greatly in value since the parents acquired it.

Would you want your family members to fight over who will be in charge of your assets while you are still alive but incapacitated? Leaving the matter up in the air means that, ultimately, a court may have to decide your fate?

What is Joint Ownership?

Joint ownership with the right of survivorship is a common way of owning property between two or more individuals. It is typical for husbands and wives to own most things in joint ownership. By doing so, this means that when the first owner dies, the survivor automatically owns the entire asset, regardless of what your will or anything else may say.

There are several problems that can occur by relying solely on joint ownership as an estate plan. It does not address the loss of control that may occur if one of the joint owners becomes mentally impaired. Also, it does not say what happens to the asset when the surviving owner dies.

Many parents believe that the best plan is to own everything jointly and then, when the first spouse dies, the survivor places all of the children’s names on the assets. There are, however, many problems that may arise with this strategy. As mentioned above, there may be some tax problems that you aren’t aware of. Second, you may never have the chance to put the children’s names on your assets. Third, assuming that you do put their names on your assets, those assets are at risk if your child goes through a divorce, a bankruptcy or a lawsuit. Finally, if a child’s name is on your deed or stock certificate, you can do nothing with that asset unless you have your child’s permission.

Remember, if you own assets this way, then your will does not control what happens to those assets on your death. Many parents have unknowingly treated one child more favorably because that child’s name had been placed on their assets.

If I have a will, is that enough?

Although a will is better than nothing, it may not be the best plan for you. A will alone usually guarantees that your estate will go through probate. A will must be approved by the probate court before it can be enforced. Additionally, because a will only takes effect upon your death, it provides absolutely no protection if you become incapacitated. In such a case, the court could take control of your assets before you die.

What is a Guardianship or Living Probate?

A guardianship is sometimes called a “Living Probate” because it happens at the probate court while the person is alive. A guardianship is a court proceeding designed to protect those who are mentally impaired. An interested party, usually a family member, petitions the court to have someone appointed to handle the incompetent’s affairs. This procedure may be humiliating for the family because the judge often requires the alleged incompetent to appear in court to determine how incompetent the person is.

The court decides who should handle your affairs, and it may not choose the person you would prefer. You have to pay attorney’s fees and court costs, and even if the court selects the right person, that person must file an accounting with the court each year saying what he or she has done with your property. In other words, the court now monitors what is being done with your assets.

Will a durable power of attorney avoid problems on incapacity?

A durable power of attorney allows you to name someone to handle your financial affairs if you are unable to do so. Until recently, there was nothing in the law requiring anyone to honor your Power of Attorney. Maryland has a new Power of Attorney law effective after October 1, 2010 which will help with the enforceability of a Power of Attorney, for documents signed after that time. Contrary to common belief, Power of Attorney authority terminates at death. However, any interested party who is not named in the power of attorney may still petition the court for a guardianship proceeding and thereby render your power of attorney ineffective.

What is probate?

Probate is the legal process whereby the court makes sure that your wishes are carried out upon your death. The court must first check to see that your will was properly executed. If you have no will, or if you have a will that is not valid, your assets are distributed according to state law.

The main purpose of probate is to transfer the title of assets after the death of the owner.

Do all assets pass through probate?

Assets that are in the name of the deceased owner go through the court process of probate. Other “Non-probate” assets typically avoid probate through joint ownership or by a beneficiary designation. Typical non-probate assets include assets owned jointly with the right of survivorship (when there remains a surviving owner), assets that pass by beneficiary designation (unless the beneficiary died first) and assets that pass by a revocable living trust. Consult your estate planning attorney before deciding on any probate avoidance technique.

What are the problems with probate?

People who have gone through the probate process have had both good and bad experiences. These people often cite that the two most common problems with probate are the cost and the time that it takes to get everything completed.

The average length of time to go through probate is 9 months to 2 years. Assets may be frozen during this time to assure an accurate inventory. In such cases, nothing may be distributed or sold without court or executor approval. If someone needs money to live on, they will have to request a living allowance.

Probate is a public proceeding. Anyone can go to the courthouse and ask to see your file, look at the inventory of your assets and how much they are worth. They can also find out who you are leaving things to, how much they will receive, and when the assets will be delivered. Do you want this to be public information?

Probate may result in family feuding. Probate has been called an “invitation” to disgruntled heirs because the court requires that notice of your probate be sent to all interested parties. Then they can decide to use the court to file an objection against your plan of distribution.

If you own real estate in another state your family may have to go through a probate in that state. This means that your family would have to pay additional fees (e.g., pay another attorney) and be subject to the probate laws in that state, which may result in additional delays.

The costs of probate include court filing fees, publication and bond fees, personal representative (executor) fees and attorney fees. Costs vary in each state, but are usually estimated at 3-5% of the gross estate.

How are Probate fees calculated?

The way that probate fees are calculated varies from state to state. Some states allow attorneys to charge whatever the court deems to be a reasonable fee. Other states set limits on the maximum amount of fees that can be charged by capping the fees at a certain percentage of the estate.

In determining the size of the estate, the court looks at the gross value of the estate. That would mean that if you owned a house valued at $350,000 passing through your probate but you owed a mortgage of $300,000, the probate fee will be based on the full value of $350,000 not the equity of $50,000 that you actually own. This helps explain how probate fees can grow to be so high.

What is a Revocable Living Trust?

A Revocable Living Trust is in many ways a complete “will substitute.” Unlike a will, a Revocable Living Trust takes effect immediately upon signing and controls assets that you transfer (“fund”) into the trust.

There are three roles that have to be filled in creating a Revocable Living Trust.

  1. Trustors – This is the person (or in the case of a married couple, the persons) who are setting up the plan and put their assets into the trust.
  2. Trustees – The persons who will manage the assets inside of the trust. They do the buying, investing, selling and generally carry out the directions of the Trustors.
  3. Beneficiaries – The persons who receive the benefits of the trust. They get to use the assets, spend the money and enjoy the assets as outlined in the trust document.

In establishing a Revocable Living Trust, the person establishing the plan can name themselves to serve in all three roles for as long as they are alive and mentally competent.

How does a Revocable Living Trust avoid Government Involvement?

When you set up a Revocable Living Trust, you along with your attorney transfer assets from your name to your name as the trustee of your trust. This process is called “funding” your trust. For probate purposes you no longer own anything because it belongs to your trust, which you control. Thus there is nothing for the court to control if you become mentally impaired or to transfer when you die.

Do I lose control of my assets with a Revocable Living Trust?

Many folks wonder if transferring assets to a Revocable Living Trust means they are giving up control of their assets. You do not give up control; you gain control. As Trustee of your trust, you can do anything you could do before (e.g., buy and sell assets, make loans and gifts, etc.). You may even amend or revoke the trust at any time. You gain more control of your assets because, if you become incompetent, then your hand chosen successor handles decisions for you, not someone the court chooses.

When something happens to me, who has control?

If you and your spouse are co-trustees, either of you can act and have instant control if the other becomes mentally impaired or dies. If you are the only trustee, your handpicked successor trustee takes over.

What does my successor trustee do?

When you pass away, your successor trustee pays all debts and any death taxes, carries out your specific wishes and distributes your property as stated in your trust. This is done without court interference, so it is often quick and private.

If you become mentally incapacitated before death, your successor trustee manages your financial affairs for your benefit for as long as is necessary. If you recover, you once again are in control.

Who can be my successor trustees?

Any adult individual, friend or relative, can be your successor trustee. You can also name a bank or trust company. If you name an individual, you should name more than one in case your first choice is unable or unwilling to act.

Does a Revocable Living Trust change my income taxes?

No. You pay your property taxes and income taxes the same way. You do not have to obtain a separate tax identification number for your Revocable Living Trust because the IRS wants you to continue using your social security number on all tax returns. You use the same tax forms and file under the same status that you always have.

Is it difficult to transfer assets into my Revocable Living Trust?

If you have no one assisting you, putting all of your assets into your trust may seem intimidating. If you have your attorney aiding you in this process, it is quite simple. Your attorney can change title on all real estate documents, and he or she should do the paperwork for changing title on stocks, brokerage accounts, bank accounts, bonds, etc. Your Revocable Living Trust will also include things like jewelry, clothes, art, furniture, collectibles and other assets that do not have titles.

How much time does it take to Fund my Revocable Living Trust?

In most cases your trust can be funded within a few weeks. It takes more time setting up a Revocable Living Trust than just signing a basic will, but you can take the time now, or you can pay an attorney to do it later as part of a probate case. Just remember, your trust will only cover assets that have been successfully funded into it.

How long does it take to establish a Revocable Living Trust?

It should only take a few weeks to prepare the paperwork after you make the basic decisions. Our clients usually receive their complete Revocable Living Trust estate plan within 4 to 6 weeks of giving us the relevant information. If your attorney cannot get it done within two months, you should question whether he or she does this type of work on a regular basis.

Is a Revocable Living Trust expensive?

Perhaps the better question is, “What would it cost me and my family if I do not have a Revocable Living Trust?” Once you figure the cost of a living probate, death probate, out-of-state probate, and/or a will contest, a trust may be a super investment. Costs vary widely, but so do services and the quality of those services. Make sure you know ahead of time what the fees will be before you agree to the planning.

If I have a Revocable Living Trust, do I still need a will?

A good Revocable Living Trust estate plan includes a “pour-over” will. This type of will acts as insurance in case assets were inadvertently left out of your trust. It also revokes your previous will to avoid confusion upon your death.