Death and Taxes
As a preliminary matter, for those that regularly practice in the Orphans’ Court for Prince George’s County, please note two relevant updates.
First, please see the message below from the Orphans’ Court:
The Orphans’ Court can only accept original filings for estates and guardianships. Filings can be mailed via the U.S. Mail, placed in the Orphans’ Court drop box or at the Register of Wills office. The Orphans’ Court drop box for filings (during business hours and after) is located at the Commissioner’s Entrance of the Upper Marlboro Courthouse. When using the drop box for filings, the filing (not the envelope) must be date stamped and placed in the box.
The second matter is regarding a new change in probate fees for estates. During the 2022 session, the legislature restructured estate administrative fees (House Bill 187). The new law takes effect October 1, 2022. In general, small estate proceedings (i.e., those estates valued at $50,000 or less, or $100,000 if the only heir is a surviving spouse) will no longer be subject to probate fees. Probate fees for regular estates below $500,000, for the most part, will decrease. On the other end of estates, fees on larger estates (i.e., over $500,000) will increase, with fees for estates valued above $5,000,000 seeing the most significant increase.
The subject of increased fees fits well with my topic for this month: taxes as it relates to Estates and Trusts. As Ben Franklin famously stated, “Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.” Being aware of the tax implications for an estate plan is vital to protect one’s hard-earned nest egg. There are two primary types of tax consequences upon death: estate tax and inheritance tax.
The estate tax – occasionally referred to as the “death tax” – is a tax on the right to transfer property upon your death. It is, essentially, how much of your assets can pass to beneficiaries before those funds are taxed. The estate tax consists of an accounting of everything you own or have certain interests in at time of your death. The tax is assessed on a decedent’s net worth before inheritance is paid out. Based on current federal law, very few people these days must deal with the estate tax at the time of a decedent’s death. Most estates will not be taxed based on current tax law.
The estate tax exemption is the amount of an individual’s net worth excluded from estate tax when a person dies. In 2022, the federal estate tax exemption is over $12 million ($12.06 million, to be exact, up from $11.7 million in 2021). This is an exemption per person, meaning a married couple each gets a $12 million exemption, resulting in the first $24 million of a married couple’s net worth not being subject to the estate tax. So, clearly, under present law, the federal estate tax is rarely an issue since the law was changed a few years back.
However, laws can of course change depending on those in power on the federal level. The estate tax threshold is, in a way, a moving target. Depending on the results of future national elections, pressure may increase to lower the current high federal credit amount. While most of the population does not have to worry about it right now, the estate tax is something that all estate planning attorneys should at least be aware. For instance, the $12 million threshold is set to sunset on January 1, 2026. Unless Congress acts before then, for those that pass away in 2026 or after, the threshold will be cut in half of the current level, to $6.03 million per decedent.
To put things in perspective, in the not-too-distant past, the federal estate tax threshold was under $1 million. When you factor in all probate and non-probate assets, between real property, retirement accounts and life insurance, surpassing the estate tax threshold was much more common. Therefore, just because the current threshold puts the estate tax out of reach for most estates and the threat of such a tax is not currently relevant for most Americans, it does not mean federal estate tax implications are gone for good.
In addition to the federal estate tax, those living and practicing in Maryland also must be aware of the Maryland estate tax. As of 2022, 17 states and Washington, D.C. have either a state estate tax, an inheritance tax (discussed below) or both. Eleven states (Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington) plus D.C. have only an estate tax. Five states (Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania) have only an inheritance tax.
There is only one state that levies both an inheritance tax and an estate tax: Maryland. For decedents dying on or after January 1, 2019, Maryland’s state estate tax exemption is now set at $5 million. Unless changed by the General Assembly, the state estate tax threshold will remain at $5 million.
There are certain exceptions to the estate tax. The most common exception is the marital deduction. The marital deduction permits one marriage partner to transfer an unlimited amount of assets to his or her spouse without incurring a tax. This transfer can occur either during the marriage during the life of both spouses or after the death of the first spouse.
As noted above, Maryland is one of only six states with an inheritance tax. Unlike the estate tax, which is imposed upon the right to transfer and assessed on the value of a decedent’s entire net worth, the inheritance tax is a tax on a beneficiary’s inheritance and is imposed on the transferee because it is the privilege to receive that is being taxed.
For decedent’s dying on or after July 1, 2000, the inheritance tax was rescinded for property passing to most relatives, including a spouse, descendant, spouse of descendant, parent, grandparent, stepparent, stepchild, brother, or sister of the decedent. The 10% inheritance tax, however, remains for others, such as nieces, nephews, aunt, uncles, cousins, more distant relatives as well as non-relatives. Of note, if a decedent includes a tax clause in his or her Last Will and Testament, the tax clause may direct the probate estate to pay all taxes – including inheritance taxes – with respect to property passing under the will, as well as specific non-probate assets.
As a final, non-relevant but interesting anecdote, Ben Franklin’s quote about “death and taxes” has one exception: The Royal Family. Following Queen Elizabeth II’s recent death, her son, King Charles III inherited the “Crown Estate” – a realm worth over $34.3 billion in assets. In the U.K., most people pay a 40% inheritance tax on anything they inherit over a £325,000 threshold. However, according to a 1993 law, members of the Royal Family do not have to pay the inheritance tax. This law was originally introduced to safeguard the Royal Family’s assets from being wiped out if two monarchs were to die in a short period of time.
Zachary W. Worshtil is a Partner at the Law Office of Ralph W. Powers, Jr., P.C. He is also a member of the PGCBA Board of Directors and co-chair of the Probate, Estates, Trusts & Elder Law Section. He concentrates his practice primarily in estate administration, probate litigation and estate planning.