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Important Updates re Maryland & DC Estate Taxes + Potential Changes in Planning

For decades core estate tax planning was relatively straight forward as we were mainly concerned with the federal estate tax exemption. Estate tax exemptions are like coupons-use them or lose them.

In recent years estate tax planning has become more complicated in jurisdictions, such as Maryland and the District of Columbia, which have decoupled from the federal estate tax. Maryland actually had two versions of decoupling before the most recent change in the law.

This year (2015) the federal estate tax exemption is $5.43 million so married couples can shelter $10.86 million from federal estate tax by utilizing both of their exemptions through proper planning. This has caused misunderstanding as many people believe they do not have to worry about estate tax planning. This is not true for many clients who are domiciled in Maryland or the District of Columbia. As a matter of fact over the next few years planning is going to be more complicated from the perspective of the attorney and other professionals who make recommendations for clients.

Long before jurisdictions decoupled from the federal estate tax, family trusts, also known as bypass trusts, have been used to shelter the federal estate tax exemption of the first spouse to die from estate taxes at the deaths of both spouses. Furthermore the value of the family trust, including its appreciated value at the second death, would pass to children and other loved ones free of estate tax at the death of the second spouse to die.

Now Maryland has a $1.5 million per person exemption which is scheduled to match the federal estate tax exemption in 2019.

The District of Columbia has a $1 million per person estate tax exemption which is scheduled to increase to $2 million in 2016 and match the Federal estate tax exemption in 2018 if certain revenue conditions are met. Note about fifteen years ago the DC Council adopted tax cuts that were similarly phased in but were instead suspended when the District encountered spending pressures.

The issue in recent years has been how to utilize the federal estate tax exemption without triggering Maryland or District of Columbia estate tax at the death of the first spouse to die. This has made, and continues to make, planning analysis, document drafting, and regular estate plan reviews crucial to planning success.

Given the current state of federal, Maryland, and District of Columbia estate tax laws and the apparent short term disparity between federal and Maryland/D.C. exemption amounts, many clients will want planning flexibility. They will not want to lose planning opportunities and they will not want to trigger avoidable taxes. There will be some clients who may be able to “simplify” their plans. Yes, Lena wrote this.

Note family trusts are used for more than estate tax planning purposes. Therefore, even if a client does not need a family trust for estate tax planning purposes, it may make sense to have one to address other planning objectives, such as asset protection, that may exist at the death of the first spouse to die.

If a family trust is not needed at the first spouse’s death, then it would not make sense to have it which would save unnecessary administrative and other potential costs.

Today a crucial key to planning success for all clients will be proper analysis of current facts and circumstances including the law, the tax laws, as well as client dreams, fears and aspirations.

Clients should review estate plans now.

This information was prepared by Lena Barnett & Associates, LLC and is intended only to provide general information.
It is neither offered nor intended for use as legal advice, nor is it a substitute for a consultation with an attorney.

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