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Estate Taxes

Estate taxes are imposed by a state or the federal government on the transfer of a person's assets to his or her heirs after death.

Federal Estate Taxes

If your estate has a gross value equal to or less than the statutory exemption (currently $3.5 million for 2009), there will be no federal estate tax to pay regardless of who receives your assets, unless you made large gifts during your lifetime. In addition, all property passing to your spouse is free from any federal estate tax, regardless of the amount.

District of Columbia Estate Tax

If you are a resident of the District of Columbia and the value of your estate is $1,000,000 or more, or if you are a nonresident who owns real estate and/or tangible personal property located in the District of Columbia and your estate is valued at $1,000,000 or more, then your estate may owe the District of Columbia estate tax.

Maryland State Estate Tax

The Maryland estate tax is imposed on the transfer of property in your estate. Currently, a Maryland estate tax return must be filed if your federal gross estate, plus adjusted taxable gifts, is $1,000,000 or greater, and you were either a resident of Maryland at the time of death or a nonresident who owned real or tangible personal property in Maryland. The tax rate is currently limited to 16 percent of the amount that the estate value exceeds $1,000,000.

Maryland Inheritance Tax

If you are a Maryland resident and your estate is passing to someone other than your immediate family, or if you are a nonresident who owns real estate and/or tangible personal property located in Maryland and it is not passing to your immediate family, then your beneficiaries may owe a Maryland inheritance tax.

Gift Taxes

The Internal Revenue Code allows gifts of this amount to be made without the imposition of estate or gift taxes. You can make gifts of $13,000 per year per recipient. If your spouse joins in the gift, the annual exemption amount per recipient is increased to $26,000. Over time, these gifts can add up and may substantially reduce your estate and your estate’s tax.

Other Taxes

Be sure to ask your attorney about other taxes such as the generation skipping transfer tax, where transfers by Will or gifts to relatives who are two or more generations below you may trigger an additional tax.

Avoiding Estate Taxes.

If your estate will be subject to the federal estate tax, proper estate planning with an attorney can lessen or completely defeat estate taxes. Such techniques are allowable under the U.S. Internal Revenue Code and state law.

PROBLEM: Jack and Mary have assets of exactly $4 million. Jack passes away, and all assets pass along to Mary with no estate taxes owed because of the spousal exemption. Several years later, Mary passes away. The unified credit is used, and so $2 million passes along to the children, estate tax free. Estate tax is owed on the next $2 million, resulting in a $900,000 estate tax bill.

SOLUTION: With proper estate planning, this estate could have paid nothing. All estate taxes could easily have been avoided by setting up a Revocable Living Trust that had a Marital and Family Trust provision, also known as an A/B trust.

Here's how it works: When Jack dies, half of the assets are placed in the Family Trust, or B Trust. Jack's unified credit would be applied to these assets, and no estate tax would be due. Mary is allowed to draw income from assets in the B Trust, and allowed to access principal if necessary. The other half of the assets are placed into the Marital Trust, or A Trust. Mary retains full control and unlimited access to assets in the A trust. Upon Mary's death, her unified credit is applied to the estate tax assessed upon her assets in the A Trust, and her $2 million passes along, estate tax free. Using this type of estate planning, Jack and Mary were able to avoid paying $900,000 in estate taxes.

An additional benefit of the B Trust. Since the estate tax calculation was applied upon the funding of the trust, the assets in the B trust will not have another estate tax assessment, even if the assets grow in the future. So, assume the $2 million in the B trust was never used by Mary, and years later, those assets had grown to $3 million. Upon Mary's death, the $3 million in the B trust passes free of estate tax, in addition to Mary's $2 million.

If no estate planning had been done, Mary's $5 million estate would owe over $1.25 million in estate taxes.

Proper estate planning pays off. Attorney's fees are very small in comparison to the amount of estate tax your estate may owe.

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