Annapolis, Maryland Wills, Trusts & Estate Planning

Filing Taxes After a Parent Dies - Annapolis Estate Planning

There are estate taxes, inheritance taxes and final taxes that all must be addressed when a person dies. What taxes must be paid and how much must be paid depends upon the size of the estate and what state the decedent lived in.

The death of a parent results in a flurry of paperwork, including taxes. One of the tasks that must be taken care of is what is grimly referred to as the “final” individual federal and state tax return, as explained by nj.com, in the recent article, “What tax returns need to be filed after someone dies?”

All of the income, starting at the beginning of the year up to the individual’s date of death, must be reported on the tax return. All of the tax deductions and tax credits that the person was entitled to may be claimed. This final return is typically filed by the surviving spouse or by the executor of the individual’s estate.

The final return can be either electronically filed or filed on paper. The tax preparer should also be sure to write “deceased” after the taxpayer’s name and include the date of death, so that the IRS knows that this will be the last individual return filed.

However, at the death of a taxpayer, a new taxpaying entity—the taxpayer’s estate—is automatically created to make certain that no taxable income escapes review by the IRS. Income that’s earned during the tax year up to the date of the person’s death is reported on the final individual tax return, and any earnings after that date are taxable to the decedent’s estate. Earned income of the estate is any income for which the decedent was entitled to during the year that occurred after the date of death. This could include any dividends or interest from stock or bond investments held in the decedent’s name that was collected between the date of death and the end of the calendar year.

In addition, beneficiaries of assets paid directly to them outside of probate, like IRAs already in distribution mode or life insurance policies, may be subject to what is called “income in respect of a decedent,” or IRD. Two things must apply for this to occur: (i) the asset earns interest before the balance is transferred or paid to the beneficiaries; and (ii) the interest isn’t reported on the deceased taxpayer’s final tax return. If both of these occur, then beneficiaries are responsible for reporting IRD on their own tax returns.

This is a situation where an experienced estate attorney should be contacted. 

Reference: nj.com (March 21, 2018) “What tax returns need to be filed after someone dies?”

Holden & Campbell, LLC – Annapolis Estate Planning

Inheritance Taxes and Stepchildren: How Does it Work? - Annapolis Estate Planning

In different states, different rules apply. That is why a local estate planning attorney is the best resource for these kinds of questions.

Here’s a somewhat complicated scenario, but one that is not uncommon today. A man marries three times. Two children are born to his first wife, he next marries a woman with two children who become his stepchildren, and then, in his third trip down the aisle, he marries a woman with no children. What, if any obligations do his stepchildren (from the second marriage, if case you’ve lost track) have, when it comes to his estate?

In New Jersey, his stepchildren are considered Class A beneficiaries, even though he has remarried. That’s the answer from nj.com’s recent article, “I've had three marriages. Will my stepchildren owe the inheritance tax?” As Class A beneficiaries, they can receive transfers at death with no inheritance tax.

The inheritance tax is levied on some inheritances, but not all of them. Whether you’re subject to the tax is based on your relationship to the decedent (the person who died).

Only six states still have an inheritance tax: New Jersey, Nebraska, Iowa, Kentucky, Maryland, and Pennsylvania.

Class A beneficiaries include a spouse, civil union or domestic partner, parents, grandparents, children (including adopted children), and their descendants, stepchildren and a mutually-acknowledged child as defined in the statute.

However, step-grandchildren aren’t Class A beneficiaries. There is some legislation that’s been introduced to make them Class A beneficiaries.

A stepchild is defined by New Jersey statute as "a child of the surviving, deceased or former spouse who is not a child of the decedent."

The law doesn’t say the decedent must not remarry in order for the child of the former spouse to remain a stepchild. Unlike other states like Iowa—where the stepchild's status derives from the marriage and thus ends on divorce—New Jersey’s definition says that the child of a former spouse remains a stepchild and thus a Class A beneficiary.

Therefore, based on the scenario at the top, it looks like the children from Marriage No. 2 are still considered Class A beneficiaries.

Consideration should also be given to qualification as a mutually-acknowledged child, if the decedent, for not less than 10 years prior to the transfer, stood in a mutually acknowledged relation of a parent, as long as the relationship started prior to the child's 15th birthday and was continuous for 10 years thereafter.

Inheritance taxes can become a complicated depending upon your state of residence. You’ll definitely want to sit down with an estate planning attorney every time you marry,  especially if there are children involved. The estate planning attorney will be able to advise you about the inheritance and estate tax obligations for your spouses, children and stepchildren.

Reference: nj.com (February 21, 2019) “I've had three marriages. Will my stepchildren owe the inheritance tax?”

Holden & Campbell, LLC – Annapolis Estate Planning

Does New Jersey’s Estate Arm Reach as Far North as Canada? – Annapolis Estate Planning

If someone dies in Canada, and her heirs live in New Jersey, are there any estate inheritance taxes owned?

A recent article from nj.com’s asks for advice if “My sister died in Canada. Will I owe inheritances taxes to New Jersey?” Unless the sister owned property in New Jersey, any inheritance to the New Jersey resident would not be subject to any state inheritance taxes.

This is due to the fact that New Jersey has an inheritance tax on the estate of a nonresident for the transfer of real property and tangible personal property located in New Jersey belonging to the decedent or transferred within three years of death in contemplation of death.

In addition, the transfer of intangible personal property, like bank accounts, stocks, bonds, and annuities, that belong to a nonresident decedent, isn’t subject to New Jersey inheritance tax.

It doesn’t matter where the beneficiary resides, experts say.

Therefore, if the relative had no real or tangible personal property located in New Jersey, there will be no New Jersey inheritance tax owed to New Jersey. If he or she had property located in the Garden State, then the tax will be calculated based upon the relationship of the beneficiary to the decedent—no matter where the beneficiary lives.

If the relative did own property in New Jersey, waivers must be obtained from the New Jersey Division of Taxation to release the lien for any New Jersey inheritance tax on the decedent's impacted New Jersey property.

If a New Jersey resident is inheriting the property from a sister, he or she is considered a Class C beneficiary and generally subject to tax at a rate of 11-16% on inheritances of greater than $25,000. However, for tax calculation purposes, a ratio of the New Jersey property compared to the entire estate can be utilized.

In New Jersey, a Form IT-NR would need to be filed (and any tax paid) within eight months of death for a decedent with beneficiaries who are other than Class A, which includes the spouse, civil union or domestic partner, parents, grandparents, descendants or stepchildren of the decedent or charities.

While there are no inheritance taxes in Canada, it is remotely possible that there may be some estate taxes due in this situation. The only way to be sure is to set up a meeting with an estate planning attorney.

Reference: nj.com (January 15, 2019) “My sister died in Canada. Will I owe inheritances taxes to New Jersey?”

Holden & Campbell, LLC – Annapolis Estate Planning

What If I Don’t Want My Inheritance? - Annapolis Estate Planning

It sounds crazy, but there are many good reasons why someone would not want to receive an inheritance. Making sure that you are not forced to receive assets must be done very carefully, so you’ll need an estate planning attorney on your team.

An estate waiver, also known as an inheritance waiver, releases a person from the right to claim assets in the event of another person’s death. You’ll need such a waiver if you don’t want to be stuck with state or federal taxes based on the value of the estate or you don’t want a piece of real estate that is located far from where you live. Another reason for not wanting an inheritance is that you may be in the middle of litigation or a divorce and the last thing you want is to increase your assets.

Whatever the reason, this article from Investopedia, “How Inheritance and Estate Tax Waivers Work,” provides some tips to consider when deciding on an inheritance or estate waiver release.

Waiver Form Language. The waiver must have specific words to be considered complete and binding. The heir must state her name, along with the name of the deceased individual. A general waiver of all benefits as to the estate of the decedent is appropriate. However, if any specific items were personally designated to the heir, or if the heir has an entitlement to any items, a waiver should list the specific items being waived. The waiver also should state that the decision is being made freely and without coercion to be legally binding.

The Legal Process. Every state has its own laws that govern wills and estates. As a result, each state has a different set of rules relating to waiving an inheritance or estate. However, generally, the disclaimer must be a written document that is filed with the court having jurisdiction over the estate. The executor of the will must get a copy of the disclaimer. In order for the waiver to be valid, the heir can’t receive compensation or other benefits for agreeing to revoke rights for certain items.

Timing and Taxes. A waiver is typically due up to nine months after the decedent's death. If the deadline passes for filing, the heir must take possession of the distributed assets. Any federal and state estate or inheritance taxes are also due nine months after the date of death. The taxes are calculated based on the taxable estate value, and these taxes must be paid before assets are distributed to the beneficiaries. 

Legal Consequences of Waiving Rights. After filing a waiver, the estate’s executor has complete responsibility for the distribution of assets. A waiver can’t direct that another person receives the waived assets. If no additional instructions are outlined in the will, the executor has the discretion to transfer the items to another individual, to an entity not listed in the will, or to a charitable cause. The probate court has to okay these types of transfers.

An estate planning attorney from your state will know the laws governing how waivers work. The language or actions required vary from state to state, and some laws are based on the relationship between the heir and the deceased. Eighteen states have restrictions on the use of waivers, and in many cases, these are related to the date of death. Your estate planning attorney will help guide you through the process.

Reference: Investopedia (October 1, 2018) “How Inheritance and Estate Tax Waivers Work”

Holden & Campbell, LLC – Annapolis Estate Planning

Here’s Why Everyone Needs an Estate Plan - Annapolis Estate Planning

If you need to be convinced that estate planning is not just for the wealthy, here’s something to consider. Without a will, the state makes the decisions about who receives your assets when you die and who raises your child. With no medical directive in place, your loved ones won’t get to say what kind of end-of-life care you get.

There are many reasons to put an estate plan in place: your loved ones and your own wishes chief among them. As reported in Investopedia’s recent article, “4 Reasons Estate Planning Is So Important,” there are four key reasons why everyone needs an estate plan.

1. An Estate Plan Keeps Your Assets from Going to Unintended Beneficiaries. Families need to plan in the event something unfortunate happens to a family's breadwinner(s). A primary part of estate planning is choosing heirs for your assets. Without an estate plan, a judge will decide who gets your assets. This process can take years and can get heated. There’s no guarantee the judge will automatically rule that the surviving spouse gets everything.
2. An Estate Plan Protects Your Young Children. If you are the parent of minor children, you need to name their guardians, in the event that both parents die before the children turn 18. Without including this in your will (in most, but not all states), the courts will make this decision.
3. An Estate Plan Eliminates a Large Tax Burden for Your Heirs. Estate planning means protecting your loved ones—that also entails providing them with protection from the IRS. Your estate plan should transfer assets to your heirs and create the smallest tax burden as possible for them. Without a plan, the amount your heirs will owe the government could be substantial.
4. An Estate Plan Reduces Family Headaches After You’ve Passed. There are plenty of horror stories about how the family starts fighting after the death of a loved one. You can avoid this. One way is to carefully choose who controls your finances and assets, if you become mentally incapacitated or after you die. This goes a long way towards eliminating family strife and making certain that your assets are handled in the way you want.

The reasons to have an estate plan are really very simple. This is how you protect your family, your property and yourself. Think of it as another way to demonstrate how much you love your family. If you don’t have a family, think of it as a way to create a legacy for the causes or people who are important to you.

Reference: Investopedia (May 25, 2018) “4 Reasons Estate Planning Is So Important”

Holden & Campbell, LLC – Annapolis Estate Planning

Say This Five Times Fast: State Estate Tax Exemption - Annapolis Estate Planning

An unintended consequence of the Trump tax cuts basically eliminating the federal estate tax, is that several states that tied their state estate tax to the federal estate tax are running into problems.

States that used the federal estate tax to set their own estate tax rates have found that new tax law has hurt their estate tax revenue. According to this article from Forbes, “States Rebel, Won't Conform To Trump Estate Tax Cuts,” these states are rolling back exemption amounts.

Connecticut, a state that used to have one of the toughest estate tax structures, may have the most generous exemption out of the states that still impose their own death taxes. There are 17 states and the District of Columbia that continue to impose either an estate tax or inheritance tax, with Maryland being the one state with both. Let’s look at what some specific states are doing:

The District of Columbia. The estate tax exemption in DC would have gone up from just $2 million to $11 million (indexed) in 2018. However, the city council dropped the exemption to $5.6 million in June, retroactive to January 1, 2018. This change is part of the budget being reviewed by the DC mayor and is expected to be approved. The exemption will be indexed beginning next year, using a special formula.

Hawaii. The Aloha State’s estate tax exemption for 2018 will be $5,490,000. That’s identical to what it was for 2017. However, the state legislature has amended Hawaii’s estate tax law, so the threshold amount matches federal law as it existed on December 21, 2017 (before the tax cuts). That’s $5 million, adjusted for inflation from 2011. The revision was signed into law by the governor this past summer.

Maryland. To keep this state’s estate tax exemption from rising from $4 million this year to $11 million (indexed) in 2019, state legislators agreed to a new fixed dollar amount for the Maryland estate tax exemption for 2019 and beyond of $5 million. The legislation does add portability, which allows a surviving spouse take advantage of their late spouse’s unused exemption. Their inheritance tax remains the same.

Maine. The state’s House and Senate recently voted on a compromise that will tie the Maine estate tax exemption to federal law, as of December 31, 2017 ($5.6 million for 2018). The governor allowed the tax bill to become law without his signature. He explained that he wouldn’t sign it, because it didn’t abolish the estate tax. Therefore, the Maine estate tax threshold is $5.6 million for 2018, with inflation adjustments starting in 2019.

Connecticut. In the fall of 2017, just before the Republican tax cuts, Connecticut modified its estate tax law to phase in its estate and gift tax exemption to match the federal exemption by 2020. The latest change—signed into law in June—lengthens the phase-in to 2023.

Before the year is out, make an appointment with your estate planning attorney to be sure that your estate plan’s tax strategy still works in your favor.

Reference: Forbes (August 31, 2018) “States Rebel, Won't Conform To Trump Estate Tax Cuts”

Holden & Campbell, LLC – Annapolis Estate Planning

What are the Taxes When Inheriting an Out of State Vacation Home? - Annapolis Estate Planning

When the family vacation home is passed from one generation to the next, there are certain tax issues to be aware of, particularly the step-up in basis.  However, there may also be state taxes.

The first part of understanding the tax responsibility when you plan on giving it to your family vacation home to adult children who live out of state, is to understand the definition of “basis” and “step-up in basis.” These terms refer to income taxes and are used to determine any gains or losses on the sale of the property.

When you die, property that you own or control is valued as of the date of death. The children who inherit the property take it with that value as their basis. The first thing is to determine the parent’s basis in the property.  You should then look at how the basis of inherited property is handled. Generally, the basis of property inherited from a decedent is one of the following:

• The fair market value (FMV) of the property on the date of the decedent's death.
• The FMV of the property on the alternate valuation date, if the executor of the estate chooses to use the alternate valuation.

They refer to the Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. The IRS suggests that for information on the FMV of inherited property on the date of the decedent’s death, you should contact the executor of the decedent’s estate. The agency also notes that in 2015 Congress passed a new law that, under certain circumstances, requires an executor to provide a statement identifying the FMV of certain inherited property to the individual receiving that property.

When a person passes away, the property he or she owns or controls, like what’s included in their taxable estate, will be valued as of the date of death. Children who inherit the property will take the property or asset with the date of death value as his or her basis.

The step-up in basis doesn’t depend on whether or not you pay state or federal estate or inheritance tax on the property.  However, if you file a federal estate tax return, the value of the property reported on the return must be the same as the value reported by the children for the property as their basis in reportable transactions.

If a person only owns part of the real property at his or her death, it’s possible only that portion will get a step-up in basis.

Because the children in this example live out of state, the current owner and heirs need to understand that some states have what is called an “exit tax.” In New Jersey, when homeowners sell their residences to move out of state, they have the pleasure of paying a standard tax rate on the profits from the sale. This tax gets paid when people move, and not during tax season.

An estate planning attorney will be able to work through the fine points with you and your children to minimize any surprises.

Reference: nj.com (July 24, 2018) “Cost Basis for and Inherited Vacation Home”

Holden & Campbell, LLC – Annapolis Estate Planning

New Estate Tax Law Enacted in Maryland Not Tied to Federal Tax Rate - Annapolis Estate Planning

The ability of the state to set laws regarding estate taxes has been exercised by Maryland, which has put its own estate law in place, separate and apart from the IRS.

The state legislature of Maryland has passed a law following the new tax reform that will limit the state’s estate tax exclusion amount to $5 million. Recently passed legislation permits portability between spouses of the deceased spouse’s unused exclusion amounts. This lets the personal representative or executor of the deceased spouse make an election on the decedent’s estate tax return to port the deceased spouse’s unused exclusion amount to the surviving spouse.

LegiScan notes in “MD HB308” that Maryland's estate tax exclusion amount has been "de-coupled" from the federal estate tax applicable exclusion amount (known as the "estate tax exemption") since 2004. However, a law enacted in 2014 provided for the eventual re-coupling of the Maryland Estate Tax Exclusion Amount to the Federal Applicable Exclusion Amount. This was phased in from 2014 through 2019. Full re-coupling was to be effective for decedents dying on or after January 1, 2019.

In effect, the 2014 Maryland law provided that for decedents dying on or after January 1, 2019, the Maryland estate tax exclusion amount would equal the amount that could be excluded under the federal estate tax. Prior to the passage of the Tax Cuts and Jobs Act in December 2017, the indexed federal exclusion amount was scheduled to be $5.7 million in January of 2019.

 However, with the new tax reform, the federal exclusion amount was upped to $10 million per person, indexed for inflation, for decedents dying on January 1, 2018 or later, through December 31, 2025. After indexing for inflation, the per person exclusion amount will be roughly $11.18 million in 2018.

Starting on January 1, 2026, the $10 million per person federal exclusion amount will sunset and return to the prior exclusion amount of $5 million per person, indexed for inflation.

The maximum Maryland estate tax rate of 16% is not altered with the new legislation .

In addition, the state’s inheritance tax is also unchanged. That rate is based on how closely related the decedent was to the people who inherit from him or her, rather than on the size of the estate. The inheritance tax doesn’t apply to surviving spouses and the children of a decedent.

The prior 2014 law still applies to decedents who passed in 2018, so the exclusion amount remains at $4 million for them. Note that the 2014 amount is not indexed for inflation and portability between spouses is not permitted.

Every state has its own estate tax laws, so it is best to meet with an estate planning attorney in your state to map out your family’s plan.

Reference: LegiScan (April 5, 2018) “MD HB308”

Holden & Campbell, LLC – Annapolis Estate Planning

Holden & Campbell, LLC – Annapolis Estate Planning

Britain’s Favorite Entertainer’s Estate Plan Leaves His Kids Out of his Will - Annapolis Estate Planning

Will Bruce Forsyth still be as beloved, now that the public knows he did not leave any of his millions of dollars to his children? Or do they recognize a tax strategy that’s well known in the United Kingdom?

The widow of one of England’s legendary entertainers, Bruce Forsyth, has inherited his entire fortune—a whopping $15.4 million. Starts at 60’s recent article, “Millionaire performer Sir Bruce Forsyth leaves kids nothing in will,” says that his children didn’t inherit a single dime of his estate.

According to The Daily Mail report, it was Forsyth’s strategy to avoid estate tax. In the United Kingdom, money that’s passed from a husband to a widow isn’t subject to inheritance tax. However, an inheritance from a parent to a child is taxed.

In addition to the money left for his wife, the entertainer left about $130,000 in a trust fund to split between his nine grandchildren when they turn 21 and roughly $26,000 to the two executors of his estate.

Nothing was left to daughters Debbie, Laura, and Julie, who Forsyth fathered in his first marriage to Penny Calvert. His daughters Louisa and Charlotte from his second marriage to Anthea Redfern also weren’t included in the will. Likewise, his son Jonathan from his third marriage won’t inherit anything.

Forsyth died last year with his six children by his side at age 89. The star had been sick for an extended period of time and had been admitted to hospital earlier in the year with a severe chest infection.

Bruce Forsyth had a record-breaking 78-year career in British film and television. He made his first TV appearance at the age of 11, taking up tap dancing after being inspired by a Fred Astaire film.

Forsyth received a knighthood in 2011. His last appearance on TV was at Christmas 2015, when he sent a festive message to fans.

Social media was flooded with tributes to Forsyth upon his death last year. The London Palladium promised to dim its lights, celebrities shared their memories of working with the entertainer and fans wrote of their experiences they had had with him.

Whether tax strategy or not, Forsyth is now one of many wealthy celebrities who have made the decision not to leave their children with their fortunes. Bill Gates, Simon Cowell, Elton John and Gordon Ramsay are among the bold-face names who have other plans for their millions.

Reference: Starts at 60 (June 19, 2018) “Millionaire performer Sir Bruce Forsyth leaves kids nothing in will”

Holden & Campbell, LLC – Annapolis Estate Planning

Do I Have to Pay Taxes on an Inherited Annuity? – Annapolis Estate Planning

Yes, there are taxes due on inherited annuities. The amount depends upon your relationship to the deceased and the value of the annuity.

If it seems like everything is subject to an inheritance tax, well, that is often true. In a recent article from nj.com, “Who pays inheritance tax on an annuity?” a beneficiary asks what happens when a Class D beneficiary inherits a qualified annuity.

In this case, which occurred in New Jersey, transfers for less than $500, life insurance proceeds, and certain state and federal pension payments are exempt. However, everything else is subject to the inheritance tax. This includes items controlled by beneficiary designations, instead of a will, like an IRA, 401(k) or annuity.

If it’s an annuity at issue, the date of death valuation must be listed on the New Jersey Inheritance Tax form (IT-R), which is for assets left to Class D beneficiaries. The personal representative (or executor or administrator) of the estate has a fiduciary duty to file the inheritance tax return (Form IT-R). The tax return, along with payment for any taxes owed, is due eight months from the date of death in that state.

The person responsible for paying the tax, depends on the deceased's will. For example, the will could state that all estate or inheritance taxes are paid out of the deceased's residuary estate, which is the part of a deceased's estate that remains after all debts have been paid and specific bequests have been distributed.

If the estate has sufficient funds to pay the tax, the beneficiaries won't owe anything. However, the will could state that all estate/inheritance taxes are paid proportionately by the recipient, even for assets not controlled by the will. That’s the default in New Jersey, when the will doesn’t say how death taxes get apportioned or the deceased died intestate (without a will).

There can be an issue when the beneficiary refuses to pay his or her share. In that case, the executor is still obligated to pay the tax with other estate funds, if any, which will negatively affect the inheritance of other beneficiaries under the will.

In that case, the executor can sue to recover the funds from non-paying beneficiary. If the executor can't pay the tax because there aren’t enough funds in the estate, the state of New Jersey will bring a delinquency claim directly against the non-paying beneficiary.

The best course of action is simply for the beneficiary to pay their share. An executor with an uncooperative beneficiary, should speak with an estate planning attorney to explore their options and protect the estate and the executor.

Reference: nj.com (May 14, 2018) “Who pays inheritance tax on an annuity?”

Holden & Campbell, LLC – Annapolis Estate Planning