The federal estate tax law provides an exemption from federal estate tax for each individual in the amount of $2 million through 2008. This amount will increase to $3.5 million in 2009. Beginning in 2004, Maryland decided to “decouple” its estate tax exemption amount from the federal estate tax exemption amount. Instead of following the federal estate tax exemption amount, which it had done for years, Maryland limited its estate tax exemption amount to $1 million per individual.
During 2006, the Maryland legislature considered a variety of proposals that would reduce or eliminate the differential between the federal and state estate tax exemption amounts (currently, a difference of $1,000,000). In the end, the legislature decided not to re-adopt the higher federal estate tax exemption amount, and chose instead to retain a Maryland estate tax exemption amount of $1,000,000. However, the new law will allow married couples to defer the Maryland estate tax on the differential between the federal and Maryland estate tax exemption amounts until the second death. Generally, to accomplish this deferral, on the first death the differential amount will need to be left to a trust exclusively for the surviving spouse’s benefit. This is contrary to many estate tax exemption or “bypass” trusts that are held for the benefit of the descendants and the surviving spouse.
The potential deferral of Maryland estate tax on this differential amounts to about $100,000 today through through 2008, and to almost $230,000 in 2009. If you want to defer the payment of the Maryland estate tax, then it is very possible that you will need to modify your Wills or Revocable Trusts to include the trust described above.
The requirements for deferral may run counter to your non-tax objectives, and it is possible that deferring the tax may result in higher taxes ultimately being paid. Thus, it is important to analyze these issues in the context of your particular circumstances.
It should also be noted that although this planning measure may benefit married couples, the change in the Maryland estate tax exemption amount is also a reason for unmarried persons (and married persons who may not want to defer the tax) to review their estate plans to determine what the Maryland estate tax law means for them.
Beneficiary designation forms are an important – but often forgotten – part of your estate planning. Occasionally, clients will execute new Wills or Revocable Trusts, and later make changes to their retirement plans or life insurance/annuity policies without coordinating their beneficiary designation forms with the estate plan envisioned in their documents. We would be very glad to review your current beneficiary designation forms to determine whether they carry out your intended wishes. This involves both tax and non-tax considerations. For example, in addition
to assuring that the intended beneficiaries are named, the
forms should be reviewed to see if they will enable the beneficiaries to “stretch” the benefits out over their life expectancies. This is also a particularly opportune time for owners of 401K and certain other non-IRA accounts to review their beneficiary designations because a new federal law enables the non-spousal beneficiaries of such plans to stretch the payout provisions in a manner that was previously available only to non-spousal beneficiaries of IRAs.
Advance Health Care Directives (“Medical Powers of Attorney”)
The Maryland legislature has updated its suggested language for these instruments. One of the updates that may be of most interest to you concerns the degree of flexibility that your health care agent will be given in light of your stated wishes.
The new language allows you to indicate whether your agent (i) should have the flexibility to make the ultimate medical decision on your behalf, using your stated wishes as a guide, or (ii) must follow your stated wishes as written, even if your health care agent disagrees with them. The insertion of this new language will clarify for your family, friends, and health care practitioners the degree of flexibility that your health care agent should have in carrying out your stated wishes. Please give us a call if you would like to review or discuss your Advance Health Care Directives.