Archive for September, 2009

Death & Taxes, or why estate planning is complex

September 9, 2009

Estate planning has become much more complex in recent years. The major reason is the ‘decoupling’ of state and federal estate taxes. Keep in mind that the ‘taxable estate’ is not the same as the ‘probate estate’.  State and Federal death taxes very broadly define ‘estate’ and that definition may include life insurance, jointly owned property and property held in trust. (More info at http://www.carrollandferguson.com/EstatePlanningKit.pdf )  Almost all states that have estate taxes set them up originally to be coupled to the federal estate tax to take advantage of a provision in the federal tax that provided for credit against the federal tax for death taxes paid to states. Initially, the state rates and exemptions were ‘coupled’ to the federal tax to take advantage of the maximum allowed federal credit. The result was that the total tax due by an estate was unchanged, just that some of it now went to the state instead of all of it going to the federal government. States were able to create a revenue stream without ‘raising’ taxes. The problem came in 2001. Congress in an attempt to repeal the federal estate tax completely gradually changed the federal estate taxes exemptions from $1,000,000.00 to $3,500,000.00 in 2009, complete repeal in 2010 and a return to the $1,000,000.00 exemption in 2011. While Congress is not likely to leave this situation alone, I am not going to predict what they will finally do about repeal other than they will not let the estate tax go away completely. The states, including Maryland did not want to lose the revenue stream they had gotten used to having, so they ‘decoupled’ the state estate taxes from the federal tax. We are now in a situation where an estate plan needs to take into account the difference between the state exemption amount and the federal exemption amounts. The Maryland estate tax rate can get quite high and now estate planning needs to take into account the Maryland estate tax and plan for it separately from the federal tax.

Dan Carroll, danc@carrollandferguson.com

www.carrollandferguson.com

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