As you probably know, death is not the end of taxation. The estate tax is imposed federally and by most states, and some states may impose an inheritance tax as well. In Maryland, a decedent’s estate pays the greater of the Maryland Estate Tax or the Maryland Inheritance Tax. These taxes are the price paid for passing on property to others after you are gone.
The Federal estate tax return, Form 706, is due 9 months after the date of decedent’s death, and you must pay any estate tax due at that time. The same holds true in Maryland. Washington, D.C. gives you ten months to file the D.C. estate tax return and pay the D.C. estate tax. Even more generous is Virginia, whose estate tax was repealed in 2006 for those dying on or after July 1, 2007.
Typically, the person administering your estate pays the tax using funds from the estate itself. If most of your assets are not liquid, this can pose problems; in order to pay the tax, the person handling your affairs will probably need to sell assets like real property or interests in other entities. This means that your estate plan will probably fail if you devise the proverbial family farm, yet leave no way for your executor to pay the tax bill. One solution for someone in this situation is to own life insurance (usually in an Irrevocable Life Insurance Trust). Life insurance is payable on your death to a named beneficiary, and it can be used to pay the tax.
Estate tax will not be imposed on individuals who pass on wealth under a certain amount. Note, however, that the federal and state exemption amounts may be different and that the federal exemption amount is scheduled to decline in 2013. Currently, the Federal exemption amount is $5,120,000; in Maryland and in D.C., it is $1,000,000.
The estate tax is an important element in estate planning; call us at 301-468-3220 or email us at firstname.lastname@example.org to set up an appointment to discuss how to minimize its consequences and prepare for its payment.
– Gary Altman Esq. and Coryn Rosenstock