By Timothy S. Barkley, Sr. April 2015.
“Let’s talk about uncomplicating your estate plan.
“When your plan was created in 2005, the federal estate tax exemption had just risen to $1.5 million. The Maryland estate tax exemption was $1.0 million. Do you have any idea what your estate value was in 2005?”
The clients leaf through the papers behind the “PLAN SUMMARY” tab in their “ESTATE PLAN” notebook. “It says here, ‘your estate is valued at approximately $3.0 million.’ But that was before the stock market took a dive. We lost a little less than half of that, and we’re only just now starting to make it back.”
The attorney nods sympathetically. “Heard that sad song before – it’s a common lament.
“That means that your estate was fully taxable in 2005, and the total combined estate tax would have been over 50% of the excess over the $1.5 million exemption. That was a powerful incentive to avoid the tax!”
The couple across the table nod agreement. “We did all this to save the kids a boatload of tax. But you’re telling us that there’s no tax anymore?”
“No, not that there’s no estate tax, but that the amount you can pass tax-free is a lot higher. You can pass over $5 million free of federal estate tax, and this year you can pass $1.5 million free of Maryland estate tax. Next year, the Maryland number rises to $2 million, then $3 million in 2017. In 2019, the Maryland exemption will equal the federal exemption. So probably no tax actually payable unless your investment guru does very well indeed.”
She looks at him and he grins. She says, “Behold, the guru. He does OK, but not that well.” All laugh.
“So unless you both die in the next eight months, you don’t need the two or three trusts in your current estate plan to avoid tax. You have two options. First, you can just shut down the current plan and start with a new trust or will arrangement. The benefit of that is that you don’t have any baggage left over from the old plan.
“The second option is to collapse the old trusts into one new trust. That trust would be simpler to run when you passed away. It wouldn’t avoid estate tax, but unless you’re unlucky, you won’t need tax avoidance. We’d transfer title of assets in the old trusts into the new trust, but because we could never be sure we had everything out of the old trusts, we’d keep them on the shelf and amend them to pay out to the new trust when you died.
“We would update your powers of attorney and medical directives – ‘living wills’ – at the same time to catch up with changes in the law and medical technology and terminology.
“What do you think?”
“I think that makes sense,” she says, “but what about nursing homes? Seems like just about the time the estate tax went away, all we hear about is nursing homes. We want to make sure that if we go to a nursing home they don’t come and take everything away.”
The lawyer smiles. “I have good news for you. Nobody comes and takes anything. But you do need to think about the costs of long-term care.”
NEXT TIME: The Nursing Home
Attorney Tim Barkley
The Tim Barkley Law Offices
One Park Avenue
P.O. Box 1136
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