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Higher Estate and Gift Tax Exemption Limits Are Not License to Dismiss Estate Planning

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Upon death, a Maryland resident’s estate is subject to both a federal and state estate tax (or “death tax”). In 2015, the federal estate tax exemption — the amount an individual can leave to heirs without having to pay the tax — is $5.43 million and is expected to rise to $5.45 million in 2016.

This year, the Maryland estate tax exemption is $1.5 million. In 2016, that number jumps to $2 million, and in 2017, it goes up to $3 million. In 2018, it reaches $4 million. And in 2019, the Maryland estate tax is slated to match the federal exemption, which is projected at $5.9 million, as indexed for inflation.

These higher (and rising) federal and state estate tax exemption limits are leading some Marylanders to believe that they can postpone estate planning or even that they don’t need an estate plan at all. They may rationalize that, without being subject to an estate tax, there’s no need to plan — at least not today.

The problem with that logic is three-fold.

1. Laws and life change.

We are in the midst of a particularly polarizing election cycle. Depending on which way the wind blows, the exemption limits, and the tax code in general, could be subject to a complete overhaul. Some candidates are calling for an elimination of the estate tax altogether, while others advocate for lower exemption limits.

It’s important to remember that laws are not set in stone. They change often, and sometimes, retroactively. An experienced estate planning attorney understands and keeps track of the laws. S/he can employ strategies that will keep one’s assets protected and make adjustments as needed when laws change.

Just as laws change, so does life — and sometimes suddenly. People put off estate planning because they think they are too young or too healthy, they don’t have enough assets, it’s too costly and so on. The reality is that no one plans to be in a life-altering car accident or to be diagnosed with cancer or to have a special needs child. No one plans on getting divorced.

Life is unpredictable. Putting off planning or delaying having pertinent documents updated could result in irreversible mistakes and leave one’s assets in the wrong hands.

2. Proper estate planning goes far beyond curbing estate taxes.

Regardless of the value of one’s assets, planning allows important choices to be made before one becomes unable to do so.

  • Who will make health care decisions
  • Who will take control of one’s finances
  • Who will run one’s business
  • Who will care for one’s children
  • How, to whom and when assets are distributed upon death

You don’t want courts making any of the above decisions for you simply because you didn’t plan ahead.

3. Neglecting to plan properly or not planning at all causes significant, yet largely preventable, financial and emotional suffering to those left behind.

There always will be cases in which, despite planning, someone in the family is displeased with how the proverbial chips fall. That being said, advanced and thorough planning can ensure that things have been settled according to the individual’s wishes and, at the very least, minimize familial tensions and the possibility of a lawsuit.

Lack of Planning Issues

• If the individual hasn’t prepared and carefully maintained a list of his or her assets, major problems can arise. In today’s digital world, many assets now are being managed “in the cloud” and can’t be accessed (or even found) after a person passes away. Similarly, if the individual has seven bank accounts, 12 mutual funds, homes in three states, etc., things will take longer to process and there is more room for error.

A seasoned estate planning attorney can provide guidance in accounting for and organizing assets, including one’s digital estate (accounts, logins, passwords, etc.).

• People fight over personal effects. If it’s not listed in black and white, there will always be those who will argue over it. Some fight over knickknacks with the same intensity that they fight over beachfront property.

• The estate treats the children differently. If the daughter is left all of the jewelry and the son is left all of the real estate, and the real estate ends up being worth four times what the jewelry is, there is a good chance that the daughter will not be happy.

In some cases, this is intentional, where the parent wishes to distribute assets based on need or the personal relationship. Working with an estate planning attorney is the best way to ensure that intentions have been carefully thought out and planned for, limiting the potential for contention.

• Beneficiary designations are outdated or incorrect. Nothing shakes up a family like an ex-spouse being the lucky beneficiary of a million-dollar retirement account, yet it happens all the time. Similarly, while Grandma may think it’s a good idea to make her 6-month-old granddaughter the beneficiary of her mutual fund, minors can’t take control of financial assets. Was anyone listed as a backup? Would a trust have been the wiser choice?

The Best Time to Plan

Estate tax exemptions being what they may, it is indeed possible that one’s assets won’t be subject to the dreaded death tax. However, estate planning is about much more than taxes. Making the value of one’s assets the deciding factor for if and when to plan can leave a person and his or her loved ones exposed to a huge amount of risk.

The best time to plan is early and often, and with the help of an experienced estate planning attorney. An estate plan should be reviewed and updated regularly to ensure that all assets are accounted for, beneficiary designations are correct and that one’s wishes are reflected in accordance with current laws.

Gary Altman is the principal and founder of Altman & Associates. He can be reached at 301-468-3220 and gary@altmanassoicates.net.