As of January 1, 2013, the Civil Marriage Protection Act legalized same-sex marriage in the State of Maryland. From the estate-planning perspective, the passage of this law clarified many points that had been problematic for same-sex couples including rights of inheritance where there is no will, spousal elective shares, and assessment of Maryland inheritance tax. Importantly, any portion of an individual’s estate passing to a surviving spouse passes free of Maryland estate tax. This exclusion was not previously available to same-sex partners who were not permitted to marry.
Unfortunately, the federal estate tax treatment of estates passing from one Maryland same-sex spouse to another remains in doubt. The Defense of Marriage Act defines marriage as a union between a man and a woman for purposes of federal benefits and application of federal law. Therefore, regardless of how Maryland or any other state defines marriage, the federal government only recognizes marriages between a man and a woman. This applies, of course, in connection with federal tax statutes such as those applicable to the federal estate tax.
The United States Supreme Court will hear the case of United States v. Windsor on March 27, 2013. The issue in Windsor focuses precisely on the constitutionality of the Defense of Marriage Act as it applies to the federal estate tax. The case concerns two New York women who were legally married in Canada. Upon the death of the first spouse, the estate was assessed an estate tax of approximately $360,000 because the surviving spouse was not considered a “spouse” pursuant to the Defense of Marriage Act. If the Supreme Court finds the Defense of Marriage Act unconstitutional, then estates passing to surviving same-sex spouses will pass free of estate tax.
The process of estate planning contemplates many issues, but one of the primary issues is addressing potential estate taxes. All married couples should engage in the estate-planning process to ensure proper distribution of assets in a tax-efficient manner. Having a discrepancy, then, between Maryland tax law and federal tax law makes efficient planning a significant challenge. The federal estate tax does not apply to everyone, but for Maryland same-sex spouses whose net worth exceeds a certain threshold, the forthcoming Supreme Court decision will have a tremendous impact on their estate planning.
Here it is, January 2, and we’ve firmly established that we’re not going headlong over some theoretical cliff. There will be plenty of time to discover all of the unintended consequences and blatant lapses in judgment buried in the new law. Well, maybe not plenty of time, because it seems that Congress has, to some extent, kicked the can down the road and will be revisiting some or all of the recent “changes.”
In any event, my primary professional concern in this kerfuffle has been the fate of the federal estate tax. For two years, estate planners have been telling our clients that there was a limited window of opportunity to use some or all of the $5.12 million gift-tax exclusion that was granted via the last can to be kicked down this particular road. Indeed, many families acted on this advice and made significant gifts and employed advanced planning techniques to benefit their families.
In fact, The American Taxpayer Relief Act of 2012 keeps the current $5.12 million exemption in place. The difference, though, is that the top estate tax rate has increased to 40%. So, was all of last year’s hype and urging to “act now” for naught? The answer is emphatically no.
First and foremost, professional advisors should never recommend making ill-advised gifts solely because the tax code dictates a certain outcome. Part of the planning that goes into making significant gifts should include discussions of whether the proposed gift will both a) benefit the family in the long run and b) not disadvantage the donors in any way. As I always say, the tax “tail” should never wag the dog. Hopefully, all gifts made in 2011 and 2012 in consideration of the increased exemptions were made thoughtfully and carefully.
Second, the increase of the estate- and gift-tax rate to 40% has increased the value of gifts made in 2011 and 2012. Individuals that have taken advantage of the increased exemption over the past two years have just seen the value of their gifts increase solely by virtue of the higher tax rate that won’t be paid at their deaths. For families making significant gifts, the dollar value of that savings is considerable.
The final point I’d like to make is that the maintenance of the $5.12 million exemptions (and Maryland’s $1 million exemption) means that individuals and families should continue to be vigilant in their planning. Those who were contemplating making gifts in 2012, but fell short of the deadline, have a renewed opportunity to consider and complete those gifts. Those who did not consider making significant gifts might now give greater attention to the matter in light of the increased federal estate-tax rate. And those who have not recently reviewed their estate plans should make time to consult with their advisors and see if changes are appropriate.
The Maryland Court of Special Appeals recently reaffirmed a long-standing rule of will interpretation in the Estate of Steven Click decision. More importantly, though, the Court’s decision provides a critical practical lesson in Maryland estate planning.
The dispute focused on a poorly drafted clause in the Last Will and Testament of Joanne Click, a resident of Edgewater. In general, a will may contain both specific bequests and what is typically called a residuary bequest. Ms. Click’s will contained several specific bequests; for example, she leaves the sum of $1,000 to each of her grandchildren. A residuary bequest, however, typically specifies how the rest (i.e., the “residue”) of the estate is distributed; for example, “in equal shares to my surviving children.” The residuary bequest in Ms. Click’s will (if it contained a residuary bequest at all) was extraordinarily unclear. The clause in question provided “any assets not directly disposed of in this Will shall be given to the surviving members in order of succession.” To say the least, this is a terrible manner in which to state one’s wishes regarding disposition of the vast majority of her estate.
The primary question before the Court was not necessarily what that clause meant, but whether outside, or extrinsic, evidence could be heard by the Court to determine what Ms. Click intended. The general rule in Maryland (and most states) is that the meaning of a will is determined by the plain words of the document itself, without resort to testimony given by others after the fact. If, however, a provision of the will is found to be ambiguous, then the Court may consider such outside testimony. Ambiguity, in this context, means more than a lack of clarity. Ambiguity is when a term may have more than one reasonable interpretation. Different groups of heirs in this matter believed that the clause had different meanings that would serve to benefit them.
The Court ultimately decided that the clause was, in fact, ambiguous and that the Circuit Court would have to conduct further proceedings to determine the meaning of Ms. Click’s will. Ultimately, the lack of clarity in Ms. Click’s will is costing her heirs a significant amount of time and money, and no one will truly know if her intent is properly honored in the end. The essential practical problem here is that Ms. Click’s intent would have been clearer if she had retained a qualified attorney or even written the will herself. Instead, she used a computer program purchased at a retail store to prepare her will. Although there are typically no “magic words” used in the drafting of a will, no computer program can substitute for the guidance and experience of a qualified attorney. The most important lesson of the Estate of Steven Click decision, then, is the relative value of good legal counsel in prudent planning.
Estate planning should be focused on anticipating possible outcomes and structuring your affairs for the tax-efficient disposition of your assets to your loved ones. However, all too frequently we estate-planning practitioners find ourselves working with clients in a reactive situation, trying to salvage an acceptable outcome out of some missed opportunity. Obviously, better outcomes are achieved when planning, rather than when reacting.
Careful attention should be paid to your retirement plan and life insurance beneficiary designations. Effective planning can ensure that these assets are directed to your beneficiaries in a way that takes advantage of all available tax benefits. Unfortunately, when proper planning is not done, opportunities to reactively salvage some benefit are few and far between.
The current environment of low interest rates and the high gift-tax exemption makes 2012 an ideal time to make gifts to or for the benefit of loved ones. The opportunity is fading fast, however, as the gift-tax exemption will revert to $1 million after this year. The smart play now is to discuss these opportunities with your estate planner, as the prevailing wisdom is that the $5 million exemption won’t return in 2013.
Finally, you cannot assume that you don’t need a will or don’t need to update your will. There are many faulty assumptions in the field of estates and trusts, and they can all be easily corrected with a quick phone call. Assuming that your ten-year old will is still appropriate and effective, though, can lead to unintended consequences.
In 2012, there are opportunities to plan. Unfortunately, too many individuals miss the opportunities and are forced into salvage missions. Be a planner!
The White House was somewhat vague about its intentions regarding the federal estate tax following the State of the Union address. One comment suggested that the Administration wasn’t going to touch the estate tax, leading to a considerable amount of speculation over what that comment actually means. Would it allow the estate tax rate and exemption level to revert to 2001 levels? Or would that mean leaving the current $5.12 million exemption and 35% rate in place? Obviously, there is a huge difference between the two options, so some clarity was needed.
That clarity (at least for the moment) has arrived with the release of the proposed FY 2013 federal budget. The Administration’s budget proposal with respect to the federal estate tax is to restore the $3.5 million exemption and 45% rate that were in effect in 2009. This would appear to be a sensible compromise between the current law and the 2001 law, but my enthusiasm for such a common-sense decision is tempered by the knowledge that this proposal actually has to make it through Congress. Does the phrase “one-car funeral” come to mind? Let’s keep our fingers crossed that Congress will allow us to plan without constantly dealing with moving targets.
In the meantime, keep in mind that the State of Maryland continues to stand by its $1 million estate tax exemption and doesn’t appear to have any intention of raising it. As I always say, at least Maryland gives us a fixed target…
It is almost automatic for families with minor children to implement trusts for the children within their estate plan. The logic is simple. If one spouse dies, the family’s collective estate is typically left in the care of the surviving spouse, who will continue to raise the children and make spending decisions on their behalf. However, if both spouses die, and the children are then raised by guardians, conventional wisdom says that the parents must leave the children’s shares of the estate in trust. Otherwise, the children would receive their shares of the estate upon reaching the age of majority, leaving the strong possibility that their shares will be spent quickly and unwisely. Therefore, minors’ trusts are strongly recommended. The basic idea is that your assets will be managed by a trustee, who will be responsible for ensuring that the assets are appropriately invested and spent for your children’s benefit. Here are a few of the primary factors families should consider: Read more
Let’s see: the stock market moves like a yo-yo on an hourly basis, the national political climate is as clear as mud, and Maryland has seen an earthquake, a hurricane, and flooding all in the span of a few short weeks. Doesn’t seem like a great time to be thinking about significant estate and gift planning? In fact, a combination of factors makes this the perfect time to consider such planning.
After almost an entire year of uncertainty regarding the estate and gift taxes, Congress finally enacted temporary legislation to reinstate the estate tax. Somewhat surprisingly, Congress also dramatically increased the estate and gift tax exemptions to $5 million. Remember that before the “fix,” the estate tax exemption in 2009 was $3.5 million per person and the gift tax exemption was $1 million per person. As with most of what comes from Congress, however, there are positives and negatives to these adjustments. Read more