Maine has recently approved changes to its estate tax laws that will exempt significantly more of a decedent’s estate from Maine estate taxes. Under the previous federal law, individuals dying in 2015 may transfer property during life and at death in an amount equal to $5,430,000.00 (as indexed for inflation) free from the federal estate tax. The amount of the federal estate tax exemption has been increased to $5,450,000.00 beginning January 1, 2016 for individuals dying after the first of the year. Those same individuals will also be subject to the new Maine estate tax regime—which is now tied to the federal estate tax exemption (i.e. $5,450,000.00).
Over the past 15 years, the exemptions for Maine and federal estate taxes have crept upward so that many of our clients no longer have estate tax concerns. If your estate plan includes an exemption trust upon the first spouse’s death (a.k.a. “credit shelter trust” or “bypass trust”) to take advantage of the decedent spouse’s applicable state and/or federal exemption, it is time to review and perhaps revise your estate plan. These trusts were utilized in order to double the amount of exemptions available to spouses. Given the recent change in the law, that purpose is no longer appropriate for many estates under the new exemption levels.
Over the years, many of our clients have worked towards reducing their estates by making gifts in order to take advantage of the annual exclusion amount ($14,000.00 per year). These gifts remove the value of the gifted property from their taxable estates. With the increased exemptions, gifting property to the next generation is less advantageous from a tax planning perspective. Indeed, sometimes holding on to the property and passing it to the next generation upon death will make the most sense from a tax planning perspective. If your beneficiaries receive property transferred upon death as opposed to during your lifetime, they receive a new basis (referred to as a “stepped up basis”) equal to the fair market value of the property at date of death. In effect, this eliminates all of the capital gain built up during the decedent’s lifetime. In contrast, gifting the property during your lifetime will not provide the next generation with any elimination of built up capital gain (i.e. no stepped up basis).
Although Maine now tracks the federal estate tax exemption, it does not allow for “portability” of exemptions between spouses. Whereas federal law allows any unused exemption of the first spouse to die to be carried over to the surviving spouse, Maine law does not allow for portability of this unused Maine exemption. It therefore necessitates ongoing planning (including spousal trusts as referred to above) in estates that exceed the $5,450,000 exemption so that the first-spouse-to-die’s Maine exemption is utilized.
There are many reasons to review an estate plan including change of circumstances, death in the family, and fiduciary changes. When tax laws change significantly as is the current case, a review of your estate plan is warranted. In many cases, a provision in your current will which mandates the establishment of a trust upon your death will not result in additional taxes—but it will needlessly compel the establishment of a trust and create additional unnecessary costs and hassles. Moreover, transferring property into trust for the benefit of a spouse will freeze the basis of the property as of the first-spouse-to-die’s date of death. Without the trust, the property will receive a second step up in basis upon the death of the surviving spouse—which is good tax planning. Furthermore, without a trust your estate plan is greatly simplified and we like that. Of course, there are still sensible, non-tax related reasons to create trusts upon the first spouse to die, which often arise in second marriages, special needs or other unique family circumstances.
You should contact this office if you have an outdated estate plan that relies upon these old exemptions in order to schedule a review with one of our attorneys.