Taxes

Maine Estate Tax Exemption to Track Federal Amount

s of January 1, 2016, Maine’s estate tax exemption will track the federal exclusion, currently set at $5.43M and indexed for inflation. In other words, for a Maine resident dying on or after January 1, 2016, Maine Revenue will impose an estate tax on all taxable estates exceeding the federal exemption amount. Only the value of the estate above the exemption amount is taxed, at rates varying between 8% and 12%. This legislation is a significant increase from the current state exemption amount of $2M and effectively eliminates estate tax planning concerns for all but the wealthiest Mainers (unless and until we see an equally large reduction in exemption levels down the road). Unlike the federal estate tax, the Maine estate tax is not “portable”. This means that the first-to-die’s unused exemption cannot be utilized by the second-to-die unless a trust is established. In contrast under federal law, both exemptions with proper planning can be utilized without the establishment of a trust so that the exclusion amount is effectively doubled. In general we recommend our clients revisit their estate plans after the tax laws undergo such sweeping change. Under the current circumstances many clients may indeed benefit by simplifying things. Some estate plans contain disclaimer provisions and other terms that are crafted to achieve maximum estate tax savings irrespective of the invariably shifting state and federal exemption amounts. Whether you have these in place depends upon the particulars of your estate plan. We therefore recommend that you contact the office to review and evaluate the effect of this new legislation on your estate plan. One of the indirect effects of the increasing estate tax exemptions at both the federal and state levels is that capital gains considerations become more relevant than estate taxes. Even with state estate tax rates of 8 to 12%, the combined federal and state capital gains rates will typically exceed those rates (depending upon the client’s individual income and circumstances). As a result, we now tend to focus more on ensuring our clients’ capital assets receive a “step up” in basis upon death. Under current tax law, real estate and other capital assets receive an increased basis upon death equal to the fair market value of the asset as of the date of death (or the alternative valuation date – six months after death). This effectively wipes out all the built up capital gain that has occurred during your lifetime. This can result in enormous tax savings for your children. Without the step up in basis, the children would be left with selling the asset and paying capital gains tax on the difference between the sale price and the original basis. As expected, whether basis planning is available to you depends on your particular circumstances. In some cases, we may advise removing property out of trusts that would otherwise not be subject to estate tax (since this is often no longer a concern) and transferring that property into the client’s name (or a grantor trust for the client) so that the assets will achieve a step up in basis upon death. As part of an estate […]