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John Whalen, PA

estate planning

estate-gift taxesMaine Estate-Gift Taxes

Will your family be subject to Maine estate-gift taxes when you die?  Maine is one of the few states which continue to have an estate tax.  Being married may help you avoid or defer it.

The Maine Estate-Gift Taxes, on those estates which are taxable, are at rates which range from 8% to 12%.  While this tax is credited against the federal estate tax, because of the differing exemption levels, the Maine estate tax might get imposed even though there is no federal tax.

The federal estate tax is a “gross up tax.” This means that it looks at the total value of gifts during life together with the value of assets held by the decedent at death to establish the value of the taxable estate.  This tax scheme has recently been modified with a broadening of the amount of the exemption, but with an increase in the maximum tax rate imposed upon those estates which are taxable.  Under current law, the life time exemption is index to inflation.  It began at $5,000,000.00 and rose to $5,250,000.00 last year. It should continue to rise with inflation.  The maximum rate on estates which are taxable is 40%.

The State of Maine can impose a tax only on estates of individuals who were residents of Maine on the date of death or estates which hold property in Maine which includes real estate, personal property, such as vehicles, and intangible assets, bank accounts, stock, etc.  In Maine, an estate which has a value in excess of $2,000.000.00 is taxable.  While this number may initially appear big, remember this tax not only is on items owned at death; but also, items where a benefit is paid due to death such as life insurance.  So, it can very well be that while there may not be a tax at the federal level, one will be imposed at the state level.  Marriage can allow a couple to avoid and/or defer that tax.

Unlike any other arrangement, couples, who join in a marriage recognized by Maine, are allowed under both the laws of Maine and the federal government to make unlimited gifts to each other and to join with each other in making gifts to others.  This allows the couple to equalize their estates by the one with fewer assets transferring assets to the other spouse.  Also, by combining on estate gift tax returns, they equalized the cost of the gift which can either avoid a gift tax or reduce its impact.  The result is a married couple by gifting between each other and to others can greatly impact the tax on their total estate.  Since the tax is imposed as of the date of each partner’s death, this provision in the tax law avoids a tax result governed by the date of either spouse’s death.  It can even result in no tax ever being paid with proper planning.  Unmarried couples cannot do this.

Another advantage of marriage is a provision called the “marital deduction”.  Under both federal and Maine state law, property which one spouse receives or obtains control over from the other spouse is deducted from the total value of the estate of the first to die.  The idea behind that law is the tax is only deferred.  When the second spouse dies, assuming that spouse has not remarried, a tax is collected upon those assets.  But, even the impact of that tax can be avoided or limited with proper estate tax planning.  By using an estate plan which utilizes both the exemption and the marital deduction, a married couple can pass substantially more onto future generations that can a single person.

In future articles we look more closely at how a couple can plan their estates to limit or avoid the impact of the estate or gift tax.  For now, it is suffice to say, if you have recently been married, or if married have not updated your estate plan,  please consider giving us a call.

John, my loved one just died. Do I have to go to Probate Court?

probate1This is a question we often get from my clients, neighbors and friends after their loved one has died or in the period just before death.  With all the negative information in the media about the complexity and cost of probate, it is no surprise that this is a concern.  But, the reality, in Maine, is that even if a probate is required, the process can be fairly simple and relatively inexpensive.  In future articles, we plan to go through the probate process in detail. But, with this introduction, we would like to address this basic question. Do I have to go to Probate Court?

What is Probate?

Before we look at the answer to this question, it might help to understand why the law has this process called “probate”?  The answer is quite simple.  Way back in the middle ages in England, it was recognized that a system needed to exist which allowed for the orderly settlement of a decedent’s debts and the orderly disposition of his/her assets. The term “probate” comes from the term used in Saxon law, “probare”, which meant to claim a thing as one’s own.  Black’s Law at p.1365 (4th ed.1951). This system was brought to America with the first colonists.  In Maine, until the mid nineteen seventies, the system was extremely complex and expensive because just about each step of the process required a hearing before the probate judge.  This changed with the adoption of Maine’s Probate Code, which greatly simplifies the process and allows most estates to be probated without the need for a hearing before a judge; but the reputation lingers.

So, in brief, the answer to the question is an estate may be needed if the deceased died holding ownership to “probate” assets and/or with unresolved debts which the family and loved ones of the deceased wish to conclude.  Let’s look at this in a little more detail.

Assets

I am afraid the definition of probate assets is one of those exception type definitions.  Probate assets are all assets owned or controlled by the decedent at the time of death except (1) property which was placed into a trust before death, (2) property which passes to an existing beneficiary by operation of a contract executed by the decedent before death, and (3) property held in joint tenancy with an individual or entity that is alive or existing at the time of the decedent’s death.  A trust is an arrangement where a person turns assets over to another person(s) or entity to hold, invest, manage and distribute to an identified beneficiary pursuant to an agreement, usually in writing, between the person turning over the assets and the person who will manage them.  This can actually be set up with the same person serving both roles.  These trusts are often called ‘living trusts” because they are set up before death, but with the intent of controlling matters after death.  But, the important thing to remember is to avoid probate there must be proof the assets are actually in the trust at death. If a question exists, the Probate judge can be asked to answer the question.  The second class of probate assets covers insurance type arrangements where the beneficiary is identified.  These assets include all types of insurance policies.  It also includes annuity investments and pension plans, including IRA plans and 401 (k) plans.  The last class applies to all types of property, real estate, vehicles, bank accounts and investments. An arrangement that passes ownership on the death of one owner directly death to the survivor on the deceased’s death falls within this class. Most married couples title their assets in this form; often when one spouse dies there may not be a need for probate.  But remember, if there exist assets which fall into this definition, probate will need to be considered.  If the total value of these assets is $20,000.00, ownership can be achieved through an affidavit of transfer provided the beneficiary is clearly known.  If the total is greater, a probate is advisable.

Unresolved Debts

The other situation which may motivate the family to consider a probate is when the decedent had unresolved debts at death which they wish to resolve.  When this question arises with an estate with little or no probate assets, my question to the family is, why do you want these debts addressed?  Unless they have done something to make themselves directly responsible for the decedent’s debts, the creditors have no claim against them unless and until they agree to be responsible for the debt.  If the family wishes to get these debts addressed, I suggest they consider a filing in probate court.  By going through probate court the debts can get settled without their being personally exposed to the creditors. By creating an estate through probate court, a person is appointed to manage the estate.  Often clients use the older terms for this role of “executor’ or “administrator”; but, in Maine, the person (or entity) who serves in this role is called the “personal representative”. The personal representative is responsible to identify the assets, address debts of the decedent and distribute the estate.  This person is not directly responsible for the debts of the decedent.  The creditors cannot proceed against the personal representative; they can only make their claims against the assets of the decedent (generally, the probate assets, but in some cases, this could expand to non-probate assets).  In these situations, the probate court functions like a bankruptcy court.  The creditors’ claims are classified and paid (or not paid, if there are no assets available to their class) in accordance a framework which the legislature has designed and put in place under Maine’s Probate Code.

We do hope this discussion has been helpful.  We will be addressing issues of estate administration, as well as estate planning, in depth in further articles. But, one last point for you to keep in mind if ever you are placed in this position.  While there is no time limit on when an estate once opened must be closed, there is a time limit on when an estate can be established. An estate cannot be established if three years have passed since the date of the decedent’s death.