May 16, 2014

Maryland Governor Signs Estate and Trust Bills Into Law

Today, Governor O’Malley signed two bills that will significantly affect estate planning in Maryland going forward.  House Bill 739 (Maryland Estate Tax – Unified Credit) increases the Maryland estate tax exemption from the currently $1 million to $1.5 million in 2015, $2 million in 2016, $3 million in 2017, $4 million in 2018, and eventually recouples with the federal estate tax exemption in 2019, expected to be about $5.9 million. Prior to 2004, the Maryland estate tax and federal estate tax were “coupled,” meaning the exemption was the same for both estate tax systems.  Estate tax was paid to the federal government on assets above the exemption amount and a credit of a certain percentage was paid to Maryland. However, as the federal estate tax exemption increased (pursuant to legislation passed in 2001), Maryland received a smaller and smaller percentage since less tax was being paid to the federal government. Maryland responded by “decoupling” from the federal estate tax and setting the Maryland estate tax exemption at $1 million, effective as of January 1, 2004. The result was that in 2004, the federal estate tax exemption was $1.5 million, while the Maryland estate tax exemption was $1 million. Since the federal estate tax exemption increased through 2009, in that year, the federal estate tax exemption was $3.5 million while the Maryland estate tax exemption remained $1 million. Currently, the federal estate tax exemption is $5.34 million, while the Maryland estate tax exemption is $1 million. That means that although many Marylanders will be exempt from federal estate tax upon their death, prior to the passage of this bill, many, particularly those with large amounts of equity in their homes, life insurance, and large retirement plans, would be subject to a Maryland estate tax, with a percentage as high as 16%. This difference between the two exemptions caused attorneys and CPAs to recommend to many of their wealthier clients that they leave Maryland for state estate-tax free states, such as Virginia, Delaware, and Florida. The concern was that the loss of these high-net worth individuals would cause Maryland to lose significant revenue it earned through estate taxes. Hence, the new legislation that gradually recouples the two exemptions.

The second major estate planning bill signed by the governor today is House Bill 83 (The Maryland Trust Act).  Until this law was passed, enacting the Maryland Trust Act, which adopts provisions from the Uniform Trust Act drafted by the National Conference of Commissioners on Uniform State Laws as most recently amended by NCCUSL in 2005 (except where the Uniform Trust Act differs from established Maryland law, the Maryland Trust Act retains Maryland law), a person administering a Maryland Trust who had a legal question would have to turn to Maryland case law, case law of other jurisdictions, and a treatise called the Restatement of the Law on Trusts, to try to determine the answer. Very little of Maryland’s trust law was actually contained in statutes. This made administration difficult and costly. The Maryland Trust Act codifies much of this Maryland law that previously existed only in cases and the Restatement of the Law on Trusts, and adds new provisions as well. An example of a new provision that the Maryland Trust Act adds to Maryland law is that if a trust is silent as to whether it can be revoked or not, it is treated as a revocable trust (i.e. a trust that may be amended or revoked by the person who created it). Another example is, unless the trust document says otherwise, an individual Trustee may terminate a trust that has assets with a fair market value of $100,000 or less.

With the enactment of these two bills, there will be sweeping changes in the way attorneys approach estate planning, and the administration of trusts will be more clear in many cases.  If you have any questions about estate planning or trusts, or want to retain an attorney who can draft an estate plan or trust for you, please contact Goodwin Weber PLLC.