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Legal Matters: Read up on estate tax law before tax season begins

It is not too soon to start thinking about your tax situation before we say goodbye to 2014. Yuck, and some stronger words we can't use here.

The information in this column is not tax advice. Anyone with individual income or estate tax questions should consult a qualified tax professional. But laws affect estate planning, and it may be a good time to catch up on some related statutes.

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Maryland follows the federal income tax treatment for fiduciaries of trusts and estates, according to the State Comptroller website, taxes.marylandtaxes.com/Individual_Taxes/Individual_Tax_Types/Estate_and_Inheritance_Tax.

That means, if you set up a trust, perhaps for a family member, and appoint a fiduciary to distribute income from the trust to the person, the trust will not have to pay tax on those distributions. But the recipient must report what he received as income, and it is taxable to him. The trust will owe tax on income it earned during the year and did not distribute. Trusts usually earn income from investments.

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What if the tax situation involves your estate? If the personal representative named in your will is dealing with taxes your estate owes, it is too late for you to plan anything.

But if you are still here to read this, you should know that this year, the 16 percent Maryland estate tax applies to all estates where the decedent's gross estate — all property, real or personal, tangible or intangible — exceeds $1 million. The state exemption will gradually increase to $1.5 million in 2015, $2 million in 2016, $3 million in 2017 and $4 million in 2018. The following year, it will match the federal exemption, which is indexed for inflation and projected at $5.9 million in 2019.

If the estate tax applied only to property you had an interest in at the time of your death, estate taxes could easily be avoided by transferring ownership of the property during your lifetime.

You may have wanted a transfer that allowed you to retain some control of the property. Congress thought of that, and wrote the rules so that nearly all lifetime gifts are includable in your gross estate, unless you gave up all rights to the property. If you transferred ownership of property within three years of your death, but retained a life estate that allowed you to live there until you died, the property is likely to be includable in your gross estate.

Depending on your circumstances, you may be able to get your estate below the threshold at which the estate tax is levied. If you have a surviving spouse, and the property passes to him outright, it is eligible for the marital deduction and no estate tax is levied. Gifts to eligible charities, mortgages and debts, estate administration expenses and any losses during estate administration may bring your estate below the estate tax threshold or reduce the amount owed.

Donna Engle is a retired Westminster attorney. Reach her with questions or feedback at 410-840-2354 or denglelaw@gmail.com. Her column, which provides legal information but not legal advice, appears on the second and fourth Sunday each month in Life & Times.

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