Changes in tax law in 2012 increased the focus on income taxes with heavier burdens imposed by higher income tax rates and the restoration of the phase-outs of itemized deductions and personal exemptions. One way for Maryland residents to reduce income taxes is to take advantage of new strategies within their estate plans in order to optimize the results of their estate valuation.
Traditionally, life insurance has been used to pay estate taxes and may have been avoided for fear the policies would be included in a decedent's estate. Higher income tax rates, however, now make it more attractive to use life insurance as an investment in conjunction with the new higher estate tax exemption. A higher exemption means estate taxes are now less likely to reduce the insurance benefits available to one's heirs free of estate and income taxes.
Trusts are often used in an estate plan to reduce estate taxes, a factor that is less of an issue with the higher exemption. Furthermore, the trust is subject to the new higher income tax rates. While keeping income in a trust can protect assets from creditors and provide other benefits, this must be weighed against potentially higher income taxes.
Higher income tax rates and the phase-out of itemized expenses will allow those with higher incomes to see more savings from making charitable gifts during their lifetimes. The higher estate tax exemption also removes many incentives for making charitable gifts through a will or trust.
A higher exemption means fewer people need to remove assets from their estate through lifetime gifts. Furthermore, higher income tax rates make it crucial to reconsider making these gifts since they are received at the same tax basis the giver had, requiring the recipient to pay taxes and the total appreciation when the property is sold. Regardless of the strategies one adopts with his or her estate plan, an experienced family law lawyer may be able to help draft and review the necessary forms.