The Elville Webinar Series’ Wellness Series — Making the Most Out of Your Medical Appointments
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The education of clients and their families through counseling and superior legal-technical knowledge is the mission of Elville and Associates. We hold multiple educational events every month. Click to view our calendar of educational webinars and events or visit the Elville and Associates YouTube channel to view recordings of our past webinars.
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Many individuals engaging in estate planning opt to create a third-party special needs trust to provide for their loved one living with a disability. However, did you know that these trusts may have to pay taxes on any income generated from the trust assets and retained by the trust for future use? If the trust is a qualified disability trust (QDT), it can minimize unnecessary tax consequences.
What Type of Trust Qualifies?
To qualify as a qualified disability trust, a trust must meet the following basic requirements:
- It must be irrevocable.
- The beneficiaries must be disabled and receive Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI). Additionally, the trust must have been established for their benefit before they turn 65.
- It cannot be a grantor trust and must be a separate tax-paying entity. So, for example, a first-party or self-settled special needs trust cannot qualify.
- Any remaining amount in the trust may be transferrable to nondisabled beneficiaries once the disabled beneficiaries are deceased.
Why Become a Qualified Disability Trust?
If a trust meets these requirements, it can reap significant tax benefits. Without the qualified disability trust designation, a trust normally may exempt up to $100 to $300 of income it generates from taxation, depending on whether it is required to distribute all of its income. However, a QDT may take an exemption equal to what an individual filing a personal income tax return may take. Per the Internal Revenue Code, this is $4,150 plus an annual adjustment for inflation.
In addition to the exemption, an individual benefits from more favorable tax brackets on income than a trust. A qualified disability trust also gets this benefit. As of 2022, the highest income trust bracket for a trust applies to amounts over $13,450, and the highest tax rate for trusts is 37 percent. In contrast, an individual taxpayer is not taxed at the highest rate of 37 percent until his or her income reaches $539,900 or more.
This preferred tax treatment can make a difference, especially when a trust wishes to retain income for future use. Alternatively, a trust may not want to distribute all income in order to protect beneficiaries from being disqualified from means-tested benefits such as Medicaid or SSI. Paying fewer taxes on retained income means more is left over for beneficiaries.
A qualified disability trust will have to file a tax form called Form 1041 to receive these benefits every year. A trust may need the assistance of a tax professional. However, this expense is well worth it when you consider the potential tax savings.
Estate Planning Tips
If you are setting up a special needs trust through your will, a best practice tip is to avoid vague terms and specifically name the beneficiary of the anticipated QDT. This will allow them to elect the qualified disability trust treatment on appropriate tax forms.
You should also carefully select your trustee. A trustee of a qualified disability trust will have serious fiduciary responsibilities that can last a lifetime. They should be financially savvy and willing to invest time and resources in correctly maintaining and administering a QDT. This includes keeping up with all annual tax filings. Elville and Associates’ and its Managing Principal, Stephen R. Elville, offers a quarterly webinar presentation titled “Trustee Selection – How to Choose the Right One for You,” which discusses this important topic in depth. You can view this presentation here.
By engaging in proper planning when setting up a special needs trust for your loved ones, you are setting them up for a better and brighter future. Working with an attorney to set up your trust correctly to qualify for qualified disability trust status may make an immeasurable difference in the lives of your beneficiaries.
For guidance in estate and special needs planning, consult with the qualified attorneys at Elville and Associates. Initial consultations are free and will give you the opportunity to have your questions answered, have your attorney listen to you and understand your situation, and offer you solutions and a path forward for your planning, giving you peace of mind along the way. Contact us online here or call us at 443-393-7696 to get started today.
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While Medicaid helps pay for nursing home care, being admitted to a nursing home as a Medicaid recipient is not always easy. There are several ways to navigate the process, depending on your situation, and it is important to speak to an experienced elder law attorney who understands the process and can help streamline the application for Medicaid and necessary spenddowns for Medicaid.
With the median cost of a nursing home room being more than $250 a day, most families need help paying for long-term care. Medicaid is the primary method of covering the costs for nursing home care in the United States, but in order to qualify for Medicaid, an applicant must have limited income and assets.
Generally, nursing homes will only accept patients who can pay for their care, while Medicaid will not pay for nursing home care unless an applicant is already living in a nursing home. This creates a predicament: How to get a loved one into a nursing home in order to receive Medicaid? The following are some of the methods you can use to find a nursing home that will accept your loved one:
- Private Pay. The easiest way to get into a nursing home is to be able to pay for care while the resident’s assets are spent down in order to qualify for Medicaid. Residents who can pay privately for a few months can file a Medicaid application once they are in the nursing home and start receiving benefits when the resident’s funds are below their state’s threshold for “countable assets.” Make sure the nursing home accepts Medicaid patients — and get the timing right so that the resident doesn’t run out of funds before the Medicaid application is approved.
If the resident lacks the funds to pay for his or her own care, the resident’s family could pay. However, this is risky. The family will not be reimbursed if the resident eventually qualifies for Medicaid. It may be possible for the family to lend the money to the nursing home under a written agreement stating that the funds will be returned when the resident qualifies for Medicaid.
- Medicare. Medicare provides nursing home coverage for up to 100 days of “skilled nursing care” per illness. The patient must enter the nursing home no more than 30 days after a hospital stay that had lasted for at least three days (not counting the day of discharge). The care provided in the nursing home also must be for the same condition that caused the hospitalization (or a condition medically related to it). In addition, the patient must receive a “skilled” level of care in the nursing facility that cannot be provided at home or on an outpatient basis. And finally, Medicare covers care only for people who are likely to recover from their conditions. If a loved one meets these conditions, it is possible for them to enter a nursing home and immediately apply for Medicaid while Medicare pays in the meantime.
- Medicaid Pending. There are some nursing homes that will accept a resident who has applied for Medicaid and is awaiting a response. Unfortunately, there are only a few nursing homes that accept Medicaid pending residents without some type of payment guarantee in the event the application is denied. The nursing homes that accept Medicaid pending residents tend to be those with lower ratings for nursing home quality.
When moving into a nursing home, be careful about signing a nursing home admission agreement. Nursing homes may try to get families to agree to pay their loved one’s bills if a Medicaid application is denied. Read any agreement thoroughly and have it reviewed by your attorney.
Navigating the Medicaid process is complicated. Contact the experienced elder law attorneys at Elville and Associates, who will help you understand the process, answer your questions, and help you apply for and qualify for Medicaid and determine the best path forward.
August Is ABLE to Save Month!
August is ABLE to Save Month and ABLE programs across the country are celebrating more than 119,000 ABLE account holders nationwide. Check out this video to hear from a Maryland ABLE account holder who is proud to be saving for her dreams during ABLE to Save Month.
ABLE programs nationwide have changed the way people with disabilities and their families participate in the community, build financial wellness and plan for the future by empowering them to save and invest for the added expenses that come with having a disability without losing access to federal means-tested benefits. Learn more about how a Maryland ABLE can benefit you – both during ABLE to Save Month and beyond.
The best interest of all family members is served when you secure the counsel of an experienced professional who practices special needs planning. Take comfort in knowing you have performed a thorough investigation and have taken steps to preserve both your family’s assets and expected government benefits to provide your loved one with the best possible future you are able.
Estate planning by parents who have children with special needs includes many considerations:
- How do you leave funds for the benefit of the child without causing the child to lose important public benefits?
- How do you make sure that the funds are well managed?
- How do you make sure your other children are not over-burdened with caring for the sibling with special needs?
- What is fair for distributing your estate between your child with special needs and your other children?
- How do you make sure there is enough money to sustain your special needs child over time?
Contact the special needs planning attorneys at Elville and Associates to learn how a Maryland ABLE account can be used as part of an overall special needs plan for your loved one to enhance their quality of life and plan for the future. Call 443-393-7696, contact Jeff Stauffer at jeff@elvilleassociates.com or visit https://lnkd.in/eskx8kxu to learn more!
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More Webinars from Elville and Associates
The education of clients and their families through counseling and superior legal-technical knowledge is the mission of Elville and Associates. We hold multiple educational events every month. Click to view our calendar of educational webinars and events or visit the Elville and Associates YouTube channel to view recordings of our past webinars.
#elvilleeducation #elvillewebinarseriesThe New Maryland Supported Decision Making Law Explained The 2022 Miracle in Annapolis – “It’s a Start”
[et_pb_section fb_built=”1″ admin_label=”section” _builder_version=”4.16″ global_colors_info=”{}”][et_pb_row admin_label=”row” _builder_version=”4.16″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Text” _builder_version=”4.22.2″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” global_colors_info=”{}”]By: Stephen R. Elville – Managing Principal and Lead Attorney – Elville and Associates, P.C.
This spring the Maryland General Assembly delivered a long-overdue victory to persons with disabilities across Maryland, one that will forever change countless thousands of lives. Not unlike Rich Strike’s astounding 80-1 odds come from behind heart-stopping victory in the Kentucky Derby, the Supported Decision Making bill, starting at the back of the legislative pack, survived apathy then eventually tough scrutiny, then in an electrifying turn of events and sentiment down the stretch, crossed the finish line with the approval of the Senate and the House, and by default (no veto by Governor Hogan) will become law on October 11, 2022 – all thanks to the proponents of the Bill, including its driving force, Megan Rusciano, Esq., of Disability Rights Maryland, the lawyer whose tireless and long-standing herculean efforts over most of the last decade has now resulted in a landmark change in Maryland law. Congratulations to Megan from all of us at Elville and Associates!
The New Maryland Supported Decision Making law (“SDM”) is simply astonishing considering the huge impact it will immediately make (effective October 1, 2022) and the 180-degree paradigm shift it represents. Not only can the foregoing sentence not be overstated, but nothing this writer can convey here can adequately describe the profound nature of this change and what it represents in terms of its effect(s) on the rights of persons with disabilities in Maryland. Simply put, the new SDM law takes everything we have ever known or become accustomed to about the treatment and consideration of persons with disabilities and their right(s) of self-determination and turns that upside down. If you are reading this article and are a person with disabilities or the parent or other loved one of a person with disabilities, you can now feel free to turn down a glass to mark the beginning of a new era in human rights for your loved one and for the persons (and organizations) like you who support them.
The following is a complete overview of Supported Decision Making, including the highlights of the new Supported Decision Making law. I provide this following information knowing the risk of providing too much information – but with the hope that by doing so you the reader will have the opportunity to realize and appreciate the profound nature of this ground-breaking news.
What is Supported Decision Making (“SDM”)?
- SDM is many things, including the following: a tool where a person with disabilities can be empowered and supported in the process of making their own decisions – to whatever extent possible; a written or oral agreement representing a formalization of authority for the supported decision maker to be recognized as such; an alternative to adult guardianship or a tool to be used as part of adult guardianship; a potential addition to a financial power of attorney and advance medical directive; part of a paradigm shift and a new world of self-determination for the disabled, young or old.
Why was Supported Decision Making needed in Maryland?
- Prior to the passage of SDM, Maryland was behind many states, including its neighbors in Delaware and the District of Columbia, in the sense that there was no good alternative to guardianship versus a power of attorney; no formalized way for a person with disabilities to be supported; no annual review of private guardianships; no clear way for all alternatives to adult guardianship to be explored and implemented; inconsistency in judicial application of existing law; old notions of traditional guardianship were clearly inequitable and no longer needed; and a culture of paternalism and risk minimization was prevalent, thereby hurting the potential of persons with disabilities.
Prior to Supported Decision Making, the following were generally considered the alternatives to guardianship in Maryland (lesser restrictive alternatives).
Guardianship of the property; guardianship of the person; then alternatives to guardianship, including consent orders (settlement agreements) in guardianship proceedings; appointment of financial agents under financial powers of attorney; appointment of health care agents under an advance medical directive; Representative Payees (Social Security); joint ownership of financial assets; surrogate decision making (health care)
Now we are no longer constrained by only this traditional paradigm.
What Supported Decision Making is not:
- SDM is not a financial power of attorney and not a way for a third party to make decisions for a disabled person, and not a mechanism giving authority to a third party to do what they deem appropriate for a person; not a mechanism by which a person with disabilities gives up their rights; and not adult guardianship
By comparison, what is adult guardianship?
- Adult Guardianship is: the removal of a person’s rights to their property (guardianship of the property or estate); removal of a person’s rights to their person – place of abode; health care decisions; right to vote; person has no legal choices; represents the paradigm of protectionism – no recognition of an individual’s right to take risks – fear of and prevention of failure; no review (private guardianships); and an unspoken consensus of permanency.
What is Supported Decision Making as compared directly with guardianship?
- No removal of an individual’s rights; facilitates the potential for restoration of rights (for persons now under guardianship); rights to property and person remain vested in the individual; paradigm of individual risk – person has the right to fail; can be part of guardianship if necessary; an addition to an individual’s financial power of attorney; an addition to an individual’s advance medical directive.
What is the difference between Financial Powers of Attorney and Advance Medical Directives versus SDM?
- In a financial power of attorney and/or advance medical directive, the principal (the individual) appoints an agent who acts on behalf of principal according to the powers provided to the agent; the power of the agent becomes effective as set forth in the document; the agent acts when principal can no longer act for themselves; the agent has fiduciary responsibility and accountability; the authority of the agent can be terminated by the principal in writing; and as mentioned above these documents are substitutes for guardianship of property and person.
- With SDM there is no agency relationship and the power of principal remains vested in them; the principal alone makes decisions (their own) with help from supporting decision maker (the supporter); there is no authority for supporter to act for or on behalf of the agent; the supporter has to be accountable – the extent depends on the jurisdiction; the supporter’s role can be changed or terminated; and SDM is a substitute for guardianship (a new substitute to be added to the list of lesser restrictive alternatives above.
With the above explanations and references as background and context for our new understanding of SDM and how it differs from the old paradigm of guardianship and its alternatives, here are excerpts from the new Supported Decision Making law. I strongly urge you to sit and contemplate this information. As you do, I predict that you will have a series of epiphanies that will collectively result in your amazement at the scope and extent of the change this legislation has brought. As you read, you will realize that like many things that seem to happen overnight, the world has now changed forever concerning the rights of persons with disabilities in Maryland.
Summary/excerpts from the new Maryland Supported Decision Making legislation:
- Supported Decision Making (defined):
- Can be “with or without SDM written agreement”
- Can be a “series of relationships”
- “to make, communicate, or effectuate the adult’s own life decisions”
- Supported Decision Making Agreement (defined):
- Plural – “arrangement with supporter or supporters”
- Describes “how the adult uses SDM to make their decisions”, “rights of the adult”, “responsibilities of the supporter”
- Supporter(defined):
- “individual selected by adult”
- “to provide support”
- “to provide support in making, communicating, or effectuating the adult’s own life decisions
- Purpose
- To assist adults:
- “by obtaining support – in making, communicating or effectuating decisions – corresponding to the will, preference, and choices of the adult”
- To prevent:
- Appointment of substitute decision maker for the adult, including a guardian
- To assist adults:
- Application
- Adult may use SDM to:
- “Increase the adult’s self-determination”
- “Prevent the need for a substitute decision maker” (agent or guardian)
- “Limit of terminate the use of a substitute decision maker”
- ALL adults are presumed capable of making an SDM agreement
- TO BE CONSTRUED LIBERALLY!
- Manner of communication – “not ground for determining the adult’s capability for making, changing, or revoking an SDM agreement”
- SDM agreement cannot be used as evidence of incapacity (no risk in signing), and cannot restrict the adult from acting independently or accessing their personal information
- Guardianship:
- Person under guardianship may enter into an SDM agreement
- Court may limit or remove guardianship due to existence of SDM agreement
- Guardian cannot prevent without “good cause”
- “Support” is defined as:
- Gathering information
- Understanding and interpreting information
- Weighing options
- Understanding consequences pro and con of a decision
- Participation in conversations with third parties
- Providing support to the adult in implementing a decision
- Responsibilities of the Supporter:
- Support the will and preference of the adult – without insertion of supporter’s opinion about reasonableness of the adult’s wishes, preferences, or choices
- Act honestly, diligently, and in good faith
- Act within the scope of the SDM agreement
- Maintain records and make them available regarding:
- Supporter’s actions
- How the adult communicates and expresses opinions
- Records and information obtained
- Maintain safety and security of such records
- Relationship is one of trust and confidence
- A supported decision maker may NOT:
- Make decisions for the adult
- Exert undue influence on the adult
- Coerce the adult
- Obtain information about the adult without the adult’s consent
- Enforce decisions made by the adult outside of the adult’s presence, unless authorized by the adult to do so
- Act outside the authority of the SDM agreement
- Who may NOT be a supporter:
- A minor
- A person against whom the adult has obtained a peace order
- A person who has been convicted of financial exploitation
- Resignation of Supporter:
- Must be orally given or in provided in writing to the adult, and to all other named supporters and third parties who have the Agreement on file
- Authority of supporter ends upon their incapacity or death
- Requirements of Form of SDM Agreement:
- Any form consistent with the Statute is acceptable
- Must be:
- Documented, dated, and witnessed by two adults who are not the supporter, an employee or agent of the supporter
- Name at least one supporter
- Describe the decision-making assistance the supporter (or each supporter) may provide the adult
- Describe how supporters may work together
- Describe any potential conflict(s) of interest and how they might be mitigated
- Requirements of Form of SDM Agreement (cont’d):
- Document how the adult selected the supporter(s)
- Be approved by the Court if adult has a guardian and the SDM agreement affects the authority of the guardian
- Contain an attestation about the adult’s independence in decision making
- Adult can revoke SDM agreement orally or in writing and can obtain support from an individual of the adult’s choosing to revoke the agreement
- Third parties may rely on the SDM agreement in good faith
- Third parties may also decline to comply with an SDM agreement on the following grounds:
- Actual knowledge of invalidity, revocation, or abrogation; or coercion or undue influence of a supporter
- Third parties may be held liable for the following:
- Causing personal injury as a result of negligent, reckless, or intentional acts
- Failing to give effect to an adult’s decision made in accordance with a valid SDM agreement
- Failing to provide information to eh adult or supporter of the adult that would be necessary for informed consent
- Actions otherwise inconsistent with the SDM law
- Adult may use SDM to:
So in summary, how will persons with disabilities benefit from the new Maryland SDM law?
- Persons living with disabilities will no longer be strictly limited by their disability or diminished capacity;
- The new paradigm of risk should encourage the ideal of independence;
- Persons living with disabilities will have new empowerment and recognition of their rights of self-determination;
- There is a new and legally articulated role for supporters;
- A new legal path forward exists – a psychological shift;
- The new SDM legislation is very broad and not limited – it should interpreted and applied as such and never “pigeonholed”;
- For persons living with disabilities, the ideals of independence and rights of self-determination are now not diminished by any real need for guardianship;
- For persons living with disabilities, there are now new protections from and alternatives to guardianship.
Remember that Maryland SDM legislation is extremely subtle, yet powerful. Most importantly, it is not complicated. Perhaps the latter is the most important advice I can provide in this article – that SDM is a simple concept and should not be confused or complicated beyond its simplicity. SDM is simply the idea that persons with disabilities can make their own decisions to whatever degree possible, provided that they have the support to do so.
In closing, sometimes if you live long enough or wait long enough, and if you’re lucky, you witness a miracle, such as the fall of the Soviet Union and the tearing down of the Berlin Wall in 1989; or the first female Speaker of the House of Representatives in 2007; or the election of the first African-American President in 2008; or the nomination of the first female African-American Justice of the Supreme Court in 2022; and now this fulfillment of the United Nations mandate on human rights in the form of Supported Decision Making law for Maryland. Are there unanswered questions about how SDM will work in Maryland? Yes. Are there many questions about supporters and their responsibilities, rights, and liabilities? Are there concerns about the SDM being fully utilized in the years to come so that it is not minimized or pigeonholed into limited use? Yes. Is the SDM law likely to evolve and change over time? Yes. Are there risks? Yes. But as one smiling person with disabilities (who is also a ward under guardianship) recently stated concerning SDM in front of a large event audience where I was the presenter, and I quote, “it’s a start”.
Managing Principal and Lead Attorney Stephen Elville’s work is centered in special needs planning, elder law, and estate planning with special emphasis in the areas of tax planning and asset protection. As a member of the Academy of Special Needs Planners, the National Academy of Elder Law Attorneys, and the National Network of Estate Planning Attorneys, he works to bring peace of mind to clients by creating solutions to their needs through counseling and education using the very best legal-technical knowledge available. He is a seasoned speaker and each year presents at dozens of webinars, workshops, conferences, and continuing education events. Steve has also been named to the Maryland Super Lawyers list seven times, including the past six consecutive years. Steve is also the founder and president of the firm’s charitable organization, the Elville Center for the Creative Arts, in 2014, a 501(c)(3) organization that partners with school music programs and other organizations such as the Annapolis Symphony Orchestra to give the gift of music to children who want to participate in music but don’t have the means to do so on their own. Steve may be reached at steve@elvilleassociates.com, or by phone at 443-393-7696 x108.
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If you want to pass money to future generations without having it subject to gift and estate taxes, then a dynasty trust may be right for you. A dynasty trust allows trust assets to be used for the benefit of multiple generations while keeping the assets out of the grantor’s and the beneficiaries’ taxable estates.
The main benefit of a dynasty trust is the avoidance of estate and gift taxes over many generations. In 2022, federal estate tax exemption is $12.06 million ($24.12 million for couples). Estates valued at more than the exemption amount will pay federal estate taxes, at a rate of between 18 percent and 40 percent. The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $12.06 million in 2022. Note that you can give any number of people up to $16,000 each per year (in 2022) without the gifts counting against the lifetime limit. In addition, the generation skipping transfer (GST) tax affects assets passed to grandchildren. The tax is imposed even when property is left in trust for a grandchild. The GST exemption is the same as the estate and gift tax exemptions. If you transfer more than the GST exemption, the tax rate is 40 percent.
Assets transferred to a dynasty trust are subject to estate, gift, and GST taxes only when initially transferred and only if they exceed federal exemption thresholds. While estate and gift tax exemptions are currently very high, in 2026 the exemption is set to drop to the previous exemption amount of $5.49 million (adjusted for inflation).
Another benefit of a dynasty trust is that the assets in the trust are protected from the beneficiaries’ creditors or in the event a beneficiary divorces. If the trust is properly structured, creditors cannot go after trust assets to pay the beneficiaries’ debts.
How a dynasty trust works
A dynasty trust is an irrevocable trust, which means once it is created it cannot be changed. Funds transferred into the trust will be taxed if they exceed the lifetime gift tax exclusion. However, once funds are transferred to the trust, beneficiaries of the trust can pass assets to the next generation without those assets being subject to estate, GST, or gift taxes. In addition, the assets placed in the trust are removed from your estate and can grow outside of it.
The trustee of the trust can be a beneficiary, but because the trust is designed to last for generations, it may make sense to have a professional fiduciary, such as a bank or other financial institution, serve as trustee. The trustee manages and distributes the assets in the way you set forth in the trust agreement. Usually, the trust provides for the beneficiaries’ support during their lifetimes. For example, it could direct the trustee to pay out income regularly, make periodic principal distributions, or make distributions contingent on the beneficiary’s need.
The length of time the dynasty trust can continue to exist depends on state law. Some states allow trusts to run for hundreds of years or indefinitely, while others place limits on how long the trust can operate. Traditionally, the rule against perpetuities states that a trust can last 21 years past the death of the last beneficiary. However, many states have opted out of the rule, allowing trusts to continue for many generations.
The downside of dynasty trusts is that they are inflexible. Once the trust is created, you lose access to the assets. Because dynasty trusts last for generations, they require guesswork about what will be best for your descendants.
Dynasty trusts are complicated instruments that must be designed correctly in order to provide benefits. Set a time with Elville and Associates’ Managing Principal and Lead Attorney Stephen Elville to talk about your situation and planning needs to determine if a dynasty trust is right for you.
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Understanding Maryland ABLE Accounts and How They Benefit Your Loved One With Special Needs
More Webinars from Elville and Associates
The education of clients and their families through counseling and superior legal-technical knowledge is the mission of Elville and Associates. We hold multiple educational events every month. Click to view our calendar of educational webinars and events or visit the Elville and Associates YouTube channel to view recordings of our past webinars.
#elvilleeducation #elvillewebinarseriesBy: Charles A. Borek – J.D., CPA, MBA, Founder of the Borek Group, LLC – Guest Contributor
Business expenditures generally may be recovered through a deduction against income at some point in time. The critical issue is “when?” If a business expenditure mut be capitalized, its deduction is delayed; the cost is recovered either over its depreciable life or when the business finally sells or otherwise disposes of it. This timing issue can have dramatic tax impacts, as entrepreneur Tamara Yapp can attest.
Tamara had been introduced to probiotic supplements during her efforts to find treatments for medical conditions suffered by her son. For this reason she decided to establish her own health food business. She entered into a distribution agreement with A.G.M. Foods under which A.G.M. would help her develop her own line of probiotic products. To this end she formed Real Food Real Life, LLC and worked to formulate new recipes that incorporated A.G.M.’s supplements to achieve products with better taste, texture, and shelf life. Tamara took steps to launch her product line commercially and hired designers to create a logo, slogan, and product labels. She researched options for shipping her products and solicited and received pre-orders of products.
All of this, as you might imagine, consumed a lot of money and resulted in a large loss for the business during its first couple of years. Unfortunately, as the IRS pointed out to Tamara, the tax law requires that “start-up” business expenditures be capitalized and deducted over 15 years rather than being deducted immediately. This mistake resulted in Yapp owing over $475,000 in unexpected tax liability, in addition to a $95,000 penalty imposed by the IRS.
The rules for capitalizing an item as opposed to expensing it can be complex. In 2014 the IRS issued extensive regulations that apply to all taxpayers, regardless of size. While navigating the rules can be challenging, it’s not all bad news. The regulations permit certain “safe harbors” that allow the immediate write-off of purchases under a certain dollar amount, regardless of whether such business expenditures would have to be capitalized under the normal rules. To learn more about this important issue, be sure to tune into my webinar, “Expense vs. Capitalize: Tangible Property Regulations” on Tuesday, August 23rd at 10 a.m. To register for the webinar, please click on its title above or here.
Mr. Charles A. Borek is Special Counsel to Elville and Associates and Founder of The Borek Group, LLC. He is a business and tax attorney with 30 years of experience representing individuals, small businesses, and nonprofits. He has taught law students as a visiting and adjunct professor of law at American University and the University of Baltimore and has lectured at Dickinson Law School of Penn State University. Chuck also holds a graduate degree in theology and literature from Wesley Theological Seminary and is pursuing doctoral work at Pittsburgh Theological Seminary. Additionally, Chuck presents seminars to CPAs and lawyers around the country though The Borek Group, LLC, including presentations to “Big 4” accounting firms and Fortune 500 companies. Mr. Borek may be reached at chuck@elvilleassociates.com, or 443-393-7696 x129.
Inheritance Tax
By: Shannon K. Mumaw – Associate Attorney
Just as there are taxes owed during life, there are taxes owed upon death. One such tax imposed after death is inheritance tax. Inheritance tax is imposed on any property passing from a decedent to a beneficiary, except for property passing to those beneficiaries who are statutorily exempt from inheritance tax. It is seen as a privilege to receive an inheritance, so naturally a tax will follow.
The tax is imposed on the beneficiary who receives the property; however, the personal representative or trustee who is making the distribution is ultimately liable until the tax is paid. A will or trust may shift the burden of payment and provide that the tax shall be paid from the estate or trust funds, but the tax is still imposed on the individual who receives the distribution. This tax is determined at the time the property is received. Therefore, if at the time of receipt the property is subject to a lien such amounts are deductible.
Persons Exempt from Inheritance Tax
Under Maryland Code, Tax-General § 7-203, the following persons related to the decedent are exempt from inheritance tax: a spouse of the decedent; a child of the decedent; a grandchild of the decedent; a great-grandchild of the decedent (and further lineal descendants of a child of the decedent); a parent of the decedent; a grandparent of the decedent; a spouse of a child of the decedent or a spouse of further lineal descendants of a child of the decedent; a sibling of the decedent; or a charitable organization. For the purpose of determining exemption status, a “child” includes a stepchild or former stepchild and a “parent” includes a stepparent or former stepparent.
Persons subject to inheritance tax include friends of the decedent, nieces and nephews, aunts and uncles, cousins, and more distant relatives.
Property Subject to Inheritance Tax
What property is subject to inheritance tax? The quick answer is all property having a taxable situs in Maryland. Any real property located outside of Maryland is not subject to Maryland inheritance tax, rather the laws of the state in which the property is located will apply. All other property is deemed to have a taxable situs in Maryland if the decedent was a Maryland resident at the time of his or her passing. This includes – but is not limited to – tangible personal property such as personal effects, vehicles, and jewelry, retirement and non-retirement assets, stocks, and bonds.
However, there are a few limitations that help narrow the broad application of inheritance tax on all property deemed to have a taxable situs in Maryland. One such limitation applies to income earned after the decedent’s date of death. This tax does not apply to the income, including gains and losses, that accrues on probate assets after the decedent’s death. However, it is important to note that this limitation is only applicable to probate assets.
The value of the property itself may also affect whether the tax will be imposed. If the total value of the property passing to any one person does not exceed $1,000, inheritance tax will not apply, regardless of that individual’s relation to the decedent. Additionally, this tax will not be imposed on the receipt of property that is distributed from a small estate.
Another exception exists for life insurance proceeds. This tax is not assessed on the receipt of life insurance proceeds, regardless of the individual’s exemption status – unless the proceeds are payable to the decedent’s estate. If life insurance proceeds are payable to the decedent’s estate, the proceeds will ultimately pass to the individual designated under the decedent’s will or by the laws of intestacy, and the individual’s relation to the decedent will thereby determine whether inheritance tax is imposed.
Common Misperceptions
It is a common misperception that placing an asset in a trust will shield the asset from inheritance tax at death. Inheritance tax applies to both probate and non-probate assets. In other words, nonexempt transfers from a decedent’s trust are subject to inheritance tax just as all other nonexempt transfers after death.
It is also a common misperception that inheritance tax and estate tax are one and the same. Inheritance and estate taxes are both assessed after death, but each are assessed differently and independently – perhaps this will be our topic of discussion next time.
Should you have any questions or matters related to inheritance tax or estate and trust administration, I can be reached at smumaw@elvilleassociates.com, or 443-393-7696.
Shannon K. Mumaw is an Associate Attorney with Elville and Associates and the leader of the firm’s busy Estate and Trust Administration Department. Through her guidance, she partners with clients as they address the sometimes complex matters of the administration of loved ones’ estates from start to finish, including helping navigate the probate process, inventory and information reports, accountings, and much more. She also addresses clients’ needs as they relate to the estate planning process. Shannon may be reached at smumaw@elvilleassociates.com, or by phone at 443-393-7696 x116.
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