Strategies to minimize Inheritance tax?

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nyc212
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Strategies to minimize Inheritance tax?

Post by nyc212 »

I just learned that Maryland charges a 10% Inheritance tax when beneficiaries receive bequests. (Direct and lineal heirs are exempted.) As I understand it, the Inheritance tax is not applied to Special Needs Trusts (SNT).

This prompts several questions.
1. Is there a maximum amount to which a SNT may be funded? So, instead of bequeathing assets to my sister (who would pay 10% Inheritance tax), is it better to bequeath to my niece’s SNT? (Assuming my sister does not need the funds.)

2. In the event my niece predeceases her mother (my sister), the funds would flow to my sister, the contingent beneficiary. Would my sister have to pay the Inheritance tax for inheriting her daughter’s SNT funds?

3. Can a SNT provide for a Limited Power of Appointment (for the contingent beneficiary)?

4. Separately, if I, as the beneficiary of an Irrevocable Trust, exercise a Limited Power of Appointment in favor of my niece’s SNT, would the same concepts apply – no Inheritance tax if I appoint to niece’s SNT, no Inheritance tax if niece predeceases mother as contingent beneficiary?
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aristotelian
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Re: Strategies to minimize Inheritance tax?

Post by aristotelian »

If you are asking these questions you need to consult a local attorney.
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Re: Strategies to minimize Inheritance tax?

Post by Lee_WSP »

it doesn’t apply if you leave it to your descendants.
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Re: Strategies to minimize Inheritance tax?

Post by sailaway »

Lee_WSP wrote: Mon Jun 10, 2024 12:40 pm it doesn’t apply if you leave it to your descendants.
But OP is debating between sister and niece, not descendents.
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nyc212
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Re: Strategies to minimize Inheritance tax?

Post by nyc212 »

Lee_WSP wrote: Mon Jun 10, 2024 12:40 pm it doesn’t apply if you leave it to your descendants.
Siblings are not descendants.
Google: "For decedents dying on or after July 1, 2000, direct or lineal heirs are exempt from inheritance tax. This includes a spouse, child, grandchild, great-grandchild, stepchild, parent, or grandparent."
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Re: Strategies to minimize Inheritance tax?

Post by Lee_WSP »

nyc212 wrote: Mon Jun 10, 2024 12:51 pm
Lee_WSP wrote: Mon Jun 10, 2024 12:40 pm it doesn’t apply if you leave it to your descendants.
Siblings are not descendants.
Google: "For decedents dying on or after July 1, 2000, direct or lineal heirs are exempt from inheritance tax. This includes a spouse, child, grandchild, great-grandchild, stepchild, parent, or grandparent."
Didn't read thoroughly enough. You need a lawyer then.
increment
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Re: Strategies to minimize Inheritance tax?

Post by increment »

nyc212 wrote: Mon Jun 10, 2024 12:12 pm I just learned that Maryland charges a 10% Inheritance tax when beneficiaries receive bequests. (Direct and lineal heirs are exempted.)

...

my sister (who would pay 10% Inheritance tax)
I believe that your siblings are also exempt.
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Re: Strategies to minimize Inheritance tax?

Post by marcopolo »

Lee_WSP wrote: Mon Jun 10, 2024 2:00 pm
nyc212 wrote: Mon Jun 10, 2024 12:51 pm
Lee_WSP wrote: Mon Jun 10, 2024 12:40 pm it doesn’t apply if you leave it to your descendants.
Siblings are not descendants.
Google: "For decedents dying on or after July 1, 2000, direct or lineal heirs are exempt from inheritance tax. This includes a spouse, child, grandchild, great-grandchild, stepchild, parent, or grandparent."
Didn't read thoroughly enough. You need a lawyer then.
Or take 2 minutes to look up the Maryland Inheritance tax rules, which say siblings are also exempt?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Strategies to minimize Inheritance tax?

Post by nyc212 »

increment wrote: Mon Jun 10, 2024 3:01 pm
nyc212 wrote: Mon Jun 10, 2024 12:12 pm I just learned that Maryland charges a 10% Inheritance tax when beneficiaries receive bequests. (Direct and lineal heirs are exempted.)

...

my sister (who would pay 10% Inheritance tax)
I believe that your siblings are also exempt.
Thank you. Indeed, this law firm site indicates siblings are exempt but not nieces and nephews. https://fredfranke.com/practice-areas/e ... nce-taxes/
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Re: Strategies to minimize Inheritance tax?

Post by Lee_WSP »

Something else to note is that it appears to be an inheritance tax, not an estate tax. The beneficiary can just move out of state.
increment
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Re: Strategies to minimize Inheritance tax?

Post by increment »

Lee_WSP wrote: Tue Jun 11, 2024 3:17 pm The beneficiary can just move out of state.
If the inheritance is from a Maryland estate, that is not a way of avoiding the tax as far as I know. My estate lawyer did not mention that out-of-state beneficiaries would be avoiding inheritance tax. That's consistent with what I found written up by some law firm in the Baltimore-Washington area.
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Re: Strategies to minimize Inheritance tax?

Post by toddthebod »

I think this entire discussion may be moot. Maryland also has an estate tax, and the inheritance tax is credited against the estate tax. Per OP's previous posts discussing the size of their estate, the inheritance tax appears to be meaningless.
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Re: Strategies to minimize Inheritance tax?

Post by Lee_WSP »

increment wrote: Tue Jun 11, 2024 6:31 pm
Lee_WSP wrote: Tue Jun 11, 2024 3:17 pm The beneficiary can just move out of state.
If the inheritance is from a Maryland estate, that is not a way of avoiding the tax as far as I know. My estate lawyer did not mention that out-of-state beneficiaries would be avoiding inheritance tax. That's consistent with what I found written up by some law firm in the Baltimore-Washington area.
That blog post uses the term inheritance tax incorrectly. It is a tax owed by the beneficiary, not the estate. But Todd has pointed out that there is also an estate tax. So that's why you can't avoid it if the decedent is in Maryland resident.
increment
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Re: Strategies to minimize Inheritance tax?

Post by increment »

Lee_WSP wrote: Tue Jun 11, 2024 10:47 pm That blog post uses the term inheritance tax incorrectly. It is a tax owed by the beneficiary, not the estate. But Todd has pointed out that there is also an estate tax. So that's why you can't avoid it if the decedent is in Maryland resident.
As far as I can tell (I am not a lawyer, just a Marylander who has consulted an estate lawyer), it may not be an "inheritance tax" following normal definitions, but the state calls it "inheritance tax" anyway.
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Re: Strategies to minimize Inheritance tax?

Post by Lee_WSP »

increment wrote: Tue Jun 11, 2024 11:35 pm
Lee_WSP wrote: Tue Jun 11, 2024 10:47 pm That blog post uses the term inheritance tax incorrectly. It is a tax owed by the beneficiary, not the estate. But Todd has pointed out that there is also an estate tax. So that's why you can't avoid it if the decedent is in Maryland resident.
As far as I can tell (I am not a lawyer, just a Marylander who has consulted an estate lawyer), it may not be an "inheritance tax" following normal definitions, but the state calls it "inheritance tax" anyway.
How do you get solely “inheritance tax” from “estate AND inheritance” tax?
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Re: Strategies to minimize Inheritance tax?

Post by toddthebod »

increment wrote: Tue Jun 11, 2024 11:35 pm
Lee_WSP wrote: Tue Jun 11, 2024 10:47 pm That blog post uses the term inheritance tax incorrectly. It is a tax owed by the beneficiary, not the estate. But Todd has pointed out that there is also an estate tax. So that's why you can't avoid it if the decedent is in Maryland resident.
As far as I can tell (I am not a lawyer, just a Marylander who has consulted an estate lawyer), it may not be an "inheritance tax" following normal definitions, but the state calls it "inheritance tax" anyway.
It certainly seems like an inheritance tax when the beneficiary of property that passes outside of probate is taxed on the value of that property.

Anyway, after reading the Maryland Office of Register of Wills guide to the inheritance tax (https://registers.maryland.gov/main/taxes.html), I am now convinced in OP's case it is irrelevant. The estate will pay the inheritance tax on behalf of the beneficiary and take a credit against the estate tax, resulting in no difference in tax paid regardless of the relationship between the decedent and the beneficiary.
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Re: Strategies to minimize Inheritance tax?

Post by increment »

Lee_WSP wrote: Wed Jun 12, 2024 9:15 am How do you get solely “inheritance tax” from “estate AND inheritance” tax?
Are we disagreeing? It seems clear to me as a layperson that Maryland estates may be subject to a thing called "estate tax" and to a different but related thing called "inheritance tax." It may be a misnomer to call the "inheritance tax" a true inheritance tax, but that is not going to stop Marylanders from referring to it by the state's normal terminology.
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Re: Strategies to minimize Inheritance tax?

Post by Lee_WSP »

increment wrote: Wed Jun 12, 2024 9:37 am
Lee_WSP wrote: Wed Jun 12, 2024 9:15 am How do you get solely “inheritance tax” from “estate AND inheritance” tax?
Are we disagreeing? It seems clear to me as a layperson that Maryland estates may be subject to a thing called "estate tax" and to a different but related thing called "inheritance tax." It may be a misnomer to call the "inheritance tax" a true inheritance tax, but that is not going to stop Marylanders from referring to it by the state's normal terminology.
It's a combined tax.

They've crafted it such that either the beneficiary will be taxed via the inheritance tax (if they're in the state) or the estate is taxed via the estate tax if the beneficiary is out of state. In either case, the tax is payable by the trustee or PR.
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Re: Strategies to minimize Inheritance tax?

Post by increment »

Lee_WSP wrote: Wed Jun 12, 2024 9:44 am It's a combined tax.

They've crafted it such that either the beneficiary will be taxed via the inheritance tax (if they're in the state) or the estate is taxed via the estate tax if the beneficiary is out of state. In either case, the tax is payable by the trustee or PR.
It is my understanding that my estate would have to pay the Register of Wills a 10% "inheritance tax" on what I leave to (say) my first cousins, nieces, nephews, etc., wherever they live, even if my estate is smaller than the $5 million exemption on the state's "estate tax."
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Re: Strategies to minimize Inheritance tax?

Post by toddthebod »

increment wrote: Wed Jun 12, 2024 10:04 am
Lee_WSP wrote: Wed Jun 12, 2024 9:44 am It's a combined tax.

They've crafted it such that either the beneficiary will be taxed via the inheritance tax (if they're in the state) or the estate is taxed via the estate tax if the beneficiary is out of state. In either case, the tax is payable by the trustee or PR.
It is my understanding that my estate would have to pay the Register of Wills a 10% "inheritance tax" on what I leave to (say) my first cousins, nieces, nephews, etc., wherever they live, even if my estate is smaller than the $5 million exemption on the state's "estate tax."
Per the link from the Register of Wills above, it seems like ultimately the beneficiary is the one responsible for the tax, but the estate can pay it as a convenience:
3. PROCEDURES FOR PAYMENT OF INHERITANCE TAX
The receipt of both probate and non-probate property is subject to inheritance tax. This includes property passing through a decedent’s probate estate and property passing by operation of law or contract, such as assets jointly held with the decedent and assets of the decedent with a named beneficiary subject to tax. The tax is based on the value of the property at the time of distribution.

Probate Assets
The tax on the receipt of probate property is due when the personal representative submits an Administration Account showing distribution of that property to the taxable individual or entity. The tax payment is submitted with the Account.

If the decedent died with a Last Will and Testament, the tax on the receipt of property by a legatee (those named to inherit in a Last Will and Testament) is paid either by the estate of the decedent or by the legatee. Most wills include a provision known as a “tax clause” which provides that any end-of-life taxes, like the inheritance tax, be paid from the estate rather than be paid by the legatee.

If the decedent died without a Last Will and Testament, the tax on receipt of property by an heir is paid by the inheriting heir.

Non-Probate Assets
The inheritance tax on non-probate property is due when the Register of Wills assesses and provides an invoice for the amount owed, based on the taxable property reported on the Information Report or the Application to Fix Inheritance Tax.

The Register of Wills will issue an invoice to the personal representative, if the estate is liable for the tax, or to the beneficiary, if the individual or entity is liable for the tax. If payment is not made within 30 days, a 10% penalty fee and interest will be charged, and a second invoice will be issued. If payment is not made within 60 days of the initial invoice, additional interest will be charged, and a third invoice will be issued. If payment is not made within 90 days of the initial invoice, additional interest will be charged, and the full amount owed will be sent to the Maryland Central Collection Unit (CCU). CCU will take over collection of the tax, penalty, and interest owed to the Register of Wills and may assess additional interest at a rate of up to 18%.
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Re: Strategies to minimize Inheritance tax?

Post by Lee_WSP »

toddthebod wrote: Wed Jun 12, 2024 11:13 am
increment wrote: Wed Jun 12, 2024 10:04 am
Lee_WSP wrote: Wed Jun 12, 2024 9:44 am It's a combined tax.

They've crafted it such that either the beneficiary will be taxed via the inheritance tax (if they're in the state) or the estate is taxed via the estate tax if the beneficiary is out of state. In either case, the tax is payable by the trustee or PR.
It is my understanding that my estate would have to pay the Register of Wills a 10% "inheritance tax" on what I leave to (say) my first cousins, nieces, nephews, etc., wherever they live, even if my estate is smaller than the $5 million exemption on the state's "estate tax."
Per the link from the Register of Wills above, it seems like ultimately the beneficiary is the one responsible for the tax, but the estate can pay it as a convenience:
3. PROCEDURES FOR PAYMENT OF INHERITANCE TAX
The receipt of both probate and non-probate property is subject to inheritance tax. This includes property passing through a decedent’s probate estate and property passing by operation of law or contract, such as assets jointly held with the decedent and assets of the decedent with a named beneficiary subject to tax. The tax is based on the value of the property at the time of distribution.

Probate Assets
The tax on the receipt of probate property is due when the personal representative submits an Administration Account showing distribution of that property to the taxable individual or entity. The tax payment is submitted with the Account.

If the decedent died with a Last Will and Testament, the tax on the receipt of property by a legatee (those named to inherit in a Last Will and Testament) is paid either by the estate of the decedent or by the legatee. Most wills include a provision known as a “tax clause” which provides that any end-of-life taxes, like the inheritance tax, be paid from the estate rather than be paid by the legatee.

If the decedent died without a Last Will and Testament, the tax on receipt of property by an heir is paid by the inheriting heir.

Non-Probate Assets
The inheritance tax on non-probate property is due when the Register of Wills assesses and provides an invoice for the amount owed, based on the taxable property reported on the Information Report or the Application to Fix Inheritance Tax.

The Register of Wills will issue an invoice to the personal representative, if the estate is liable for the tax, or to the beneficiary, if the individual or entity is liable for the tax. If payment is not made within 30 days, a 10% penalty fee and interest will be charged, and a second invoice will be issued. If payment is not made within 60 days of the initial invoice, additional interest will be charged, and a third invoice will be issued. If payment is not made within 90 days of the initial invoice, additional interest will be charged, and the full amount owed will be sent to the Maryland Central Collection Unit (CCU). CCU will take over collection of the tax, penalty, and interest owed to the Register of Wills and may assess additional interest at a rate of up to 18%.
I don't know why you question me.

https://mgaleg.maryland.gov/mgawebsite/ ... ived=False

(a) (1) Except as otherwise provided in this section, the inheritance tax on property that passes from a decedent shall be paid, before it is distributed, by the person who distributes the property.

(2) The person who distributes property that passes from a decedent is liable for the inheritance tax on the property distributed until the tax is paid.


The PR or Trustee is supposed to pay the tax before distributing. The only exception is banks and other institutions where the property passes by contract.
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Re: Strategies to minimize Inheritance tax?

Post by toddthebod »

Lee_WSP wrote: Wed Jun 12, 2024 11:19 am
toddthebod wrote: Wed Jun 12, 2024 11:13 am
increment wrote: Wed Jun 12, 2024 10:04 am
Lee_WSP wrote: Wed Jun 12, 2024 9:44 am It's a combined tax.

They've crafted it such that either the beneficiary will be taxed via the inheritance tax (if they're in the state) or the estate is taxed via the estate tax if the beneficiary is out of state. In either case, the tax is payable by the trustee or PR.
It is my understanding that my estate would have to pay the Register of Wills a 10% "inheritance tax" on what I leave to (say) my first cousins, nieces, nephews, etc., wherever they live, even if my estate is smaller than the $5 million exemption on the state's "estate tax."
Per the link from the Register of Wills above, it seems like ultimately the beneficiary is the one responsible for the tax, but the estate can pay it as a convenience:
3. PROCEDURES FOR PAYMENT OF INHERITANCE TAX
The receipt of both probate and non-probate property is subject to inheritance tax. This includes property passing through a decedent’s probate estate and property passing by operation of law or contract, such as assets jointly held with the decedent and assets of the decedent with a named beneficiary subject to tax. The tax is based on the value of the property at the time of distribution.

Probate Assets
The tax on the receipt of probate property is due when the personal representative submits an Administration Account showing distribution of that property to the taxable individual or entity. The tax payment is submitted with the Account.

If the decedent died with a Last Will and Testament, the tax on the receipt of property by a legatee (those named to inherit in a Last Will and Testament) is paid either by the estate of the decedent or by the legatee. Most wills include a provision known as a “tax clause” which provides that any end-of-life taxes, like the inheritance tax, be paid from the estate rather than be paid by the legatee.

If the decedent died without a Last Will and Testament, the tax on receipt of property by an heir is paid by the inheriting heir.

Non-Probate Assets
The inheritance tax on non-probate property is due when the Register of Wills assesses and provides an invoice for the amount owed, based on the taxable property reported on the Information Report or the Application to Fix Inheritance Tax.

The Register of Wills will issue an invoice to the personal representative, if the estate is liable for the tax, or to the beneficiary, if the individual or entity is liable for the tax. If payment is not made within 30 days, a 10% penalty fee and interest will be charged, and a second invoice will be issued. If payment is not made within 60 days of the initial invoice, additional interest will be charged, and a third invoice will be issued. If payment is not made within 90 days of the initial invoice, additional interest will be charged, and the full amount owed will be sent to the Maryland Central Collection Unit (CCU). CCU will take over collection of the tax, penalty, and interest owed to the Register of Wills and may assess additional interest at a rate of up to 18%.
I don't know why you question me.

https://mgaleg.maryland.gov/mgawebsite/ ... ived=False

(a) (1) Except as otherwise provided in this section, the inheritance tax on property that passes from a decedent shall be paid, before it is distributed, by the person who distributes the property.

(2) The person who distributes property that passes from a decedent is liable for the inheritance tax on the property distributed until the tax is paid.


The PR or Trustee is supposed to pay the tax before distributing. The only exception is banks and other institutions where the property passes by contract.
So then it is, practically-speaking, an estate tax, and not an inheritance tax like increment was saying.
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Re: Strategies to minimize Inheritance tax?

Post by Lee_WSP »

toddthebod wrote: Wed Jun 12, 2024 11:35 am
So then it is, practically-speaking, an estate tax, and not an inheritance tax like increment was saying.
I still say its both. However, it functions more like an estate tax. it appears as though they’re thinking is that the estate should owe the tax but just in case they’re going to include an inheritance tax on any beneficiaries in the state.
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Re: Strategies to minimize Inheritance tax?

Post by celia »

Since OP asked about strategies, I will give input on that while the rest of you debate "who" and "where".

In general, you can do Roth conversions to bring down the balance in tax-deferred accounts. A beneficiary who is not a charity, will have to pay taxes on withdrawals from tax-deferred accounts.

Think of that tax-deferred account as containing both spendable money as well as federal (and state?) income taxes still owed. And if that account also has inheritance taxes applied to it, inheritance taxes will need to be paid on both the spendable part of withdrawals as well as the withdrawals for taxes that are not yet paid.

But if Roth conversions are done before the account owner dies and the Roth is smaller because taxes were withheld for the Roth conversion, inheritance taxes will only be applied to the "smaller" Roth (and not those taxes that were already paid).

Of course, OP also needs to take into account what tax bracket s/he would be in when paying the Roth conversion income tax compared to what tax bracket the beneficiary would be in.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Strategies to minimize Inheritance tax?

Post by Barefoot »

We are going through this now. Mrs Barefoot's Aunt passed recently without any direct descendants.

In hindsight, the 2 things that would have avoided/minimized the state of MD 10% tax would have been to have her move out of MD, or have her legally adopt her nieces and nephews.
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Re: Strategies to minimize Inheritance tax?

Post by Lee_WSP »

Barefoot wrote: Wed Jun 12, 2024 1:24 pm We are going through this now. Mrs Barefoot's Aunt passed recently without any direct descendants.

In hindsight, the 2 things that would have avoided/minimized the state of MD 10% tax would have been to have her move out of MD, or have her legally adopt her nieces and nephews.
I wouldn't put adoption forward as a viable option unless the adoptee has no living parent, but yes, that would technically work.

Transferring assets outside the state and having them transfer outside of probate would also work.
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Re: Strategies to minimize Inheritance tax?

Post by Barefoot »

Lee_WSP wrote: Wed Jun 12, 2024 4:11 pm
I wouldn't put adoption forward as a viable option unless the adoptee has no living parent, but yes, that would technically work.

Transferring assets outside the state and having them transfer outside of probate would also work.
It's not the location of the assets that matters, it's the residence of the person who passes. Her assets were in a trust, therefore not subject to probate, but the MD law covers that possibility too.

As far as adoption, the aunt in question was Mrs B's mother's twin sister. Both of Mrs B's parents had passed on many years ago. The aunt had no kids of her own, so she was kind of Mrs B's surrogate Mom. She moved to live close to us after her husband passed on and we took care of her in her declining years. The thought of adoption never came up until we learned of the 10% tax after she passed.
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Re: Strategies to minimize Inheritance tax?

Post by Lee_WSP »

Barefoot wrote: Wed Jun 12, 2024 5:59 pm
Lee_WSP wrote: Wed Jun 12, 2024 4:11 pm
I wouldn't put adoption forward as a viable option unless the adoptee has no living parent, but yes, that would technically work.

Transferring assets outside the state and having them transfer outside of probate would also work.
It's not the location of the assets that matters, it's the residence of the person who passes. Her assets were in a trust, therefore not subject to probate, but the MD law covers that possibility too.
Not correct. Maryland can only govern that which they have Jurisdiction over.
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Re: Strategies to minimize Inheritance tax?

Post by bltn »

Lee_WSP wrote: Wed Jun 12, 2024 4:11 pm
Barefoot wrote: Wed Jun 12, 2024 1:24 pm We are going through this now. Mrs Barefoot's Aunt passed recently without any direct descendants.

In hindsight, the 2 things that would have avoided/minimized the state of MD 10% tax would have been to have her move out of MD, or have her legally adopt her nieces and nephews.
I wouldn't put adoption forward as a viable option unless the adoptee has no living parent, but yes, that would technically work.

Transferring assets outside the state and having them transfer outside of probate would also work.
Useful suggestion.
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