3 Decidedly Dumb Ways to Leave an Inheritance for Your Children
Estate planning offers many ways to leave your wealth and pass on a legacy to your children and future generations, but it’s just as important to know what not to do when it comes to Maryland inheritance laws. If you live in Howard County, Maryland or a surrounding area and want to leave an inheritance for your children, keep reading to make sure that you aren’t making these all-too-common – but very costly – mistakes.
Maryland Inheritance Laws: 3 Textbook Examples of What NOT To Do
1. Oral Wills
If you feel you have a good rapport with your family or don’t have many assets, you might be tempted simply to tell your children or loved ones how to handle your estate when you’re gone. However, even if your family members wanted to follow your directions, it may not be entirely up to them. Under Maryland inheritance laws, without a written document, any assets you own individually must go through probate, and “oral wills” have no weight in court. It would most likely be up to a judge and the intestate laws written by the legislature, not you or your desired heirs, to decide who gets what. This is one strategy to not even try.
2. Joint Tenancy
In lieu of setting up a trust, some people name their children as joint tenants on their properties. The appeal is that children should be able to assume full ownership when parents pass on, while keeping the property out of probate. However, this does not mean that the property is safe; it doesn’t insulate the property from taxes or creditors, including your children’s creditors, if they run into financial difficulty. Their debt could even result in a forced sale of your property.
There’s another issue. Choosing this approach exposes you to otherwise avoidable capital gains taxes. Here’s why. When you sell certain assets, the government taxes you. But you can deduct your cost basis—a measure of how much you’ve invested in it—from the selling price. For example, if you and your spouse bought vacant land for $200,000 and later sell it for $315,000, you’d only need to pay capital gains taxes on $115,000 (the increase in value).
However, your heirs can get a break on these taxes under Maryland inheritance laws. For instance, let’s say you die, and the fair market value of the land at that time was $300,000. Since you used a trust rather than joint tenancy, your spouse’s cost basis is now $300,000 (the basis for the heirs gets “stepped-up” to its value at your death). So, if she then sells the property for $315,000, she only has to pay capital gains on $15,000, which is the gain that happened after your death! However, with joint tenancy, she does not receive the full step-up in basis, meaning she’ll pay more capital gains taxes.
3. Giving Away the Inheritance Early
Some parents choose to give children their inheritance early–either outright or incrementally over time. But this strategy comes with several pitfalls. First, if you want to avoid hefty gift taxes, you are limited to giving each child $14,000 per year. You can give more, but you start to use up your gift tax exemption and must file a gift tax return. Second, a smaller yearly amount might seem more like current expense money than the beginnings of your legacy, so they might spend it rather than invest. Third, if situations change that would have caused you to re-evaluate your allocations, it’s too late. You don’t want to be dependent on them giving the cash back if you need it for your own needs.
Shortcuts and ideas like these may look appealing on the surface, and many think they may serve as a way to circumvent Maryland inheritance laws. However, they can actually do more harm than good. Call McDonald Law Firm today to set up a consult with Andre O. McDonald, a knowledgeable Howard County estate planning attorney, who can help you find better strategies to prepare for you and your families’ future.
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