Probate is the legal process of administering a deceased person’s estate and can be lengthy, expensive, and public. Many people wish to avoid probate to keep estate matters private, minimize legal fees, and ensure assets transfer quickly to beneficiaries. Using a trust is one of the most effective ways to accomplish probate avoidance in Montgomery County, Maryland.
Why is Montgomery County, Maryland an expensive place to live and an even more expensive place to die?
Navigating Maryland’s Death Taxes
Montgomery County, Maryland residents face two separate death taxes – an inheritance tax and an estate tax. While federal estate taxes impact fewer Americans today, Maryland’s death taxes remain complex to navigate.
The inheritance tax applies when certain individuals receive assets from a Maryland resident’s estate. It specifically targets beneficiaries who are unrelated or distantly related to the deceased. Spouses, children, grandchildren, and siblings are exempt. But nieces, nephews, cousins, and more distant relations will pay inheritance tax on receipts over $500. The rate is 10%, taken directly from the inheritance amount.
Maryland’s estate tax is more encompassing. It applies to all Maryland residents and non-residents who own Maryland real estate. In 2023, estates valued over $5 million owe estate tax. Rates range from 9% to 16% based on the total taxable estate value. Assets transferred to a surviving spouse or charity are exempt. For non-residents, only Maryland real estate counts toward estate value.
Estates that incur both taxes do receive some relief. The estate tax bill is reduced by the full amount of inheritance tax paid. For example, an estate paying $15,000 in inheritance tax and $100,000 in estate tax would only pay $85,000 to the state’s Comptroller.
Navigating Maryland’s two death taxes takes specific estate planning. Strategies like trusts, asset ownership arrangements, and charitable bequests can minimize the impact. With proper advice, Maryland residents can optimize inheritances for their heirs, and save on the costs of taxes and administration.
Adding Insult to Injury. What is Probate, and why is it so expensive?
When someone passes away, their assets like real estate, bank accounts, investments, and personal belongings are distributed through probate court. The court oversees validating the will, inventorying assets, paying debts and taxes, and finally distributing property to heirs.
This process takes time, with probate in Maryland typically lasting 6-18 months. Maryland law requires creditors get first crack at the estate assets and provides for a six-month window from the time of death for creditors to file their claims against the estate. The estate pays administration fees to attorneys, executors, appraisers, accountants, and the probate court itself. Probate records are also public, so anyone can find out what assets were left behind and to whom.
Why Avoid Probate in Montgomery County, Maryland?
There are several key reasons why probate avoidance planning is so popular in Montgomery County:
- Assets are high—Montgomery County, Maryland estates tend to be amongst the highest valued in the state, with significantly greater costs for housing in the county then surrounding counties, and one of the highest per capita incomes in the state. According to a recent CNBC study, Bethesda-Gaithersburg-Frederick ranked as one of the 15 most expensive cities for housing costs. https://www.cnbc.com/2023/08/22/us-cities-with-the-highest-cost-of-living.html
- Montgomery County probate fees appear deceptively low, but the actual cost can be quite high. On a $500,000 estate, the fee to open probate is $1,000, but the administrative costs for valuations, bonding, advertising, and personal representative commissions and attorney’s fees could total $15,000 or more. Total costs on a $1,000,000 estate could easily exceed $35,000.
- The process moves slowly. With court schedules and paperwork, it takes a minimum of six months and could take well over a year before beneficiaries receive their inheritance.
- Privacy is lost. Probate files are public records, exposing assets and distributions. Many wish to keep this information private.
- Out-of-state real estate complicates matters. Owning real property in multiple states can mean ancillary probate proceedings and additional fees.
- Conflict over distributions happens. When people inherit directly, there is more potential for dissent and disputes over asset division.
How Trusts Avoid Probate in Montgomery County
Using a revocable trust, (sometimes called a living trust) is the primary way that Montgomery County residents avoid probate while still maintaining control over their property. With a trust, you transfer assets like real estate, financial accounts, and personal property into the trust during life.
At death, assets in the trust flow directly to beneficiaries and avoid probate. The trust contains legal instructions dictating asset distribution, and the designated trustee simply follows the instructions.
Key benefits of using a living trust in Montgomery County include:
- Assets transfer immediately to beneficiaries according to trust terms. Fast, private, and no courts are involved.
- Allows control over asset distribution. Spell out exactly who gets what and when in the trust.
- Consolidates multi-state real estate. All properties can transfer under a single trust, avoiding multiple probates. In most instances, transfers to the trust are exempt from transfer and recording taxes, and subject only to de minimis fees for recording and deed preparation.
- Lower costs. Trustee fees and legal costs are typically far less than probate court expenses, by comparison, non-professional trustee fees in Maryland are typically capped at approximately 1/4 the cost of probate commissions (e.g., 1% vs. 3.6%). For professional trustee fees, expect costs in the 1-2% range, more than non-professional fees, but less than probate commissions.
- Privacy protection. Trusts and their terms remain private and are not public record.
Requirements for Creating a Trust in Montgomery County
To create a valid trust that will avoid probate in Montgomery County, Maryland, there are several requirements:
- The trust creator must be over 18 and of sound mind. This allows them to make legal decisions regarding their estate.
- The trust must name a trustee to administer trust assets. Either an individual or corporate trustee can fill this role.
- Trust documents must be signed and notarized. Proper trust formation is legally verified by a notary. The best practice would be to have multiple witnesses, a notary, and no “interested” parties present at the time of execution.
- Trust assets must be retitled in the name of the trust. To avoid probate, accounts and property must be owned by the trust, not the individual.
- The trust creator should fund the trust during life by transferring assets. Funding is essential to achieve probate avoidance at death. The reason most trusts fail to perform as expected is the result of a failure to implement the funding plan, and not
Avoiding probate in Montgomery County, Maryland using a living trust provides multiple advantages for those wanting privacy, reduced costs, and efficient estate distribution. By working with an estate planning attorney to create and fund a trust, individuals can ensure their assets pass directly to beneficiaries when they pass away. Taking the time for proper trust planning can help avoid the public process of probate court.
Photo Credit: Maryland Register of Wills: https://registers.maryland.gov/main/fees.html