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LAWatch
Vol. 14, No. 1 Spring 2003 (HTML Version)
ESTATE AND GIFT TAX - JUST WHEN YOU THOUGHT YOU UNDERSTOOD IT
First, since 1982, the gift tax credit and estate tax credit have been a unified credit. That is, you could apply the unified credit against taxable gifts made during your lifetime, and upon your death, the unused portion of the credit would be available in determining the amount of estate tax due. In essence, you could “use it now or use it later.” Under the Act, beginning with the year 2004, the estate and gift exclusion amounts will no longer be unified. That is, that although the estate exclusion amount will increase to $1,500,000, the gift exclusion amount remains at $1,000,000. In fact, although the estate exclusion amount is scheduled to increase to $2,000,000 in 2006 and to $3,500,000 in 2009, the gift exclusion amount remains at $1,000,000 throughout. Beginning in 2011, unless the law is changed, the estate exclusion amount and the gift exclusion amount will again be unified at $1,000,000. This divergence of the estate and gift exclusion amount presents an interesting planning issue. Should you make a gift during your lifetime in excess of the $1,000,000 exclusion amount and pay the gift tax for the purpose of removing future appreciation as well as future earnings from your estate, or should you retain the assets until your death, hoping that the estate exclusion amount will have increased to the point where there will be no estate tax to pay on those same assets? A second less publicized aspect of the Act is the fact that although over the next several years the estate exclusion amount is increasing and the maximum estate tax rate is decreasing, the total estate tax liability of an estate could increase, rather than decrease, depending on the year of death of the decedent. At the very least, the total estate tax liability will be decreasing at a slower pace than had originally been reported in the media. This is because the state death tax credit is being phased out by the Internal Revenue Service, but being kept in full force by many states, including the State of Maryland. The state death tax credit for federal estate tax calculations is reduced by 25% in 2002, by 50% in 2003 and by 75% in 2004; in 2005 the state death tax credit is replaced with a deduction from the gross estate. Under the old law, the IRS would first compute the total federal estate tax liability; next, the state death tax credit would be computed, and the credit would be deducted from the total estate tax liability to determine the net federal estate tax due. The full amount of the state death tax credit would then be payable to the state as a state estate tax. However, the Act provides that the state death tax credit will be phased out, allowing for a smaller credit against the federal estate tax liability, which will result in a larger net estate tax payment to the IRS. Maryland, along with several other states, quickly realized that a reduction in the state death tax credit would mean a reduction in the amount of estate tax paid to the state. Therefore, the Maryland legislature, like others, amended the statute to provide that the amount of estate tax due to the State of Maryland would be equal to the state death tax credit computed under the old tables before any reduction. In other words, although only a portion of the state death tax credit is allowed as a credit in determining the amount of estate tax due to the IRS, the full amount of the state death tax credit must be paid to Maryland as an estate tax. Two examples will best illustrate this concept. Example No. 1: Decedent dies in the year 2002 with an estate of $1,300,000. The estate tax to be paid to the IRS will be $85,300 (the $51,600 state death tax credit having been reduced by $12,900, or 25%). However, Maryland estate tax is now computed based on 100% of the state death tax credit. Therefore, the estate tax payment to Maryland will be the full $51,600. The total federal and state estate taxes paid by the decedent’s estate in 2002 will be $136,900. If instead the decedent dies in the year 2003 with an estate of $1,300,000, the state death tax credit of $51,600 will be reduced by $25,800, or 50%. Therefore, the estate tax payment to be made to the IRS would be $98,200. The Maryland estate tax will remain at $51,600. Therefore, the decedent’s estate in 2003 will pay total estate taxes of $149,800, an increase of $12,900 from a decedent dying in the prior year. Example No. 2: Decedent dies in the year 2004 with an estate of $1,800,000. Her estate will pay estate tax to the IRS of $113,700 (the $85,200 state death tax credit having been reduced by $63,900, or 75%), and estate tax to Maryland of $85,200, for total estate tax payments of $198,900. If instead the decedent dies in the year 2005 with an estate of $1,800,000, her estate will pay estate tax to the IRS of only $96,660, since although the state death tax credit has been fully phased out, the amount of state estate tax actually paid will now be an allowable deduction in computing the taxable estate. The estate tax due to Maryland will remain at $85,200, for total estate tax payments of $181,860. Therefore, a decedent with an estate of $1,800,000 will pay $17,040 less in total estate tax if she dies in the year 2005 then if she dies in the year 2004, even though the estate exclusion amount and Federal estate tax rates have not changed. Please feel free to contact the author if you would like to discuss either of these issues or other estate and trust issues.
LANDLORD BEWARE! On June 13, 1998 at 1:17 a.m., an intruder forced open a patio door at the apartment of Susan and Howard Hemmings and shot Mr. Hemmings, who died hours later from his wounds. The Hemmings’ landlord had equipped the patio door with a bar which was missing when the break-in took place. Exterior lighting in the back of the apartment where that door was located was minimal and may not have been working at the time. Five years after Mr. Hemmings’ death, Maryland joined a handful of states whose courts have ruled that a landlord can be liable for negligent maintenance that results in murders and other crimes inside a tenant’s premises. Before the June 16, 2003 Court of Appeals decision in the Hemmings case, a Maryland landlord owed a duty to protect lessees only from crimes which occurred in “common areas” if the landlord had prior notice of criminal activity in those common areas and should have foreseen that the condition of the common areas enhanced the likelihood of harm. Scott v. Watson, 278 Md. 160 (1976). “Common areas” are those portions of the landlord’s property over which he retains control, typically halls, stairways and other locations used by all tenants. After Hemmings, the failure of a landlord to maintain and inspect lighting, locking devices and similar security measures in those common areas may now expose him to a judgment in a court of law, even when his tenants are injured by the intentional acts of criminals within the leased portion of the premises. Hemmings has been returned to the trial court to determine whether liability should be imposed on the landlord under the particular facts of the case. In a strongly-worded dissenting opinion, three members of the Hemmings court criticized the majority opinion, referring to authorities outside Maryland which do not believe it is fair to hold landlords liable for crimes. These authorities note that it is often difficult to determine whether criminal actions are foreseeable and to set a clear standard to measure the reasonableness of a landlord’s conduct. They further comment that the government (not the private sector) has traditionally been responsible for safeguarding citizens. In the wake of Hemmings, landlords potentially face increased insurance premiums because of the increased risk that they will be held responsible for criminal actions. To try to minimize that risk, landlords may be forced to incur added maintenance expenses and may wish to consider modifying leases to make their tenants expressly responsible by contract for security within tenants’ spaces. Regardless of whether we agree with the Hemmings decision, it is now Maryland law.
PROFILE
HAS SOMEONE SPENT YOUR MONEY?
The Maryland Construction Trust Statute was enacted to protect subcontractors and suppliers from dishonest practices by general contractors and other subcontractors for whom they might work. The statute creates a trust relationship between a contractor that has been paid by theowner, and a subcontractor or supplier for whose work the owner has paid. The Statute requires the directors, officers, and employees of the contractor who have the responsibility for the control of funds paid by an owner for work or materials supplied by a subcontractor or supplier to hold those funds in trust for the subcontractor or supplier. Significantly, the Statute creates personal liability on the part of officers, directors, or employees of contractors who fraudulently retain or use trust monies for any purpose other than to pay the subcontractor or supplier for whom such funds are intended. If you are a subcontractor or supplier who suspects that funds paid to an upstream contractor for your benefit have not been paid to you, or if you are a contractor who has questions about the use of funds paid to you by an owner or an upstream contractor, please feel free to contact us to discuss the implications of the Maryland Construction Trust Statute for you and your business.
PROFILE
Who's Who in Law
“It’s a nice feeling when you think you’ve accomplished something,” said Dorf, an expert in dispute mediation for Adelberg, Rudow Dorf & Hendler. “Mediation will bring about communication between the two parties. With litigation or arbitration, there's still the animosity.” Dorf first gained an interest in mediation and alternative dispute resolution as a Baltimore City Circuit Court judge from 1968 to 1983. At the time, Dorf and other judges saw a growing backlog of cases, and decided to clean them up. Through a series of “settlement conferences,” the judges closed old cases that otherwise would have clogged up the courts for years. Dorf, a graduate of the University of Maryland and the George Washington University Law School, has been on the faculties at the University of Baltimore Law School, the University of Maryland- University College's paralegal studies department and Maryland Institute for Continuing Professional Education of Lawyers. He has served on the Governor's Commission on Alternate Dispute Resolution, and is a member of the Maryland State Bar Association, the Bar Association of Baltimore City, the Baltimore County Bar Association, the Maryland Bar Foundation and the Maryland Trial Lawyers Association. He was recently appointed to the Board of Trustees for the Baltimore Bar Foundation. In 1985, Dorf founded the state's first arbitration and mediation firm, and began settling cases between lawyers and insurance companies. He also helps settle domestic disputes and other cases. -Tim Hyland (thyland@bizjournals.com) THIS ARTICLE APPEARED IN THE VOL. 21, NO. 2 ISSUE OF THE BALTIMORE BUSINESS JOURNAL THE WEEK OF MAY 30- JUNE 5, 2003. IT HAS BEEN REPRINTED BY THE BALTIMORE BUSINESS JOURNAL AND FURTHER REPRODUCTION BY ANY OTHER PARTY IS STRICTLY PROHIBITED. © COPYRIGHTED 2002 BY THE BALTIMORE BUSINESS JOURNAL, CANDLER BUILDING. 111 MARKET PLACE, SUITE 720, BALTIMORE, MARYLAND 21202, (410) 576-1161.
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By now, most
people are
aware that
under the Economic Growth and Tax
Relief Reconciliation Act of 2001
(the “Act”) the estate and gift tax
applicable exclusion amount was
accelerated to $1,000,000 for the
years 2002 and 2003. Under the old
law, the exclusion amount would not
have increased to $1,000,000 until
the year 2006. Most people also
know that the 55% maximum estate
tax rate was decreased to 50% in
2002 and 49% in 2003. However,
several aspects of the Act have not
yet been as highly publicized.
Laurie R. Bortz
became Of
Counsel to
ARD&H this
past June. She
focuses her
practice
primarily on federal and state
litigation. Ms. Bortz received
her J.D. from the University of
Baltimore School of Law, where
she was Recent Legislation
Editor of the University of
Baltimore Law Review, and was
admitted to the Bar in Maryland,
1978. She received her B.A. in
English from Boston University.
For 17 years, Ms. Bortz served
as senior attorney and counsel
for Baltimore Gas and Electric
Company and its affiliates.
There she handled many
complex litigation matters,
including breach of contract
litigation, employment
discrimination actions,
construction disputes, defense of
serious personal injury cases and
other legal matters.
In a typical
construction
project,
subcontractors
and suppliers submit their bills to
the general contractor who
thereafter incorporates these bills
into its billings to the project owner.
When things run smoothly, the
project owner then pays the general
contractor, who in turn pays its
subcontractors and suppliers. What
happens, however, when the
general contractor or subcontractor
wrongfully withholds money paid
by an owner and uses those funds
for another purpose? The Maryland
Construction Trust Statute, which is
contained in Title 9 of the Maryland
Real Property Code, provides a
strong remedy for subcontractors
and suppliers who are damaged in
this fashion.
The greatest satisfaction
Paul Dorf gets from
his work comes from the
settlement of domestic
disputes—helping people
who hardly talk find a
common ground and an
acceptable compromise.