Preparing for Maine’s New Estate Tax Laws with Life Insurance Trusts
For residents of Maine dealing with the estates of relatives, estate taxes can be confusing because the laws in the state have recently changed. The good news is the laws offer some benefit to those owning property or residing in Maine because the threshold is a bit higher than it used to be. The bad news is that the percentage the estate must pay in taxes is also higher.
We deal with estates in Maine a lot because it’s such a popular vacation spot, so more than a few clients own properties there. And if you know anything about Maine, you know the property there is pricey, especially if you’re on the beachfront. If you own property or reside in Maine for more than six months a year, then you’re going to need to prepare your heirs to help them deal with the complicated estate settlement process.
Changes to Maine’s Estate Taxes
Maine’s estate tax law recently underwent some changes. For people who passed away before 2013, there was no estate tax. For those who passed away in 2014 and 2015, the threshold for filing an estate tax return was $2 million. For deaths occurring in 2016 and after, the estate tax threshold is equal to the federal threshold of $5.45 million and will continue to follow that threshold in the years going forward. The percentage can go as high at 12% based on the amount of the total estate. Below is the tax levied based on the net value.
|Estate Value||Applicable Tax|
|$5,450,000 – $8,450,000||8% of amount over $5,450,000|
|$8,450,001 – $11,450,000||$240,000 plus 10% of amount over $8,450,000|
|$11,450,001+||$540,000 plus 12% of amount over $8,000,000|
The estate tax applies to anyone who is a resident of the state of Maine at the time of his or her death. It also applies to anyone with a federal gross estate that contains property in Maine — either real estate or other tangible property that was primarily located in Maine at the time of death.
The estate tax return is due within nine months of the date of death, as are any payments of taxes. If filed 60 days late or less, an additional penalty of 10% of the total tax due is assessed. If more than 60 days late, the penalty goes up to 25% of the tax due. There are additional penalties levied for willful understatement, failure to complete proper appraisals, and executor negligence.
Due to the changes in the tax laws, as well as the heavy penalties imposed for failing to report accurately, it’s important to have a tax plan set up in advance to cover estate taxes. For this, we recommend using an irrevocable life insurance trust (ILIT).
Using an ILIT to Comply with Maine’s Death Taxes
When one of our clients is in a position in which they might face Maine’s death taxes, we highly recommend purchasing universal life insurance as a means of creating a pool of funding for the payment of taxes later. Of course, because the proceeds are typically considered part of an estate when you own the policy, these policies need to be held in a trust instead. The trust allows you to create a pool of funding that heirs can use to pay off taxes so they can stay in compliance with Maine’s strict filing requirements. Here are just a few benefits of using universal life insurance in an ILIT:
- Universal life insurance is scalable, meaning that you may be able to adjust the face amount and thereby increase or decrease premium payments.
- The tax-free death benefits are made as soon as you pass away, giving your heirs immediate access to funds without having to go through probate.
- This can also be used as a wealth creation vehicle while you’re still alive because policy cash value can be used for loans and other purposes.
- The trust acts as a credit and tax shelter, meaning that neither the government nor your creditors can gain access to it to settle end-of-life debts.
At Howard Kaye, we’ve been using ILITs and life insurance to help our clients work through the complexities of estate taxes and as a means of building a legacy. In some instances, we’ve even found ways to help our clients give their estate away twice by leveraging premium financing with existing assets. For more information on working around estate taxes in Maine, contact a Howard Kaye representative today at 800-DIE-RICH.