The new Maine budget, signed into law by Gov. Paul LePage on June 20, 2011, makes significant changes to the Maine Estate Tax. Most notably, effective for deaths on or after January 1, 2013, it doubles the Maine Estate Tax exemption from $1 million to $2 million per decedent. Through proper estate tax planning, married couples essentially will be able to shield $4 million of assets from Maine estate taxation, and other techniques may also be used to further reduce the tax burden.
The state estate tax rate structure is also modified and improved by the new legislation. In the past, the method by which the state estate tax was calculated resulted in a “cliff effect” wherein an estate that was just over the exemption amount would end up paying a much higher effective tax rate than an estate that was well over the exemption amount. Under the new legislation, the rate will be:
- For estates between $2,000,000 and $5,000,000: 8% of the excess over $2,000,000
- For estates between $5,000,000 and $8,000,000: $240,000 plus 10% of the excess over $5,000,000
- For estates over $8,000,000: $540,000 plus 12% of the excess over $8,000,000
Compared to the prior law’s inequitable cliff effect and top rate of 16%, this is a much more favorable structure for taxpayers.
Also, effective for deaths on or after January 1, 2011, the new law alleviates what would have been a difficult decision for the surviving spouse of a Maine decedent with a taxable estate. Because of an anomaly in the Maine estate tax law, for the 2011 and 2012 tax years, the surviving spouse would have had to choose between maximizing the deceased spouse’s federal estate tax exemption and paying a Maine estate tax as a result or, alternatively, avoiding a Maine estate tax but losing the advantage of a significant portion of the deceased spouse’s larger federal estate tax exemption. The new law expands the amount of a decedent’s estate for which a Maine-only qualified terminable interest property election can be made, thus alleviating this dilemma.
Briefly, a qualified terminable interest property election (or “QTIP” election) is made to postpone the imposition of estate tax on property passing from a deceased spouse to a surviving spouse until that surviving spouse’s later death. Because the federal estate tax exemption amount is greater than the state estate tax exemption amount, it is tax efficient to make a QTIP election for Maine purposes but not federal purposes for the amount that represents the difference between the state estate tax exemption and the federal estate tax exemption. That amount was capped by prior law at $2.5 million, which was the difference between the federal and state estate tax exemptions in 2009.
In late 2010, however, Congress increased the federal estate tax exemption for 2010, 2011, and 2012 to $5 million. That change created a gap of $4 million between the two exemption amounts for those three years (recall that the Maine estate tax exemption is not increased until 2013). This legislation addresses that gap by increasing the amount for which an estate can elect Maine-only QTIP treatment to the difference between the state and federal exemptions at the time of the decedent’s death, therefore allowing a full $4 million Maine QTIP for the relevant years. Unfortunately, this fix does not alleviate the problem for estates of 2010 decedents.
Finally, the Act also codifies what had been Maine Revenue’s informal interpretation of the taxation of nonresidents who own Maine property through a pass-through entity. For Maine Estate Tax Purposes, pass-through entities owning Maine property are disregarded and the Maine property is taxed to the nonresident decedent as though it were owned outright. The current statute is written broadly enough that it could have included any ownership interest in a pass-through entity, even, theoretically, a very large business in which the nonresident decedent had made a very small investment. While Maine Revenue had clarified by rule that they did not interpret the statute this broadly, this statutory clarity provides greater certainty for taxpayers.
Under the new statute, Maine Revenue will still look through pass-through entities owning Maine property and tax a nonresident decedent. Now, however, the look-through provision will only apply if the entity does not actively carry on a for-profit business, the ownership by the pass-through was not for a legitimate business purpose, or the property was acquired by other than a bona fide sale and the decedent retained an interest in the Maine property. The practical effect? Maine will still impose state estate tax on a nonresident owner of Maine property who merely shifts the ownership of the property to a pass-through entity in an attempt to make it non-Maine property for tax purposes. (It would be non-Maine property absent this statute because the decedent would own an intangible asset—a membership interest in the pass-through, which would be sited to his own state of domicile, rather than tangible property sited to its location.) But the State will not tax any property held in a pass-through for a legitimate business purpose.
If you have any questions regarding these new changes or if you would like a Pierce Atwood attorney to review your estate plan to make sure you are positioned to take advantage of these tax savings, please contact a member of our Trusts & Estates Practice Group.