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  1. #1
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    Default How Much Are Federal and State Inheritance Taxes

    Inheritance taxes Federal and State of Maryland

    My two brothers and I found out the state of Maryland is holding my deceased mother's 401K proceeds of about $85,000 in escrow, until we collect it. We have two options, 1 to collect it as a lump sum, which will be taxed and then split it up or 2. To collect it separately and each individually pay taxes on $28,333. My question: What State and Federal taxes would be collected on these sums. That is, what percentage are the State and Federal taxes on $85K and what are the State and Federal taxes on $28K? Two percentages for State and Federal in each scenario or a link to a tax chart would be welcome answers.

    Thank you in advance!

    Nathan

    P.S. Just to clarify the above, me and my brothers are trying to decide to get the money by the way of my older brother's power of attorney status I believe, which would get us three, the divided amount in about a year OR to use an old Will our father, her ex-husband has to get the total to him which we will then divide up. Time is a consideration as well, so any insight into how long a method will take would also be appreciated, as would any ideas on how to speed up the process.

  2. #2
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    Default Re: How Much Are Federal and State Inheritance Taxes

    There's no such thing as a FEDERAL INHERITANCE tax. There's a Federal estate tax but with an estate in the range of $100,000, it's most likely within the exclusion limits and there is no tax due. Maryland has a similar exclusion (though they set their own limits rather than tracking what the feds do) that probably is still higher than the size of the estate you're looking at (it's like $1.25M these days I think).

  3. #3
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    Default Re: How Much Are Federal and State Inheritance Taxes

    You're not asking about inheritance taxes - you're asking about income taxes. A 401K involves pre-tax savings, so income tax is payed when the money is withdrawn. How much you will ultimately owe depends upon your other income, deductions, and tax bracket.

  4. #4
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    Default Re: How Much Are Federal and State Inheritance Taxes

    Yes, missed the fact that we weren't just talking estate or intelligence here. Also what your options are depends on how old the person was when he died and what you intend to do with the money. If the plan is administered by some commercial company (Fidelity, Prudential, etc...) they can usually help you with that information (they'll love to set up your own retirement IRA or whatever if they think they can).

  5. #5
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    Default Re: How Much Are Federal and State Inheritance Taxes

    Quote Quoting albato55ity
    View Post
    Inheritance taxes Federal and State of Maryland

    My two brothers and I found out the state of Maryland is holding my deceased mother's 401K proceeds of about $85,000 in escrow, until we collect it. We have two options, 1 to collect it as a lump sum, which will be taxed and then split it up or 2. To collect it separately and each individually pay taxes on $28,333. My question: What State and Federal taxes would be collected on these sums. That is, what percentage are the State and Federal taxes on $85K and what are the State and Federal taxes on $28K? Two percentages for State and Federal in each scenario or a link to a tax chart would be welcome answers.

    Thank you in advance!

    Nathan

    P.S. Just to clarify the above, me and my brothers are trying to decide to get the money by the way of my older brother's power of attorney status I believe, which would get us three, the divided amount in about a year OR to use an old Will our father, her ex-husband has to get the total to him which we will then divide up. Time is a consideration as well, so any insight into how long a method will take would also be appreciated, as would any ideas on how to speed up the process.
    Your brother cannot use his power of attorney. That POA died when your mother passed away. The 401k proceeds should be paid out to whomever is the beneficiary of the 401k. If there is no beneficiary, then it would follow the intestate laws form MD.

    If you and your siblings have the right to inherit the account there is another option that quite frankly would be the wiser option to take, and that would be to roll the amounts for each of you individually (trustee to trustee) into an IRA of your own. In that way, there would be no tax ramifications at all.

  6. #6
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    Default Re: How Much Are Federal and State Inheritance Taxes

    There is a process to establish beneficiary 401k's. As I recollect, you can set up termination of the beneficiary 401k to pay out fully in year 1 or break it down over 5 years, as you wish, for tax purposes.

  7. #7
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    Default Re: How Much Are Federal and State Estate Taxes

    Thank you for your responses.

    I decided to include the below just to make it clearer what the situation is, and if there is a question I should be asking but am not and also to correct what I misreported.

    As it stands, my brothers and me had a video conference where Niles proposed having our father claim the money since Josh still had not signed and sent the forms on to Maryland and at this rate nothing was going to happen. Josh felt he needed to contact his lawyer brother in law to find out if the divided sums would pay substantially less taxes than the full sum. His brother in law did not know and last Niles and I heard, his brother in law was going to give Josh Maryland attorneys he could call. So it seems as if the processes is likely to stall yet again.

    My question of: what percentage would the taxes be on the whole sum versus it divided by three individuals possession?
    Answered by flyingron & Mr. Knowitall, simplified by me, forgive me if I mis-sited you.
    Flyingron The amount is below what is taxed by estate tax.
    Mr. Knowitall You and your brothers or your father, will pay income tax on the claimed money, not estate tax. The amount will relate to the details of your tax bracket.
    llworking & flyingron
    Roll the money into an IRA to avoid paying taxes on it.



    The State Representative mentions below are moot, since we have one.
    A lot of this is sorting out what has already happened and reads a bit like a convoluted mystery with lots of factors being found to be irrelevant and tossed out.
    __________________________________________________ ___paste
    Josh and Nathan,

    I was attempting to put together the documents to reclaim the 'Unclaimed Property' funds that Dad heard about through a letter from The State of Maryland. The funds total $85,000 which. So, not insignificant. In discussing this with Dad, he thinks it may have been from a 401K fund.

    Claiming these funds requires us to go through a few hoops, particularly if we can't produce the documents that allowed the house to be sold and those funds distributed.

    I thought I had been making progress, but, as I worked to fill out the 'Regular Estate' form, I called a representative of the State of Maryland New Proceedings Division, looking for some assistance. She was very helpful in pointing me to the forms that needed to be filled out and explaining the process. The problem, however, is that there have already been assets sold from Mom's estate, with the proceeds distributed. Specifically, Josh, you sold her house. Unless the house was in your, and her, name - then you shouldn't have been able to do that. So, you had some sort of document that allowed you to engage in the transaction. If none of that can be found, we'll need to sort out how to explain this to the State.

    As a summary of what we need to provide the State of Maryland, in order to gain a Letter of Administration to retrieve the funds, is as follows:

    1) Her death certificate
    2) The letter of Administration;
    3) a photocopy of the drivers license for the person who is responsible for managing her estate; and
    4) a copy of that persons social security number.

    I've sent away for a copy of the death certificate, but the real problem lays in the 'Letter of Administration'. To get that, we need to provide the State with:

    1 An original copy of the will, or a clear explanation as to why there was not a will. (I have attached two scanned copies of her 1973 and 1977 Will and Testament, along with a scanned SS #).
    2. A 'Regular Estate' form filled out. (A form, partially filled out, is attached)

    Once the State reviews these, and approves everything, then a Personal Representative (PR) will be appointed. The PR is supposed to be a resident of Maryland and cannot be any of us. There is, however, the option of having someone that is not a resident of Maryland be the PR, but we still need a resident to 'serve as the agent'. I wonder if this could simply be a friend - I don't know what responsibilities they would have to take on.

    I have attached a set of scanned documents that should be of help in working through all of this.

    1. Mom's SS card and two of her Last Will and Testaments (1973 and 1977).
    2. The letter from the State of Maryland to Dad.
    3. The Regular Estate form, to be filled out by the three of us.
    4. A Handbook on Admistering Estates, put out by the State of Maryland.
    We should all make a time to talk about this when Josh comes back from Japan. And then we can decide upon a process, or at least the next steps.

    Best,
    Niles

    ________________________________________paste
    Next:

    Thus, it appears that the State has no real records regarding Mom's estate. So, I think the drill is:

    1. To explain to the State that there is not an existing Will that has been filed or that we can locate.
    2. We will need to file, collectively, the 'Regular Estate' form. Given that she had a house, but transferred it to Josh prior to her death, this becomes unclear enough that Josh should be on the phone with me the next time I talk with the Wills Office. I think they want to help us, but I was on the verge of sounding evasive the last time I spoke with them, and if they aren't clear as to what has transpired - they're only going to prolong the retreival process.
    3. The state should be okay with this process as they would, in the absence of a Will, divide the net estate among us equally (see page 20 of the 'Administering Estates in Maryland').
    4. I think the 'Personal Representative' that we choose, will have to do exactly that (divide the net estate among us equally).
    5. So, I would suggest that we, upon Josh's return from Singapore:
    a) Collectively discuss this process.
    b) That we fill out the "Regular Estate' form.
    c) That Josh and I (or maybe all three of us) call the Will Office to ensure that we're following procedure properly.
    d) We can select Lori to be the 'Personal Representative' and she will, by law prescribed by the State of Maryland, distribute the net proceeds to each of us equally.
    e) We will need to find someone that is a resident of the State of Maryland to serve as our 'resident agent'. To quote from the Administering Estates document (page 26), "The only responsibility of the resident agent is to accept service of process in the same manner and with the effect as if it were served personally in the State on the nonresident." I think that means they'd have to accept, on our behalf, the receipt of any legal papers, notices or summons. Don't know who'd want to sign up for such duty or how we could convince them it didn't expose them to any liability or general hassle.

    Make sense?
    Niles
    ________________________________________paste
    Next

    The fireproof box you reference is in my possession. That is where I found the old (1973 and 1977) Wills. I do think there was a Will drawn up by Armstrong, but - notably, there was nothing filed with the State of Maryland. They've looked for any evidence of a Will using her address, Social Security #, and her date of death. So, Armstrong must not have filed anything, which is just as well - given that, if I remember correctly, he factored himself in for something like a third of the income. Pretty outrageous abuse of a woman who was not using the best of judgment. If I remember, Ben called him out on this and he went away. Josh says that he thinks Mom signed the house over to him (Josh) prior to her death, and that's what enabled Josh to sell the house and dispense the funds.

    Thus, it appears that the State has no real records regarding Mom's estate. So, I think the drill is:

    1. To explain to the State that there is not an existing Will that has been filed or that we can locate.
    2. We will need to file, collectively, the 'Regular Estate' form. Given that she had a house, but transferred it to Josh prior to her death, this becomes unclear enough that Josh should be on the phone with me the next time I talk with the Wills Office. I think they want to help us, but I was on the verge of sounding evasive the last time I spoke with them, and if they aren't clear as to what has transpired - they're only going to prolong the retreival process.
    3. The state should be okay with this process as they would, in the absence of a Will, divide the net estate among us equally (see page 20 of the 'Administering Estates in Maryland').
    4. I think the 'Personal Representative' that we choose, will have to do exactly that (divide the net estate among us equally).
    5. So, I would suggest that we, upon Josh's return from Singapore:
    a) Collectively discuss this process.
    b) That we fill out the "Regular Estate' form.
    c) That Josh and I (or maybe all three of us) call the Will Office to ensure that we're following proceedure properly.
    d) We can select Lori to be the 'Personal Representative' and she will, by law prescribed by the State of Maryland, distribute the net proceeds to each of us equally.
    e) We will need to find someone that is a resident of the State of Maryland to serve as our 'resident agent'. To quote from the Administering Estates document (page 26), "The only responsibility of the resident agent is to accept service of process in the same manner and with the effect as if it were served personally in the State on the nonresident." I think that means they'd have to accept, on our behalf, the receipt of any legal papers, notices or summons. Don't know who'd want to sign up for such duty or how we could convince them it didn't expose them to any liability or general hassle.

    Make sense?

    Josh, you should read through pages 22 -25 of the 'Administering Estates in Maryland' as answers to the questions of the process we followed after Mom's death, are likely to be compared to what the State's formal expectations had been.

    Niles



    ________________________________________

  8. #8
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    Default Re: How Much Are Federal and State Estate Taxes

    My question of: what percentage would the taxes be on the whole sum versus it divided by three individuals possession?
    Nobody can answer that question with any certainty. As someone already explained everyone's marginal tax rate is different depending on the facts of their income, deductions and credits.

    Odds are, that more taxes will be paid on the money if one person claims it, simply because of the amount of money and our stair step system for federal taxes. I will give you an example:

    Lets say that one of you is single, and only has 20k of income a year. If that person claims the entire thing that makes their income 105k. The first 9750.00 of it won't be taxed at all. The next 8700.00 of it will be taxed at 10%, the next 26649.00 will be taxed at 15%, the next 50509.00 would be taxed at 25%, and the remaining 9392.00 would be taxed at 28%.

    If the person claiming it has income of 100k to start, then that takes it up to 185k. The same numbers would apply as the previous example, except that you would have a lot more in the 28% bracket.

    Now, if you take that same person with 20k of income, and add only 26k to their income, then most of it would be taxed at 10 or 15%, with only a about 900.00 taxes at 25%.

    So...if your father only has 20k in income, and the three sons make over 100k each...that comparison is very different than if your father has 100k in income, and each son makes about 20k...and all of the other possible combinations will result in different comparisons..

  9. #9
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    Default Re: How Much Are Federal and State Estate Taxes

    >>My question of: what percentage would the taxes be on the whole sum versus it divided by three individuals possession?

    Quote Quoting llworking
    View Post
    Nobody can answer that question with any certainty. As someone already explained everyone's marginal tax rate is different depending on the facts of their income, deductions and credits.

    Odds are, that more taxes will be paid on the money if one person claims it, simply because of the amount of money and our stair step system for federal taxes.
    Thank you for your help llworking.
    So it is a matter of income brackets, to determine the percentage of the sum(s) tax liability, right?
    So to compare the different scenarios tax liability, I will need a chart of income brackets. I assume this would be an income tax chart as oppose to an estate tax chart. That is, the money recovered will be considered income and not get some sort of inheritance deduction, correct?
    If the above is correct and the sum recovered will be taxed as income, then we need to find the appropriate tax chart to figure out whether to go with a single sum payed to our father who would pay taxes on it and transfer it to us, where we would not pay taxes on it? or we would also pay taxes on it as a gift? Or the other scenario where we would recover the money in our three names and each pay income tax on it or some sort of inheritance tax?

    What I am still foggy about is how the government would tax the recovered money, income or inheritance. Knowing this would let us know which tax charts to compare. Obviously I know next to nothing about tax law and where to find the charts in question. Therefore; Links to the appropriate charts would be much appreciated.

    Also, if we decide to place the recovered money into individual IRA accounts, then it would not be taxed until it was removed from them, right?
    The questions that occur to me are:
    1. Would the sum(s) be taxed under estate tax law and or income tax law?
    2. Are the sum(s) large enough to be taxed under estate tax law?
    3. Would rolling the sums into individual IRAs, help reduce the tax burdens or merely delay them?
    4. Once the relevant tax chart(s) are determined, we should compare the amounts owed in taxes and go with the option that has the least money lost to taxes?
    5. Time: What difference is there in the time to recover the money, is there, in pursuing the different options?

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