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Most people are aware that the U.S. federal government imposes a federal estate tax. However, fewer people know that individual states often impose an additional estate tax on their own. Maryland has its own state-level estate tax, and also a separate inheritance tax. In fact, Maryland is the only remaining state to have both a state-level estate tax and an inheritance tax. However, as we will see, Maryland’s tax regime isn’t as bad as you would think. In this post, we’re going to explore some of the basic facts pertaining to Maryland’s estate tax and inheritance tax.
State Estate Tax vs. Federal Estate Tax
As mentioned, Maryland’s estate tax is separate from the federal estate tax, and these two taxes have different thresholds. The threshold for the Maryland estate tax is $5 million (as of 2021). However, the federal estate tax has a threshold of $11.7 million. Depending on the size of a Marylander’s estate, you might owe Maryland estate taxes, but avoid the federal estate tax. If your estate exceeds $11.7 million, then both the federal estate tax and Maryland estate tax will apply. This will, of course, mean double taxation.
Estate Tax & Inheritance Tax
In addition to a state-level estate tax, Maryland also imposes an “inheritance tax”. This inheritance tax is separate from the estate tax. As mentioned, Maryland is currently the only state remaining in the U.S. which imposes both of these death taxes. One key point to remember is that the Maryland inheritance tax is only triggered in certain situations. And, many inheritors won’t pay any inheritance tax at all. Whenever inheritance tax is triggered, the amount of estate tax owed will be offset by the same amount paid in inheritance tax. So, in effect, the same amount is paid, even when both taxes are triggered. The inheritance tax, therefore, simply shifts the tax burden from one entity to another. However, the same aggregate total is collected.
When to File a Maryland Estate Tax Return
The question naturally arises: when will a Maryland estate tax return be required? The answer, of course, is whenever a decedent’s gross estate exceeds the $5 million threshold. But what counts toward a person’s “gross estate”? This would appear to be the most significant follow-up question in this scenario. The answer is that a person’s gross estate includes nearly all property. In addition, taxable gifts made in the year prior to the decedent’s death will be included in the gross estate. The following types of property will be included:
- real estate;
- bank accounts;
- investment accounts;
- retirement accounts;
- automobiles;
- boats and other tangible personal property;
- life insurance proceeds;
- interests in a business; and,
- financial instruments (i.e. stocks, bonds, etc.).
If property is co-owned, only the portion of the property owned by the decedent is counted toward the gross estate. Furthermore, non-probate assets, such as living trusts, are also counted toward the gross estate.Importantly, nonresidents will need to file a Maryland estate tax return if they own real or personal property in Maryland. This will trigger if the estate exceeds $5 million at the time of death. However, the estate tax due will only be based on the value of the assets which are located in Maryland.
Maryland Estate Tax Rate
Currently, the Maryland estate tax rate is 16%. This rate only applies to the amount of your estate which exceeds the $5 million threshold. This means that if your estate amounted to $5.5 million, then only $500,000 would be subject to the 16% tax. Furthermore, whatever is paid in inheritance tax will decrease the amount of estate tax owed. So, if $50,000 is paid in inheritance tax, then the estate will owe $50,000 less in estate tax.
Contact The Murphy Law Firm for More Information
This is just an overview of Maryland’s estate tax and inheritance tax. We will almost certainly come back and discuss these topics in greater detail in the future. For now, if you have any questions, contact The Murphy Law Firm by calling 240-493-9116.
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