This article should be sufficient to round up our series on Maryland’s state-level estate tax and inheritance tax. Our last article provided some additional details on Maryland’s estate tax. As we saw, there is plenty to know about this important layer of Maryland taxation. In this post, we will shift our focus to the inheritance tax. As we mentioned in our initial article, Maryland is currently the only state which imposes both an estate tax and an inheritance tax. Having these two “death taxes” doesn’t mean that Maryland is double dipping on the assets of its residents. In reality, these two taxes mean a more complicated procedure for collecting the same amount of tax because inheritance tax offsets the estate tax, as we discussed earlier.Let’s look at a few more details on the inheritance tax here in Maryland.
Exemptions on Recipients and Beneficiaries
One of the most critical details to know about the inheritance tax is that exemptions are in place for many beneficiaries. In other words, many recipients are exempt from paying any tax altogether. The following beneficiaries are exempt: spouses, biological children, stepchildren, grandchildren, former stepchildren, adopted children, biological parents, stepparents and former stepparents, grandparents, brothers, sisters, spouses (including surviving spouses) of children, grandchildren, or other lineal descendants, businesses which exempt members wholly own, and certain non-profit organizations.
Exemptions on Assets
In addition to particular beneficiaries, exemptions also apply to certain types of assets. The transfer of the following assets will not trigger taxation: inheritances of $1,000 from any source, transfers of any assets received as compensation for Holocaust-related suffering, life insurance proceeds (as long as the beneficiary is a designated individual), and primary residences owned as joint tenants.
Inter Vivos Gifts & Small Estates
Another important detail to remember is that inter vivos gifts – gifts made during a person’s life – may also be subject to tax. The inheritance tax will apply to gifts made in anticipation of death; in other words, a person cannot simply give away wealth to avoid the inheritance tax. In addition, any gift considered a substantial part of a person’s estate made within two years before their death will be subject to the inheritance tax.Another key point to note is that small estates – those in which the total value of probate assets is under $50,000 – will not be subject to an inheritance tax.
Tax Rate & Payment Arrangements
The current tax rate for the Maryland inheritance tax is 10%. This tax is applied to the “clear value” of the received assets, which means fair market value minus certain costs (i.e., transaction costs, brokerage fees, etc.). In Maryland, the inheritance tax is paid upfront by the estate’s representative. The representative pays the tax before distributing assets to the inheritors. However, if for whatever reason the representative fails to pay the tax, then the tax becomes the responsibility of the inheritor.If an inheritor needs to sell something to raise capital to pay the inheritance tax, the inheritor can pay the tax on an installment agreement. Of course, this is only the case if the tax is passed to the inheritor from the representative.
Contact the Murphy Law Firm for More Information
Hopefully, this sheds more light on the mechanics of the inheritance tax here in Maryland. If you need more information, contact the Murphy Law Firm directly by calling 240-493-9116.