If you are planning your estate, you should know something about Maryland that sets it apart from the rest. Maryland is the only state in the entire country that imposes both an estate tax and an inheritance tax. Both taxes can apply to your estate depending on its size and who your beneficiaries are.
Understanding how these two distinct taxes operate is essential to ensuring your heirs receive your assets according to your wishes. The presence of these taxes can create substantial confusion and unexpected tax burdens for your loved ones during an already difficult time.
How does the estate tax work?
The estate tax generally applies only if the estate exceeds Maryland’s estate tax exemption amount. Maryland establishes this threshold for estates valued at $5 million or more. If your total assets fall below this specified amount, your estate will not owe this particular tax.
Your estate pays the Maryland estate tax before your heirs receive their assets, but the first $5 million is exempt. The state uses progressive tax rates up to a maximum of 16%. Maryland calculates the estate tax using a credit-based system tied to historical state death tax credits.
Who pays the inheritance tax?
While the estate tax looks at the estate’s total value, the inheritance tax is based on who receives your assets. Maryland applies the inheritance tax to certain people who receive property from you.
The following is a list of people who are exempt from the tax:
- A surviving spouse or domestic partner
- Your children and stepchildren
- Your grandchildren
- Any surviving parents
- Your siblings
Under Maryland law, they are commonly called “exempt beneficiaries.” Maryland charges a flat 10% inheritance tax on assets passing to non-exempt beneficiaries.
Does “double taxation” happen?
Your estate can meet the criteria for both taxes. For example, your estate may be large enough to owe the estate tax, and some beneficiaries are not exempt from the inheritance tax.
Fortunately, Maryland law (specifically Md. Code Ann., Tax-Gen. § 7-304) prevents true double taxation. Any inheritance tax paid typically acts as a credit against the Maryland estate tax owed, reducing the overall estate tax burden.
Keep this in mind, as both taxes can significantly reduce the inheritance you intended for your loved ones.
Practical strategies
Planning can help minimize the impact of these taxes on your heirs. Consider financial and legal tools such as revocable living trusts, lifetime gifting strategies or spousal portability. You may want to consult a legal adviser to learn strategies for reducing your tax liability.
