Yes, Maryland has several state-specific taxes that can impact your estate planning. Understanding these taxes is essential to developing an estate plan that minimizes tax liabilities for your heirs. Here are the key Maryland state-specific taxes to consider:
1. Maryland Estate Tax
- Maryland imposes an estate tax on estates that exceed a certain exemption amount. As of 2024, Maryland’s estate tax exemption is $5 million per person.
- If the value of your estate exceeds this threshold, the estate tax will apply to the portion of the estate above the exemption amount.
- The Maryland estate tax rate ranges from 0.8% to 16%, depending on the size of the taxable estate.
- Maryland’s estate tax is separate from the federal estate tax. The federal estate tax exemption is much higher (currently $12.92 million in 2023), so some estates that don’t owe federal taxes may still owe Maryland estate taxes.
2. Maryland Inheritance Tax
- Maryland is one of the few states that also has an inheritance tax. The inheritance tax applies to the transfer of assets to certain heirs, based on their relationship to the decedent.
- The inheritance tax rate in Maryland is 10%, but it only applies to beneficiaries who are not direct relatives of the decedent. Specifically, the tax does not apply to:
- Surviving spouses
- Children (biological or adopted)
- Grandchildren
- Parents
- Siblings
- Stepchildren
- Certain other direct lineal descendants
- However, the tax does apply to more distant relatives (e.g., cousins, nieces, nephews) and non-family members.
3. How Maryland Estate and Inheritance Taxes Interact
- Maryland is unique in that both estate tax and inheritance tax may apply to the same estate. However, the inheritance tax is a priority over the estate tax.
- For example, if a part of the estate is subject to inheritance tax, that portion may be deducted from the taxable estate for estate tax purposes, potentially lowering the estate tax liability.
4. Gift Tax Planning
- Maryland does not impose a separate gift tax, but gifts made within one year of death may be included in the calculation of the estate for Maryland estate tax purposes.
- Federal gift tax rules still apply, so if you plan to make large gifts, consider the annual federal gift tax exclusion (which is $17,000 per recipient in 2023) to reduce the size of your taxable estate.
5. Tax-Deferred Accounts (Retirement Accounts)
- Maryland does not impose estate or inheritance taxes specifically on retirement accounts like 401(k)s or IRAs when passed to exempt beneficiaries, such as a spouse or children.
- However, heirs will still need to pay federal income taxes on withdrawals from these tax-deferred accounts, as they are taxed as ordinary income.
6. Planning Strategies to Minimize Maryland Taxes
- Marital Deduction: Maryland allows for a marital deduction, meaning you can transfer assets to your spouse upon your death without incurring estate tax. Assets passed to a surviving spouse are tax-free under both Maryland estate tax and federal estate tax laws.
- Trusts: You may consider using trusts (such as irrevocable life insurance trusts or other irrevocable trusts) to remove assets from your taxable estate. This can reduce your estate tax liability in Maryland.
- Qualified Terminable Interest Property (QTIP) Trusts and bypass trusts are common tools used to minimize estate taxes in blended families or larger estates.
- Charitable Giving: Making charitable donations through your estate plan can help reduce the size of your taxable estate. Charitable donations are deductible from the estate tax calculation in Maryland.
- Gifting: Regular gifting during your lifetime, up to the annual federal exclusion amount, can also reduce the value of your estate that is subject to Maryland estate tax.
7. Federal Estate Tax
- While not Maryland-specific, it’s important to remember that the federal estate tax may also apply to estates that exceed the federal exemption, which is $12.92 million per person in 2023.
- Maryland residents must plan for both state and federal estate taxes if their estate exceeds these thresholds.
Conclusion:
Maryland residents need to be aware of both the Maryland estate tax and inheritance tax when planning their estates. Proper planning strategies, such as the use of trusts, charitable donations, and gifting, can help minimize or avoid these taxes. Consulting with an estate planning attorney familiar with Maryland law can ensure your estate plan takes full advantage of available tax-saving opportunities while ensuring your beneficiaries are protected.