Maryland recently enacted the first increase in its estate tax exemption since 2002. The prior law provides that estates of decedents owning $1 million or less are exempt from Maryland estate tax, and larger estates are taxed on wealth in excess of $1 million (at an initial rate of 16 percent). The new law increases that $1 million exemption amount in 2015 and future years, as follows:
Year of Death Exemption Amount
2015 $1.5 million
2016 $2 million
2017 $3 million
2018 $4 million
2019 [Federal Exemption]
In 2019 and later years, the Maryland estate tax exemption will equal the federal estate exemption, which is currently $5.34 million. It increases for inflation annually.
The newly-enacted schedule of increases in the Maryland estate tax exemption heralds a sharp decrease in the number of clients in Maryland who will need estate tax planning. Many of these clients currently have wills containing tax-planning provisions that are destined to become unnecessary at some point over the next five years. The prospect of simplifying all those estate plans is likely to look attractive to attorneys and clients alike.
The Maryland estate tax is a “pick-up” tax, meaning that it relies primarily on federal estate tax law to define the taxable estate, with certain minor exceptions. The federal deduction for payments of state death taxes is disallowed for Maryland purposes, as is any deduction for an expense that’s also deducted on any income tax return. Maryland also gives special, favorable treatment to the first $5million worth of “qualified agricultural property,” provided the land continues to be farmed over the ensuing 10 years.
Prior Law Created Complications
The disparity since 2002 between the Maryland and federal exemption amounts made it more complicated to create a tax-efficient estate plan for a married couple. The typical plan requires limiting the size of the credit shelter trust created on the first spouse’s death to just $1 million, which is the most that can pass free of both state and federal estate taxes.
Next, an amount not exceeding the difference between the two exemptions is allocated to a traditional qualified terminable interest property (QTIP) trust, with the expectation that the personal representative will make a QTIP election on the Maryland estate tax return but not on the federal return. In effect, this second trust is a credit shelter trust for federal purposes and a marital deduction trust for state purposes. Any additional assets may be left to the spouse or to another QTIP trust. This 3-tiered approach allows maximum use of both exemptions while still deferring all tax until the surviving spouse’s death.
Alternatively, since 2010, it’s possible to accomplish the same result by leaving everything in excess of the $1 million credit shelter amount to the surviving spouse and electing portability on a federal estate tax return. This approach doesn’t work as well for wealthier clients, due to the fact that portability doesn’t apply to the generation-skipping transfer tax exemption.
Maryland also has a 10 percent inheritance tax, but its effects are limited. The tax doesn’t apply to most immediate family members, so its most common application is to nieces, nephews and unmarried partners. The tax used to fall heavily on same-sex couples, but not since Maryland recognized same-sex marriage by statute last year. Also, inheritance tax payments operate as credits against any Maryland estate tax liability.