Maryland is the only state in the country that levies both a state estate tax and a state inheritance tax. These taxes can be confusing for families after a loved one dies. Learning how they work can make the estate process easier to follow.
How are estate tax and inheritance tax different?
Maryland’s estate tax and inheritance tax apply in different ways. The estate tax is based on the total value of the property a person leaves behind after death. The estate pays this tax before beneficiaries receive their inheritance. The personal representative handles payment of the estate tax. This person usually uses money from the estate to pay the tax.
The inheritance tax works differently. It applies to certain people who receive property from an estate. The person who receives the property may owe the tax. However, the personal representative often pays it before distributing the assets.
The amount of inheritance tax depends on the beneficiary’s relationship with the person who died. Maryland charges estate tax on estates worth more than $5,000,000. This limit is set by law and does not increase with inflation. The estate tax rate can be as high as 16 percent. The inheritance tax rate is a flat 10 percent for all non-exempt beneficiaries.
Who does not have to pay inheritance tax?
Maryland does not charge inheritance tax to many close family members. A surviving spouse does not pay inheritance tax on inherited property. Children, grandchildren and other direct descendants are also exempt.
Parents, grandparents and other direct ancestors are exempt as well. Full siblings and half siblings do not have to pay inheritance tax. Stepchildren and stepparents are also completely exempt from the Maryland inheritance tax.
Charities, religious groups and government organizations generally do not pay inheritance tax on property they receive. However, some beneficiaries may still owe the tax. This can include nieces, nephews, cousins and people who are not related to the person who died.
How can estate planning help?
Planning ahead may help reduce the impact of Maryland taxes. Giving away some assets during your lifetime may lower the value of your estate. However, federal gift tax rules and limits may still apply.
Some trusts may also help with tax planning. For example, an irrevocable life insurance trust may provide money to cover estate taxes without adding the insurance benefits to the taxable estate.
Charitable gifts may also reduce estate taxes while supporting organizations you care about. Proper asset titles and beneficiary choices may help some property avoid probate. However, these steps do not always remove estate or inheritance taxes.
Why planning ahead matters
Understanding Maryland’s estate tax and inheritance tax can help you make better estate planning decisions. Knowing which beneficiaries qualify for exemptions can help you plan how your assets are passed on. Careful planning may also reduce problems during estate administration.