Maryland Estate Tax Guide: Surprising Strategies [+IRS Tips]

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Paul Sundin, CPA

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Maryland has one of the more complex tax structures. But what about the Maryland estate tax, inheritance tax and gift tax?

In this article, we break down the taxes applicable to residents of Maryland. The goal is not only to help you calculate the tax liability, but also to allow you to do some planning to mitigate any exposure. Let’s jump right in.

Maryland Estate Tax

Unfortunately, Maryland does have an estate tax. The rules are similar to the IRS estate tax rules. For example, a life insurance policy that has little value to the decedent during lifetime is included in the estate.

However, just like the IRS estate tax, the inclusion of the life insurance policy can be mitigated with an ILIT (irrevocable life insurance trust). The point is that there are strategies you can employ to reduce your estate tax exposure.

Maryland Estate Tax FAQs

Maryland Inheritance and gift tax

Maryland is one of 7 states that has an inheritance tax. The inheritance tax rate is 10% of the value. It is currently only levied against certain heirs such as a niece, nephew or simply a friend. Other heirs, such as parents, grandparents, children, stepchildren, brothers or sisters, are currently exempt. But Maryland has taxed them in the past.

Fortunately, Maryland does not track lifetime gifts made and does not include lifetime gifts for estate tax purposes. This is different than IRS law that has unified the gift and estate taxes.

Estate tax return

When you are planning to make an Estate tax return, you need to be prepared. The first step is to find out the value of the assets you intend to leave to your beneficiaries. This value is based on the fair market value of those assets at the time of your death.

The IRS will then agree to this value with the fiduciary, and it will become the basis for calculating the taxable value of the assets for your beneficiaries.

You can get an extension of time to file your estate tax return by paying eighty percent of the total amount due. Failure to pay the estate tax on time will void the extension of time. In addition, if you fail to pay the full amount by the due date, you will be charged a late filing and payment penalty.

The IRS also charges interest on the outstanding balance of the estate tax if you do not pay on time. The penalties are high, so you should prepare accordingly.

In addition to filing a return, you need to gather general background information about the decedent and their assets at the time of death. You can find most of this information in the death certificate.

Then, you must complete an inventory of the assets. This inventory should include all accounts, financial assets, investments, and business interests. If you are unsure about the value of certain assets, you can obtain information from bank or brokerage account statements. This information can help you determine the total estate value.

Trust tax planning

If you are a trustee, one of your responsibilities will be to file trust tax returns and minimize income taxes. If you are not currently taxing your trust, there are many tax planning strategies you can apply in 2020.

Before the end of the year, pay deductible expenses, including taxes (up to $10,000), fiduciary fees, and attorney and accountant fees. Review your investment holdings for unrealized losses. Net capital losses are tax deductible for trusts and you can claim up to $3,000 of these in a given year.

One common planning strategy is to create a DING (Delaware Incomplete Non-Grantor) trust, which has favorable state income tax consequences. Many states assert that a DING trust is taxable based on the grantor’s domicile, the trustee’s domicile, or the place where the trust is administered. In these situations, it may be advantageous to request a private letter ruling from the state that will impose the tax on the DING trust.

Another option is to establish a dynasty trust, which allows assets to skip several generations of taxation. By making gifts during life and bequests at death, you can lock in today’s high exemption levels.

These types of trusts also allow you to provide for future generations and not lose stepped-up basis at death. You can even create a trust with a family member’s children. A dynasty trust can help you minimize taxes and maximize your assets for future generations.

What are the federal estate tax rules?

The federal estate tax has been around for decades. The good news is that very few people are subject to it. It only affects less than 1% of all estates.

The estate tax is based on a simple approach. Although the details can be confusing. The complications tend to revolve around valuing certain assets like business interests and real estate.

The first step in the process is to analyze and review all assets as of the date of death. Valuations and appraisals should be completed to make sure the fair value has been properly determined.

rules requirements

These valuations could be very simple for stocks bonds and other publicly traded instruments. However, when it comes to an operating business it can be complex. The rules also establish specific valuation approaches for farms and other closely hold business interests.

Once the valuation of assets has been completed, the estate can be reduced for estate liabilities and also certain administrative costs. These costs include legal fees, tax return and accounting fees, and other funeral and burial related costs.

The net result is considered the net estate. A rate of 40% is applied to the net estate assets. There is discussion of this rate going higher, possibly to 45%. But in any event, make sure you do planning to do whatever you can to stay below the estate threshold.

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Gilbert, AZ