Maryland Estate Tax Guide: Surprising Strategies

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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.

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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