Good news for Maryland residents with estates over $1 million: Maryland will soon let residents pass more of their wealth free of estate tax when they die. Maryland hopes that by reducing the amount of estate taxes owed, fewer residents will leave Maryland for states with lower or no estate tax.
Governor O’Malley recently signed a bill that will raise the exemption amount for the Maryland estate tax, currently at $1 million, to match the federal estate tax exemption amount, currently at $5.35 million. The exemption is the amount that passes free of tax. Any amount above the exemption amount is taxed by Maryland at a graduated rate that caps at 16%. The rate for the federal estate tax rate is 40%. The exemption amount will increase incrementally over the next few years until 2019 where it will match the Federal exemption.
The yearly increases in the exemption amount are shown below. For Maryland residents who pass away:
- Before January 1, 2015: $1 million
- In 2015: $1.5 Million
- In 2016: $2 Million
- In 2017: $3 Million
- In 2018: $4 Million
- Starting January 1, 2019: Match Federal Exemption, projected to be $5.9 Million in 2019 (The Federal exemption is indexed for inflation)
Not every state imposes an estate tax. Maryland is one of the only two states that imposes an estate tax and an inheritance tax. Inheritance tax is applied to bequests greater than $1,000 to individuals outside of one’s direct descendants. Gifts to spouses, children (and their spouses and children), siblings and parents are not subject to the inheritance tax, but a gift to an aunt, niece, or friend would be taxed. A credit is applied to inheritance tax paid so that gifts are not exposed to both inheritance tax and estate tax.
The property that is counted to establish your estate for tax purposes is any property that changes hands upon your death. This includes not only bank accounts, your home, personal property, but also accounts with a named beneficiary like retirement accounts, life insurance, and payable-on-death accounts. You may have modest assets and be liable for estate tax when life insurance and retirement accounts are included.
What does this change mean for you and your estate plan? If you didn’t have enough assets to worry about the Maryland estate tax before, you still won’t have to worry. If you have more assets and already have strategies for the federal estate tax, those strategies should still work. The change will most affect those individuals whose assets are expected to be in the $1 million to $5 million range. Those individuals would have had to pay estate tax under the old regime, but won’t once the new exemption is fully raised.
Be sure to talk to a tax professional or attorney to make sure you are well prepared. An attorney can advise you on what strategies you can use to minimize taxes and other costs. Investing some now can provide major savings later.
Updated on June 9, 2014 to reflect that the bill has been signed.
Montefusco Estate Planning, LLC is an estate planning law firm in Frederick, MD. If you are interested in our services, contact us today. This information is written for the context of Maryland estate planning but is not legal advice for anyone. For more information, read our disclaimer.