The State of Estate Taxes

Legend has it that the following exchange took place between F. Scott Fitzgerald and Ernest Hemingway:

Fitzgerald: The rich are different than you and me.
Hemingway: Yes, they have more money.



Maryland Estate and Inheritance Taxes

Hemingway probably made up the quote, but it’s funny because we think it’s true. Unfortunately, the State of Maryland doesn’t have a sense of humor when it comes to your wealth. According to Maryland’s estate tax laws, you are rich, and you don’t have more money. Quite simply, if you have money and property valued at $1 million or more, Maryland has declared that you are wealthy.


If you are a Maryland resident and your estate is more than $1 million, you are subject to estate tax. Maryland is one of 16 states that impose its own estate tax, and only three states have exemption amounts lower than Maryland’s. Here’s how easy it is to hit that low threshold. In Howard County, the median house value in 2009 was $452,800. If you add in even modest life insurance of $300,000 and retirement savings of $250,000, you have a taxable estate.

In addition, Maryland has an inheritance tax. Generally, if you name someone other than a lineal descendent (child, spouse of a child, spouse, parent, grandparent, stepchild or stepparent, and siblings), the inheritance tax rate is 10%. Maryland and New Jersey are the only two states to impose both an estate tax and an inheritance tax. Smart Money magazine’s February 2011 issue rated Maryland as second among “The Worst Places to Die,” with a combined effective estate and inheritance tax rate of 50.9% (New Jersey was first with a 54.1% rate).


Federal Estate Tax

Complicating the matter is that on December 17, 2010, President Obama signed a two-year extension to the federal estate tax law developed under the Bush administration. Under the extension, the federal estate tax exemption has been raised to $5 million, and the tax rate has been reduced from 55% to 35%. However, after 2012, the exemption reverts to $1 million (back where it was in 2001).


Key provisions of the new federal estate tax law:

  • Inflation. For the first time, the exemption is indexed to inflation. Maryland’s $1-million exemption is not adjusted for inflation.
  • Portability. The exemption amount is now “portable.” This means that any portion of a deceased spouse’s unused federal exemption may be used by the surviving spouse’s estate to reduce estate taxes, effectively giving a married couple a $10- million exemption at the federal level. Maryland’s exemption is not portable, so you need to set up estate documents properly so that each spouse can take advantage of the $1-million state exemption.
  • Year of Death. In 2010, there was no federal estate tax. However, the law for 2010 had many complicating factors that created unintended consequences. Therefore, the estate of a person who died in 2010 can choose to file a federal estate tax return under the 2010 law or the 2011 law. Maryland’s 2010 and 2011 estate laws are identical.
  • Other. The federal gift tax exclusion and generation-skipping transfer (GST) tax were both increased to $5 million. The GST tax is not portable.



Plan Ahead

Estate planning is complicated. But the disconnect between Maryland’s law and federal law (plus the changes in the federal law and its two-year window) make planning even more difficult. This is especially true for those whose existing wills and trusts contain a credit shelter trust or by-pass trust.


Whether you are in retirement or you are accumulating assets during your prime working years, you should review your estate plan to ensure that you receive the exemptions to which you are entitled. If you have a question, please contact Mark Stinson.