Maryland Phases-In Increased Exemptions for Estate Tax

Currently, in addition to any federal estate tax, Maryland imposes an estate tax on property that passes upon the death of an individual on the amount of the decedent’s taxable estate in excess of $1 million. The maximum rate of Maryland estate tax is 16 percent of the amount above $1 million. Conversely, the exemption amount for purposes of the federal estate tax is $5,340,000 for decedents dying in 2014. The federal exemption amount is indexed for inflation and, thus, will increase over time.

On May 15, 2014, Governor O’Malley signed into law HB 739, which gradually increases the amount exempt from Maryland estate tax as follows:

1. $1,500,000 for a decedent dying on or after January 1, 2015 but before January 1, 2016;
2. $2,000,000 for a decedent dying on or after January 1, 2016 but before January 1, 2017;
3. $3,000,000 for a decedent dying on or after January 1, 2017 but before January 1, 2018;
4. $4,000,000 for a decedent dying on or after January 1, 2018 but before January 1, 2019; and
5. For a decedent dying on or after January 1, 2019, the Maryland exemption will be equal to the federal exemption amount (as indexed for inflation).

The new Maryland law, however, does not change the maximum Maryland estate tax rate of 16 percent.

The new Maryland law also does not alter the Maryland inheritance tax, which does not depend on the size of the estate but rather on how closely related the decedent was to the people who inherit from him or her. The inheritance tax does not apply to surviving spouses and children of a decedent, for example.

The new Maryland law does not directly address portability of unused Maryland estate tax exclusion. Under federal law, a surviving spouse may elect to use, under certain circumstances, any portion of his or her deceased spouse’s unused federal estate tax exemption, although portability is not permitted for generation-skipping transfer tax exemption. The Maryland Comptroller’s Office, however, has publicly taken the position that because the new law re-couples the Maryland estate tax system with the federal estate tax system in 2019, portability for state estate taxes will be available in Maryland in 2019.

Although the increases in the Maryland exemption will be phased-in over a five-year period, Maryland residents should review their current estate plans and meet with advisors to determine whether any changes would be advisable.