When it comes to estate planning and transferring wealth after death, taxes play a significant role. Taxes often determine how much beneficiaries ultimately receive. Maryland is one of the few states in the U.S. that imposes both an estate tax and an inheritance tax. Understanding how the Maryland inheritance tax works, who it applies to, and how it can impact your beneficiaries is essential for effective planning. Learn more from Blackford & Flohr.

What is the Maryland Inheritance Tax?

The Maryland inheritance tax is a state-level tax that is levied on the transfer of assets from a deceased person (the decedent) to their beneficiaries. Unlike the estate tax, which is calculated based on the overall value of the estate, the inheritance tax is assessed on the assets that each beneficiary receives.

The rate of the Maryland inheritance tax is currently set at 10%. It only applies to certain beneficiaries. Importantly, close family members are exempt from the inheritance tax, while more distant relatives or non-family members are required to pay it.

Who Is Subject to the Maryland Inheritance Tax?

The Maryland inheritance tax is not applied uniformly to all beneficiaries. Instead, it depends on the relationship between the decedent and the person receiving the inheritance.

Exempt Beneficiaries

Certain beneficiaries are exempt from paying the Maryland inheritance tax, meaning they can inherit assets without being taxed. These exempt beneficiaries include:

• Spouses: A surviving spouse does not have to pay inheritance tax on assets received from their deceased partner.
• Children and Grandchildren: Biological and adopted children, stepchildren, and grandchildren are exempt.
• Parents and Grandparents: The decedent’s parents and grandparents are also not subject to the inheritance tax.
• Siblings: Full, half, and step-siblings are also exempt from the tax.
• Other Exempt Individuals: The decedent’s surviving spouse’s parents, aunts, uncles, and certain other relatives can be exempt depending on the specific familial relationships.

Non-Exempt Beneficiaries

For non-exempt beneficiaries, the 10% Maryland inheritance tax applies. This includes:

• Nieces and Nephews: Unlike siblings, nieces and nephews are not exempt and must pay inheritance tax on assets they inherit.
• Friends or Distant Relatives: Friends or more distant family members like cousins must pay the inheritance tax.
• Non-Family Members: Any non-family member, including unrelated individuals or charitable organizations (unless exempt), are subject to the 10% inheritance tax on any property they inherit.

What Assets are Subject to the Maryland Inheritance Tax?

The Maryland inheritance tax applies to most types of property transferred upon death, including:

• Real Estate: Property such as houses, vacation homes, or land is subject to inheritance tax.
• Cash: Any cash left to a non-exempt beneficiary, including money in bank accounts or personal funds, is taxable.
• Stocks, Bonds, and Investments: Investment portfolios, brokerage accounts, and other financial assets are included in the taxable estate.
• Personal Property: Items such as vehicles, jewelry, art, or collectibles left to a non-exempt beneficiary may be subject to inheritance tax.
• Business Interests: If the decedent had ownership in a business or partnership, the value of that interest could be subject to inheritance tax.

However, certain assets may be excluded or have specific rules governing their taxation:

• Life Insurance Proceeds: If the decedent named a beneficiary on their life insurance policy, the proceeds are generally exempt from the inheritance tax in Maryland.
• Retirement Accounts: Distributions from qualified retirement accounts (e.g., 401(k)s, IRAs) may be subject to inheritance tax depending on the specific terms of the account and the beneficiary’s relationship to the decedent.

How Is the Maryland Inheritance Tax Calculated?

The Maryland inheritance tax is based on the fair market value of the assets inherited by the non-exempt beneficiary. Here’s an overview of the steps involved in calculating the tax:

1. Determine the Beneficiary’s Relationship

The first step is to identify whether the beneficiary is exempt or non-exempt. If the beneficiary is exempt (such as a spouse or child), no tax is owed. If the beneficiary is non-exempt (such as a niece or friend), the inheritance tax applies.

2. Value the Inherited Assets

The fair market value of the inherited assets must be determined. This involves valuing real estate, personal property, investments, and any other items passed on to the beneficiary.

3. Apply the 10% Tax Rate

For non-exempt beneficiaries, the tax is applied at a flat rate of 10%. For example, if a niece inherits a $200,000 home, the inheritance tax owed would be 10% of $200,000, or $20,000.

4. Paying the Inheritance Tax

The inheritance tax is typically paid by the beneficiary receiving the inheritance. The personal representative (executor) of the estate is responsible for ensuring that the tax is calculated and paid to the state of Maryland.

Can the Inheritance Tax Be Reduced or Avoided?

While the Maryland inheritance tax applies to non-exempt beneficiaries, there are several strategies that individuals can use to reduce or avoid this tax through proper estate planning:

1. Gifting During Lifetime

One way to avoid inheritance tax is by giving gifts during your lifetime. Maryland does not impose a gift tax, so individuals can transfer assets to beneficiaries before death without triggering an inheritance tax. However, large gifts may have federal tax implications, so it’s essential to consult with a tax professional.

2. Setting Up a Trust

Creating certain types of trusts can help reduce the inheritance tax burden. A Revocable Living Trust allows you to place assets in a trust while retaining control over them during your lifetime. Upon death, the assets pass to the designated beneficiaries without going through probate, which may help minimize tax exposure. Additionally, Irrevocable Trusts can be structured to avoid or reduce inheritance tax for non-exempt beneficiaries.

3. Charitable Donations

If a significant portion of the estate is left to a charitable organization, it can help reduce the inheritance tax burden on non-exempt beneficiaries. Maryland exempts qualifying charities from inheritance tax, meaning assets left to charitable organizations are not subject to the 10% tax.

4. Life Insurance Planning

Using life insurance as part of your estate planning strategy can help beneficiaries cover the cost of inheritance taxes. You can purchase a life insurance policy specifically to cover the tax liabilities for your non-exempt beneficiaries, ensuring they receive the full value of their inheritance.

When and How is the Maryland Inheritance Tax Paid?

The Maryland inheritance tax is generally due when the estate goes through the probate process. The personal representative of the estate is responsible for filing the Maryland Estate Tax Return (Form MET-1) and ensuring that the correct amount of inheritance tax is calculated and paid.

Payment of the inheritance tax must typically be made within nine months of the decedent’s death. However, under certain circumstances, the Maryland Comptroller may grant extensions.

Conclusion

The Maryland inheritance tax is a critical consideration for anyone planning their estate or receiving an inheritance. While many close family members are exempt, non-exempt beneficiaries are required to pay a 10% tax on assets they receive. Understanding how the tax works, which assets are subject to it, and how you can potentially reduce or avoid it through estate planning strategies can make a significant difference in preserving wealth for your loved ones.

Contact Blackford & Flohr for Help with Maryland Inheritance Tax

Navigating the Maryland inheritance tax can be a challenging process, particularly for families dealing with large estates or non-exempt beneficiaries. At Blackford & Flohr, our experienced Maryland estate planning attorneys are here to help you understand how the inheritance tax will impact your beneficiaries and guide you through strategies to minimize its effects.

If you have questions about Maryland inheritance tax or need help with estate planning, contact Blackford & Flohr today for personalized legal assistance.