Maryland is one of just two states imposing both an estate and inheritance tax. The other is nearby New Jersey. You do not have to worry about the latter tax if you inherit money from your spouse, parents, grandparents, siblings, or step parents. Property left to charity is also not subject to inheritance tax. However, if an aunt, uncle, cousin or more distant relative or friend leaves you an inheritance worth more than $1,000, you must pay the 10 percent tax. That also holds true for a long time partner to whom you are not married.
“The Maryland inheritance tax is a tax imposed on the privilege of receiving property,” according to the Comptroller of Maryland. There are properties subject to and properties exempt from this privilege. It does not matter whether property passes through a will or trust or through the state’s laws of intestate succession if the decedent – the dead person – died without a will. It also does not matter whether the property was held jointly – you will still owe tax on the percentage owned by the decedent and left to you. Exemptions from inheritance tax include:
- Small estates, those valued at $50,000 or less.
- Life insurance proceeds specifically naming you as the beneficiary are not subject to the inheritance tax.
- Monies received as compensation if the decedent was a Holocaust survivor.
Nonresidents Owning Property
If the decedent did not live in Maryland but owned property in the state, that property is subject to Maryland estate and inheritance tax law even if the beneficiaries all reside out of state.
The 10 percent tax is incurred on the clear value of the properties. For bank, retirement, brokerage and similar accounts, that is straightforward, and it is the value as of the date of the decedent’s death. Other properties, such as real estate, artwork, and antiques, require an appraisal. The estate’s personal representative is responsible for arranging appraisals.
Register of Wills
The Register of Wills in the county in which the decedent resided – or owned property – collects the inheritance tax. In many cases, the estate’s personal representative pays the inheritance tax before the property is distributed, so you do not have to pay it directly. If the personal representative did not pay the tax, you do not have to pay it until the property is distributed to you from the estate. Assets held jointly do not go through the probate process, but you are still responsible for paying the inheritance tax.
If you inherited a small business from the decedent and would have to sell it in order to pay the tax, it is possible to make arrangements to pay the tax in installments, for up to five years.
You may have to pay tax on property received as a gift prior to the decedent’s demise, if that property was given to you within two years of the death. Maryland considers such gifts part of the decedent’s estate, given to avoid inheritance tax since the person believed they were soon going to die. That’s why they are referred to as “deathbed gifts.”
If you and your partner are not married and intend to leave all or part of your personal property to each other, consider tying the knot. That is the most practical way to avoid paying Maryland inheritance tax when one of you dies. If you have concerns about marriage and property, a prenuptial agreement may address some of those issues. Of course, there are personal and financial reasons outside of inheritance that are not conducive to marriage.
Maryland also permits domestic partnerships, which exempts the surviving partner from paying inheritance tax on the couple’s primary residence, if held in joint tenancy.
Estate planning can minimize some of the effects of the inheritance tax. If you are in good health and expect to live more than two years, planned giving to individuals otherwise subject to the inheritance tax can reduce your taxable estate and avoid triggering inheritance taxes. Federal law prevents giving more than a specific amount away annually to individuals unless you are willing to pay taxes on the excess amount.
Contact an Attorney
Dealing with Maryland inheritance tax is complicated. The attorneys at Blackford & Flohr can help guide you through the planning process to best benefit your estate and heirs. Contact us online or call our office today at 410-647-6677 to set up an appointment today.