Recently, one of my colleagues wrote an article on why Maryland is a nice place to live, but a bad place to die. There was a lot of great information in this article, most importantly a graph showing how each state rates for estate taxes, inheritance taxes, or both and of course, Maryland has both. This month, we’ll take this information one step further by reviewing some of the death taxes in Maryland, and by noting that, with proper planning, you can minimize your exposure and potentially reduce your family’s obligations for any taxes. It’s also important to note that some of the bigger tax advantages implemented with the Tax Cuts and Jobs Act (TCJA) of 2017 will revert in 2026. Here’s how it breaks down and some things you can do to plan ahead.
Federal Estate Tax: For 2022, the Federal Estate exemption is $12,060,000 per person, meaning that the tax only applies if a single person’s estate exceeds $12.6 million (doubled for a married couple to $24,120,000) pursuant to the TCJA of 2017. However, that provision is set to expire as of Jan. 1, 2026, when the exemption would return to its previous amount of $5 million (adjusted for inflation), unless otherwise changed by Congress.
Maryland Estate Tax: The biggest death tax in Maryland is currently the Maryland estate tax which is $5 million per person (or $10 million per couple). Estates these days frequently exceed the Maryland estate tax exemption amount and must be considered in estate planning. The exemption applies to the total gross value of the estate, including, but not limited to, cash, stocks and investments, real property, personal property, and the value of LLC memberships or corporate shares. All these assets can add up and quickly exceed the estate tax exemption. There are several tools that can help avoid the estate taxes, including trusts and LLCs.
Unlimited Marital Deduction: A benefit that accrues to married people to reduce the estate taxes is the unlimited marital deduction, which permits a person to transfer an unrestricted amount of assets to their spouse at any time, including at the death of the first spouse, free from the estate taxes and any potential gift tax. This tax provision, in effect, postpones the estate taxes until the death of the second spouse, when those assets are then transferred to the children or other beneficiaries. When the first spouse passes, it is extremely important to review and revise the plan to ensure that the children will also receive their inheritances free from the estate taxes.
Inheritance Tax: Inheritance tax is a tax imposed on the person inheriting the asset or property from an estate. It is state specific. This death tax in Maryland is one of a handful of states that still impose an inheritance tax, as well as Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania. In Maryland, certain classes of beneficiaries are exempt from the tax, including spouses, parents, siblings, and lineal descendants, such as children and grandchildren. If others outside of those groups receive any portion of an estate, such as nieces, nephews, friends, or significant others, then their distribution would be taxed at 10%. The Last Will & Testament or Trust would determine if the tax is deducted from that person’s distribution or if the tax is paid by the estate or trust. Joint accounts and payable on death beneficiary designations might be options to help reduce or avoid these taxes. It is important to work with an estate planning attorney to review all of these available tools and strategies.
Income Taxes: Maryland estates and trusts are also subject to income taxes, which are separate and apart from death taxes. If an estate or trust receives income of more than $600 per year, then it must file a tax return reporting that income and is subject to income tax. In that instance, the Personal Representative of an estate or the Trustee of a trust is required to file a Maryland Fiduciary Tax Return (Form 504) and a U.S. Income Tax Return for Estates and Trusts (Form 1041). A properly drafted estate plan can avoid income taxes, such as ensuring that all income from a trust is distributed annually to avoid the necessity of reporting any income.
Gift Taxes: During your lifetime, you may make gifts to others (e.g., cash, stocks, land, a new car), but you must be aware of the rules of gifting from a tax perspective. As of 2022, the IRS allows you to gift up to $16,000 per person per year without reporting the gift or paying taxes on the gift. On top of the $16,000 annual exclusion, you get a $12.6 million lifetime exclusion (This limit is set to drop back down to the previous exemption amount of $5.49 million (adjusted for inflation) in 2026). A common strategy of people with larger estates is to use this gifting power to reduce the taxable estate. Again, an experienced estate planning attorney can help you determine which tools can be used to avoid estate and gift taxes upon death.
Trusts: Trusts are commonly used to avoid assets from passing through probate and to avoid federal and state estate taxes. By using marital and by-pass trusts, an estate could avoid estate taxes entirely. This is where estate planning becomes invaluable.
Limited Liability Companies: LLCs can be a wonderful estate planning tool, especially for small businesses, as they can help you pass assets to your children while avoiding gift and estate taxes. An LLC is a pass-through entity, meaning that it does not file a separate tax return but reports income and losses on a Schedule C as part of your personal tax return. Your CPA and Estate Planning Attorney can collaborate on the best strategies for you and your business.
As you can see, there are some significant benefits to planning ahead. But, there are many issues to consider and your estate planning attorney will work closely with your Accountant and/or Financial Advisor to create an estate plan for your unique circumstances, especially if you are a small business owner.
Note: Nothing herein should be construed as tax or legal advice; instead, please contact the attorneys at Frame & Frame Attorneys at Law or reach out to your Accountant to discuss your specific needs.
Tara Frame is the Managing Partner of Frame & Frame Attorneys at Law – an estate planning firm that has over 65 years of service to the community. Tara is a graduate from Johns Hopkins University and the University of Baltimore School of Law.
This article was published in I95 Content Marketing in the October 2022 issue.