The New Maryland Estate Tax Law

On May 15, Maryland’s Governor signed the Maryland Estate Tax Bill, HB0739, which will raise the Maryland estate tax exemption from $1 million dollars, where it has sat for over a decade, to ultimately equal the Federal estate tax exemption in 2019.

Under the terms of the law, the Maryland estate tax exemption will increase each year between 2015 and 2019, as follows:

2015 $1,500,000

2016 $2,000,000

2017 $3,000,000

2018 $4,000,000

2019 Equal to the Federal Exemption (thought to be $5.9 million or more at that time)

From that point, the Maryland exemption will be the same amount as the Federal exemption, with both rising each year due to the inflation indexing in the Federal law. In addition, starting in 2019, the Maryland estate tax will include the “portability” provisions which may essentially double the amount of estate tax protection available to a married couple.

This change will benefit many Maryland residents who would otherwise be subject to Maryland estate taxes. It will especially help resolve a current problem for Maryland residents with non-citizen spouses, as the Maryland tax had no provision for the use of a qualified domestic trust (QDOT) to avoid the imposition of Maryland estate tax for assets above the Maryland threshold but under the federal exemption.

Note that this change does not mean there will no longer be a Maryland estate tax. There will continue to be one, separate and apart from the Federal estate tax. However, the act will greatly reduce the number of people subject to the Maryland tax. This act does not change the Maryland inheritance tax at all.

What This Will Mean for Our Clients Over the Next 5 Years

As the Maryland tax changes, will be important to review estate plans to ensure the most efficient tax treatment in your planning. The increases in exemptions for estate taxes, coupled with increases in capital gains income tax rates, require more careful review of planning options to make sure that estate taxes are not avoided at the cost of increased income or capital gains tax exposure. The key to this will be building flexibility into the estate plan to allow tax planning decisions to be left until the “last minute” when as many variables as possible can be identified.

Clients who have existing grantor trusts, or who are trustees or beneficiaries of testamentary or insurance trusts created at the death of a spouse or a parent, will now want to review the options available under those trusts to maximize income and capital gains tax planning.

If you have been putting off review of your estate plan in anticipation of these changes, now is a good time schedule a meeting with your estate planning attorney to determine how your plan may be affected by the new law.