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Understanding the Maryland estate tax

On Behalf of | Jun 12, 2023 | Estate Planning

People who live in Maryland and have moderate to large estates should know about the Maryland estate tax. While this tax won’t apply to all estates, it will to those that are valued above the threshold established by the state. In Maryland, the estate tax threshold is $5 million, so estates above that size will face estate taxes without careful estate planning.

Understanding the Maryland Estate Tax

The Maryland estate tax affects wealthy individuals with estates worth more than $5 million when they die. It is a progressive tax, meaning that estates will pay higher amounts when their estates exceed the threshold substantially. When the estate tax applies, it ranges from 0% to 16% based on graduated thresholds above the $5 million exemption amount. Maryland’s estate tax is portable between spouses, meaning that two spouses will be able to exempt a total of $10 million from taxation. In addition to the Maryland estate tax, very wealthy individuals might also need to worry about the federal estate tax. For federal tax purposes, the first $12.92 million of an individual’s estate is exempt or double for spouses. The marginal rate for federal estate taxes ranges from 18% to 40% based on how much the value of the estate exceeds the exemption threshold.

Minimizing Estate Taxes

Wealthy individuals might be able to minimize the estate taxes that might be assessed against their estates after they die through careful gift and estate planning. Several strategies might help to reduce the countable value of an estate, including the following:

  • Gifting the maximum exempt gift amount under federal law to different loved ones each year up to a lifetime maximum of $12.92 million (the federal exemption amount)
  • Establishing a dynasty trustSetting up an irrevocable life insurance trust
  • Making large charitable contributions
  • Place businesses in a family limited partnership

There are several estate planning strategies that can be used to reduce or avoid estate taxes. It’s important to note that the estate tax must be paid out of the proceeds of an estate before the remainder is distributed to the beneficiaries or heirs and is not the same thing as an inheritance tax. Maryland does not assess inheritance taxes for immediate family members that inherit money, but it does assess a 10% tax for non-family members who inherit money.