The Tax You Didn’t Know
What do Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania all have in common? These six states are the only states to collect an inheritance tax. In addition to an estate tax, these states tax the transfer of wealth to the beneficiary. And the results can be severe.
Many Maryland estates will be affected by the inheritance tax and not any other “death” related tax. The federal government imposes an estate tax on estates exceeding $12.92 Million as of January 1, 2023. Maryland has an estate tax imposed on a decedent’s assets of more than $5,000,000. The Maryland tax rates are applied on a graduated scale reaching 16% on estates whose total value exceeds $15,000,000.
The inheritance tax is different from estate taxes. The inheritance tax is imposed upon the “privilege” of inheriting assets from a deceased person. Maryland collects an inheritance tax at a rate of 10% on property that passes to anyone who is NOT an immediate family member. Property passing to a child or other lineal descendant, spouse of a child or other lineal descendant, spouse, parent, grandparent, stepchild or stepparent, siblings or a corporation having only certain of these persons as stockholders is exempt from taxation. Devises to aunts, uncles, cousins, and other relatives are subject to the inheritance tax. Bequests to non-relatives are also subject to the inheritance tax in Maryland.
The tax is levied on property that passes under a will, an estate without a will, and property that passes under certain trusts, deeds, joint ownership accounts, or other assets. The tax is collected by the Register of Wills located in the county where the decedent either lived or owned property.
Because the estate tax and inheritance tax are different, some people can occasionally get hit with a triple whammy. Maryland, for example, has both a Maryland estate tax and an inheritance tax. These are in addition to the Federal Estate tax. A Maryland estate might have to pay the IRS and the state, and then the beneficiaries might have to pay the state again out of their inheritance.
There are some simple ways to avoid the inheritance tax should you feel the need to leave assets to a person who is not an immediate family member. First, you can make gifts “with a warm hand” before you die. Such transfers avoid Maryland tax. There is no gift tax in Maryland. And de minimis transfers of $16,000 per year are ignored for Federal Estate Tax purposes.
Second, the inheritance tax does not apply to the beneficiaries of a life insurance policy.
Third, the inheritance tax does not apply to the receipt of an annuity or other payment under a public or private employees’ pension or benefit plan if the annuity or other payment is not taxable for federal estate tax purposes.
Fourth, there is no inheritance tax on small estates (under $50,000 in total value) or transfers to an individual smaller than $1,000. These are of little interest to most planners.
There is a fifth and most consequential way to avoid Maryland inheritance tax as well as Maryland estate tax. These taxes do not apply to non-residents. The best tax planning for Maryland residents is sometimes this: MOVE! Even Iowa is eliminating the Inheritance Tax in 2025.
Evan J. Krame
