A recent Maryland tax court case increased a widow’s death taxes by over $400,000 because she relocated from Michigan to Maryland after her husband’s death and was the beneficiary of a QTIP¹ trust created in Michigan.
The facts in Taylor v. Comptroller, 2015 WL 530 5936 (Md. Tax)(9/3/15), are simple: prior to Mr. Taylor’s death in 1989 the couple were Michigan residents. On his federal estate tax return, QTIP trust treatment was elected for about $3.2 million which grew to approximately $4.1 million by his wife’s death in 2013.
Between her husband’s death and her death, Mrs. Taylor moved to Maryland. Although Mr. Taylor never resided in Maryland and no Michigan tax would have been due at his wife’s death had the couple retained residency in Michigan, her estate was deemed to include the full value of the marital trust for Maryland estate tax purposes.
Maryland, of course, uses the federal definition for determining the extent of the gross estate for estate tax purposes. This general definition, however, is altered to add back the value of a QTIP where a Maryland state only QTIP was elected on a Maryland estate tax return. Tax – General Section § 7-309(b)(6)(i). But for this add back provision, the “gap” amount would pass tax free at the second death because it would be part of the federally “taxable” amount at the first death and not be included in the federal base of the surviving spouse’s estate.
The estate argued that the add back provision specifically targeting the state-only QTIP meant that no other QTIP would be deemed to be taxable in the surviving spouse’s estate. The tax court disagreed stating that the general rules for determining the extent of the surviving spouse’s estate under the federal definitions controlled. Thus, the Michigan QTIP was included in the Maryland widow’s estate.
This case shows that relocating from a state without a stand-alone estate tax to a state with an estate tax can trip a tax otherwise not due if a QTIP trust was funded at the first death.
The case, however, may illustrate a corollary “goose/gander” rule. If a Maryland surviving spouse moves to a tax free state carrying with him or her a Maryland QTIP, that QTIP escapes tax unless it holds Maryland real estate or tangible personal property with a situs in Maryland.
New Maryland law, of course, will match the state estate tax threshold with that of the Federal in 2019, thus eliminating the “gap amount”. Until 2019, however, moving to Maryland can involve a nasty tax trap. Welcome to the not-so-free-state.
¹QTIP, or qualified terminable interest property, qualifies for the unlimited marital deduction, but is added back into the calculation of estate taxes due at the surviving spouse’s death.