Basically, there are three taxes that can impact an estate at someone’s death in Maryland. The first is an inheritance tax. This tax is a little strange mainly because of how it evolved over time. The tax has two effective rates – a zero rate and a 10% rate. The zero rate is applied against lineal descendants. That would be children, grandchildren, parents, anyone in the lineal line plus certain other people that have been added to that such as brothers, sisters and stepchildren. The reason that it has a zero rate instead of not existing is to give the Maryland General Assembly the ability to have this creep back in if they ever need it in the future without the legislators being accused of establishing a brand new tax. For the near future, however, this is a tax we, more or less, ignore. The 10% inheritance tax, however, cannot be ignored. This applies if you are leaving property to someone that’s not a lineal ancestor, or descendant or someone not on the expanded list. So, for example, if you leave property (a bequest) to a friend, to a nephew or to a niece that has the 10% tax. There is no threshold for the imposition of the 10% tax if the bequest is exposed to the tax so, for example, if you leave someone $10.00 there is a 10% tax on that and if you leave someone $1 million there’s a 10% tax on that. There is no lower amount that gets a free ride.
One important thing about the Maryland inheritance tax, is to anticipate if it is going to be triggered and think through how you want have it handled. If you mean to leave someone $10,000.00 you should make a provision in your Will or Revocable Trust that the estate pays the tax on that bequest so the person actually gets $10,000.00 and not a reduced amount. This can be additionally important if you are trying to make equal gifts to people and they’re exposed or non-exposed to the tax because if you don’t watch the tax clause you will end up not making equal gifts but having those exposed to the inheritance tax getting less than those not exposed. As we’ll discuss a little later, the inheritance tax has a relationship to the Maryland estate tax. Maryland imposes an estate tax over a certain threshold amount but it first takes into account any inheritance tax that’s paid.
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