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.