What is Maryland’s “Inheritance Tax”?

Maryland is one of the few states that charges “inheritance tax”.

We’ll start with the good news before you read on—fortunately, most conveyances of property are exempt from inheritance tax.

However, it is important to be aware of inheritance tax as you consider bequests from your will, trust, or transfers via beneficiary designation.

What is The Tax?

The Maryland inheritance tax is a tax imposed on the privilege of receiving property from a deceased individual (the “Decedent”).

The tax is collected by the Register of Wills for the county where the Decedent resided? The tax is not due until the time the property is distributed to the beneficiary.

Who is Exempt from the Tax?

The following recipients of property are exempt from inheritance tax:

• Spouse
• Children (and stepchildren)
• Spouses of children
• Grandchildren (and step grandchildren)
• Great-grandchildren
• Siblings
• Registered domestic partners (must register with the Register of Wills)
• Not-for-profit entities

Every other recipient of property is exposed to inheritance tax, including:

• Nieces and nephews
• Friends and other non-relatives
• Non-registered domestic partners

Who Pays the Tax?

In a will or trust, the Decedent can allocate any inheritance tax that is assessed to be paid by their estate or trust.

Absent such an allocation, by default, the recipient of the property will be assessed the inheritance tax. An invoice will issue from the Register of Wills directly to the beneficiary and the tax will be due within 30 days.

What is The Tax Rate?

If the inheritance tax is allocated to the estate or trust, the tax rate is 11.1111% of the value of the property that is passing to the non-exempt beneficiary.

If the inheritance tax is paid directly by the non-exempt beneficiary, the tax rate is 10% of the value of the property that is passing to the non-exempt beneficiary.

When inheritance tax is allocated to the estate or trust, the extra 1.1111% tax rate applies because the tax payment by the estate is considered an additional gift subject to inheritance tax.

There are pros and cons to each approach, which should be carefully discussed with your estate planning attorney.

What Assets Are Taxed?

A common misconception is that only assets that pass through probate are taxed. After all, the Register of Wills only supervises the transfer of probate assets.

This is untrue.

Inheritance tax is assessed against all property passing to a non-exempt beneficiary, whether via a will, a trust, or through a beneficiary designation.

In other words, if you designate a niece or nephew as the pay-on-death beneficiary of a portion of your retirement account, even though the retirement account will not need to pass through probate because of the beneficiary designation, the asset still is exposed to inheritance tax.

How Does the Register Know to Collect a Tax?

A nominated Personal Representative of an Estate must file an Information Report with the Register of Wills.  This form discloses whether any non-exempt individuals have received any property by virtue of the Decedent’s death.

If the bequest is non-probate (i.e., the pay-on-death beneficiary designation described above), the nominated Personal Representative must file an Application to Fix Inheritance Tax on Non-Probate Assets. This form must be accompanied by documentation to establish the actual value of the bequest. The Register will then issue an invoice for the inheritance tax.

If the bequest is passing through the Decedent’s probate estate, the Personal Representative will file an Accounting which reports a proposed distribution to a non-exempt beneficiary. The Register will then issue an invoice for inheritance tax.

Concluding Thoughts

Inheritance tax is another wrinkle that is unique to Maryland and should be considered as part of an estate plan. The good news is that many individuals are exempt from inheritance tax and a conscientious client can allocate inheritance tax so that a beneficiary does not personally bear the tax.

How can we help you with your estate plan? Contact estate planning attorneys Jeremy Rachlin or Liz Farley at (301) 656-1177 to schedule your consultation.