THE MARYLAND LEGISLATURE IN 2014 PASSED A NEW LAW WHICH MAKES SUBSTANTIAL CHANGES TO THE MARYLAND ESTATE TAX

This change has an impact on one of the two Maryland “Death Taxes,” which are:

1. Maryland Inheritance Tax: Maryland has an inheritance tax if a Maryland resident leaves assets valued at over $1,000 to a beneficiary who is not a close relative. Exempt from that tax are a spouse, parent, grandparent, child (or other descendant), stepchild, spouse of a child, sibling, or a tax exempt charity. This tax has not been changed.

2. Maryland Estate Tax. If a Maryland resident leaves assets to his or her family or friends upon death, those assets are likely subject to the Maryland Estate Tax (MET). The MET is a tax assessed on all assets that a decedent leaves to his or her beneficiaries. It is sometimes referred to as the “death tax”. Contrary to popular belief, life insurance proceeds are subject to the MET, as are retirement plan assets such as IRA’s, 401 (k) assets, and thrift savings plans. The new change in the law will greatly increase the amount that can be transferred free of this tax.

If assets are left to a decedent’s surviving spouse, the MET is not assessed. An unlimited amount of assets may be left to a surviving spouse (who is a US citizen) without any MET exposure.

However, if assets are left to persons other than a surviving spouse, the MET applies.

Currently, each decedent is entitled to a 2 million exemptions from the MET. That is, the first 2 million of assets in an estate that pass to persons other than a surviving spouse is not subject to the MET. But, a decedent’s estate in excess of 2 million is subject to the MET. The 2 million exemption applies per decedent, not per beneficiary.

THE FORMER $1 MILLION MET EXEMPTION IS INCREASING

In May, 2014, the Maryland Legislature passed a law which will gradually increase the MET exemption over the next 5 years to bring it in line with the much higher federal estate tax exemption. Currently, the federal estate tax exemption is $5.45 million per decedent. The MET exemption in Maryland will increase according to the following phase in schedule:

2016 $2.0 million
2017 $3 million
2018 $4 million
2019 $5.35 million, or the then current federal estate tax exemption

As a result, a Maryland resident can pass more assets to his or her family without MET exposure. With proper estate planning, a Maryland resident can also create trusts which provide creditor protection and “bloodline” protection for his or her family with far less capital gains tax exposure than under out prior law current law.

When drafting wills or trusts to minimized death taxes, some of the strategies employed there have negative income taxes consequences. For instance, for a married couple, it was common to create a “Bypass” or “Credit Shelter” at the death of the first spouse, to take advantage of that person’s death tax exemption. However, by using this strategy when the first spouse dies, when the second spouse dies, the tax basis of assets within the bypass trust will net be adjusted at the second death. If stocks or real property has grown in value within that trust and are sold when the second spouse dies to make distributions, capital gains taxes will be due for that increase.

As our concern about paying death taxes is reduced or eliminated by increasing death tax exemption amount, you should revise how your planning is designed, to retool it for the new tax environment.

Asset protection trusts that were designed to minimized death taxes do so by keeping the assets out of your estate. However, if assets are included in your estate for death tax purposes, you receive an adjustment to the basis of stocks and real estate to their date of death value. If no death taxes are due, then changing your plan to allow the increase of basis at death can lead to substantial income tax savings when those assets are sold.

If you have asset protection and/or credit shelter trust planning, you should have your plan reviewed as soon as possible. Without such an update, your beneficiaries may face significant capital gains tax exposure which could have been avoided had the plan been updated consistent with the way the death taxes have changed.