An "estate tax" is one imposed by a governmental entity on the transfer of a person's property at death to his or her heirs or beneficiaries. Estate-tax supporters see it as a legitimate way for the government to collect money for the public treasury.
Opponents dub it the "death tax," characterizing it as "double taxation" because the asset was already taxed when it was earned during the decedent's lifetime. Those critics see it as a governmental intrusion into the private right at death to give all of his or her money and property to whomever an individual desires, without the government dipping in.
Marylanders are subject to both a federal estate tax and Maryland estate tax. For federal purposes, decedents with estates valued up to $5 million are exempt from taxation if they die in 2011 or 2012 (decedent's who are married may be able to exempt up to $10 million of their estate). Over the next two years, the federal estate tax rate applied to the value of an estate exceeding $5 million ($10 million in some cases where decedent is married) is 35 percent.
Maryland only exempts estates valued up to $1 million from its estate tax, so estates valued between $1 million and $5 million are subject to Maryland, but not federal, estate tax. Under current law, the value of an estate exceeding the $1 million exemption are taxed by Maryland at a maximum rate of 16 percent.
The Maryland estate tax applies to the transfer of a Maryland resident's estate or the transfer of a nonresident decedent's property if it is Maryland real estate or tangible personal property physically located in Maryland.
The personal representative of the decedent's estate has the duty to file the Maryland estate tax return (Form MET-1) within nine months from the date of the property owner's (decedent) death. Even if an estate is not required to file a federal estate tax return (Form 706), one must still be prepared in order to complete the Maryland estate tax return. If no personal representative was appointed by the court, every person possessing the decedent's property has the duty to file.
The Maryland estate tax return may be filed with the local Register of Wills or the Comptroller of Maryland. A limited extension for filing may be requested and is generally allowable for up to six months from the due date of the return or up to one year if the person required to file is out of the country. The Maryland filing extension must be requested on or before the nine-month (from date of death) due date. A request may also be made for an alternative payment schedule and a special deferral may be available for estate tax payment on agricultural real estate or personal property used in farming.
Interplay With State Inheritance Tax
In addition to the estate tax, Maryland has an "inheritance tax" for certain beneficiaries receiving assets from the estate. Money and property (valued over $1,000) left to anyone other than a close relative (defined as a spouse, parent, stepparent, grandparent, sibling, child or grandchild, stepchild or step grandchild (the latter must be a lineal descendant) and child/stepchild's or grandchild/step grandchild's spouse) is subject to a 10 percent Maryland inheritance tax on the recipient. In other words, assets left to people outside an immediate family are taxed to those beneficiaries, encouraging people to leave wealth to close family members.
Effective for decedents dying on or after July 1, 2009, there is an exemption of the Maryland inheritance tax on a recipient for real property passing to that recipient if the recipient was a domestic partner and held the real property jointly with and is in a domestic partnership with the decedent.
When inheritance tax is paid, the corresponding Maryland estate tax for the deceased individual is reduced by the inheritance tax amount. A large inheritance tax has the potential to cancel out any estate tax that would otherwise have been due.
Conflicting opinions exist as to whether Maryland's estate tax is enough of an impetus for wealthy individuals to leave the state for other states with no or lower estate taxes. For a wealthy Marylander who stays, an experienced estate planning lawyer can give advice about ways to lower the estate-tax burden like the possible use of certain trusts, lifetime gifts and charitable bequests.
This has been only a brief, simplified overview of Maryland and federal estate taxes. The intricacies of these laws are considerable. Anyone with substantial assets in Maryland should consult with a knowledgeable tax attorney about a smart estate plan.