Maryland Inheritance Tax

If you inherit property in Maryland or from a resident of Maryland, you could be subject to the Maryland inheritance tax, depending on your relationship to the decedent. According to the Maryland Comptroller, the inheritance tax is imposed on the clear value of property that passes from a decedent to some beneficiaries.

The inheritance tax applies to the beneficiaries and is different from the federal estate tax, which applies on the net value of the estate. The estate tax is paid by the administrator of the estate before property is distributed to the beneficiaries. In the case of the Maryland state inheritance tax, the non-exempt beneficiaries pay the tax on their respective shares of the property distributed from the estate.

The Maryland inheritance tax applies to both probate and non-probate property that passes according to a will, according to the intestate laws of succession when there is no will, and also on property that passes under a trust, deed, and under joint ownership. The tax is collected by the Maryland Register of Wills in the county where the decedent lived or owned property.

Exemptions

The Maryland inheritance tax rates changed for decedents who died on or after July 1, 2000, exempting certain close relatives of the decedent from the tax. According to the Maryland Register of Wills these relatives include the surviving spouse, the decedent's parents and grandparents, children and other lineal descendants, the spouses of children and other lineal descendants, stepparents and stepchildren, and the decedent's brothers and sisters. Also exempt is a corporation, if all the stockholders consist of these exempt relatives.

The tax rate for all other non-exempt persons is 10%. This would include nieces, nephews, cousins, aunts, uncles, step-grandchildren, friends, and non-exempt organizations. A bequest left under a will to a charitable organization as defined by the State of Maryland is not subject to inheritance tax. Also, the inheritance tax does not apply when the total value of the property that passes to any one person does not exceed $1,000.

Taxable Property

It is important to note that the Maryland inheritance tax is imposed on both probate and non-probate property. In general, all property in which the decedent had an interest, whether in his or her name alone or with others, is subject to the Maryland inheritance tax.

Probate property includes all property held in the decedent's name alone and property held as tenants in common. According to the law firm Pairo & Pairo, LLC in Maryland, when a person dies an estate is opened with the Register of Wills, normally in the County of the decedent's residence. The probate estate, which can be governed by the will, consists of those items for which a beneficiary has not been named. Non-probate property is property for which a beneficiary has been named and is not controlled by a will.

Pairo & Pairo cite the example of a decedent who held a bank account in his name only. Upon his death, the bank account would become part of his probate estate. But if he owned the account jointly with his wife, or named his wife as beneficiary, the account would not be part of the probate estate and would belong solely to his wife. In both cases the bank account would be subject to inheritance tax, but if the decedent's wife inherits the account, she would be exempt from tax as the spouse.

Living trusts are also subject to inheritance tax in Maryland. Living trusts may serve to keep property out of probate, but since both probate and non-probate property is subject to the tax, living trusts are included in taxable transfers. In addition to living trusts, life insurance proceeds, whether payable to the decedent's estate or directly to a beneficiary, and transfers of property made in contemplation of death are also subject to Maryland inheritance tax.

Filing and paying the inheritance tax

Normally the personal representative in charge of administering the decedent's estate would be responsible for gathering documentation on all probate and non-probate property, the related mortgages or other liabilities, and information on the beneficiaries. The personal representative would prepare and file the necessary reports and tax forms. According to the Maryland Register of Wills, they will determine the amount of inheritance tax owed on probate and non-probate property.

If no personal representative has been appointed, or there are non-probate assets passing at death of which the personal representative is not aware, and you are the recipient of that property, you could be responsible for filing the "Application to Fix Inheritance Tax on Non-Probate Assets" (Form RW 1125). The distributor of the property may also be responsible for filing the form. This form can be downloaded from the State of Maryland Register of Wills website at www.registers.state.md.us.

Pairo & Pairo point out that the inheritance tax is payable by the person who receives the property, but a will can be structured so that the decedent's estate pays the tax.

Sources:
CCH Financial Planning Toolkit - Maryland Estate Taxes: www.finance.cch.com
Comptroller of Maryland - Inheritance Tax: http://individuals.marylandtaxes.com
Pairo & Pairo, LLC - Estate Planning: www.pairo.com
State of Maryland Register of Wills - Administering Estates in Maryland - Chapter 8: Inheritance Tax: www.registers.state.md.us