Maryland’s motto “the Free State” isn’t so free for your loved ones. However, there are indications coming out of Annapolis that this year there may be some relief when someone in your family passes away away.
A bill introduced in the Maryland Senate to raise the level of the state estate tax exemption to $4 million from its current level of $1 million, Senate Bill 155, is gaining support. Senator Mike Miller says he supports the bill.
Why is raising the state estate tax exemption important to you?
Suppose you are single, retired, have paid off your mortgage, have a life insurance policy and a small investment account. If your house is worth $400,000, your life insurance policy will pay $500,000 and your investment account is $200,000, your loved ones have a tax problem.
Under current Maryland law, you can pass $1 million to your loved ones without state estate tax, but your loved ones will have to pay tax (up to 16%) on anything over $1 million. In this case, your estate is $100,000 over the exemption amount and your loved ones may have to pay as much as $16,000 tax on your estate of $1.1 million.
Rather than put their heirs in a position where they must pay the state estate tax, many retired Marylanders are simply moving out of state and re-locating in states that have no state estate tax, like Florida, the Carolinas and Virginia. It is certainly time for our legislators to take a hard look at the detrimental effect of so many of our residents moving out of state.
Was it always this way? No. In 2001, the State of Maryland “de-coupled” its estate tax exemption from the Federal limits. Prior to 2001, there was no state estate tax, only the Federal estate tax. In 2001, the state decided that the beneficiary of any Maryland estate over $1 million per person ($2 million for a couple) had to pay Maryland state estate tax up to 16%.
Today, the Federal estate tax exemption is $5.34 million per person, double that for couples – that means that your beneficiaries will pay no Federal estate taxes on estates they inherit worth less than $5.34 million per person or $10.6 million for a couple. This exemption is sufficiently large to encompass the value of most estates; however, the imposition of the Maryland state estate tax at anything over $1 million per person (up to 16% tax) has created a tax trap for Marylanders with estates between $1 and $5 million per person that many are seeking to escape.
Comptroller Peter Franchot is voicing strong support for the state to re-couple the Maryland estate tax with federal government regulations.
“The large gap between Maryland and the federal estate tax exemption creates inconsistencies for family planning and an uncompetitive environment with neighboring states,” Franchot said in a recent news release. “This doesn’t just benefit the families it would directly affect, either. It’s about attracting entrepreneurs and the jobs they bring with them and keeping the people who so often are bedrock philanthropists who give so much back to our communities.”
In addition to the state estate tax, some states like Maryland impose an inheritance tax. In Maryland spouses, children, daughters and sons-in-law, parents, grandparents and siblings are exempt from state inheritance tax. But, nieces and nephews and more remote descendants must pay a 10% inheritance tax on property worth $1,000 or more – and, gifts made within two years prior to death may also be subject to the tax.
Twenty-one states and the District of Columbia impose some sort of death tax and the low exemption amounts available in these states make sure the middle class gets caught paying the taxes. It appears, at least in Maryland, that our legislators finally recognize that forcing Marylanders to flee the state to avoid state estate taxes makes no sense.
If you agree, let Senator Miller know you support him in his efforts to raise the state estate tax exemption. Here’s how to reach him:
Thomas V. “Mike” Miller, Jr., President of Senate
State House, H-107
Annapolis, MD 21401
(410) 841-3700, (301) 858-3700
1-800-492-7122 FREE, ext. 3700 (toll free)
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them” (2013 ebook download available at LegalStriegel.com.). Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.