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Changes to the Maryland Estate Tax

October 3, 2004

By: Brian A. Balenson

Under legislation passed earlier this year by the Maryland legislature and effective as of January 1, 2004, the exemption from Maryland estate tax has been capped at $1.0 million, even though the exemption from federal estate tax has been increased to $1.5 million. The federal estate tax exemption is scheduled to increase further over the next several years as follows:

  • 2006, 2007 and 2008 - $2.0 million
  • 2009 - $3.5 million
  • 2010 - repeal of estate tax
  • 2011 - and thereafter $1.0 million

Until now, the Maryland and federal estate tax exemptions have always been identical. The decoupling of the Maryland and federal estate tax exemptions may require you to reexamine your estate plan. If your plan provides for setting aside in a credit-shelter trust (also known as a "by-pass trust") the maximum federal estate tax exemption amount at the first spouse’s death (currently $1.5 million), under Maryland’s prior estate tax law there would have been no federal or Maryland estate tax. Under the new Maryland estate tax law there would be Maryland estate tax because the amount that is exempt from Maryland estate tax is only $1.0 million. The Maryland estate tax on the difference between the $1.5 million federal exemption and the $1.0 million Maryland exemption will be approximately $64,400.

If the federal and Maryland laws stay in effect as they are now, the tax problem will grow as the federal estate tax exemption increases over the next several years. This is because the Maryland estate tax exemption of $1.0 million is not scheduled to increase.

The following chart shows how the increasing federal estate tax exemption could subject your estate to increasing Maryland estate tax in coming years if your present estate plan provides for setting aside in a credit-shelter trust the maximum federal estate tax exclusion amount at the first spouse’s death.

There are several ways to deal with the new Maryland estate tax law, a few of which are described below. One option is to pay the Maryland estate tax at the first spouse’s death because doing so may save a much greater amount of federal estate tax upon the death of the second spouse. Another option is to cap the amount which passes into the credit-shelter trust at the Maryland exemption level of $1.0 million. This option will avoid the Maryland estate tax upon the death of the first spouse but may cause a greater amount of federal estate tax to be paid upon the death of the second spouse. A third option would be to use a disclaimer credit-shelter trust structure in your Will. This option would allow the surviving spouse to determine how much will pass into the credit-shelter trust. This option has certain risks, such as not making the disclaimer within the time period allowed or accepting the benefit of the assets before a disclaimer is made.

It is important in light of the change to Maryland’s estate tax law that you review your estate plan with your attorney and settle upon an option which best suits your personal needs and estate tax goals. The estates and trusts attorneys at Tydings would be happy to meet with you to discuss which option will work the best for you.

For more information on these tax changes, contact Brian A. Balenson at 410.752.9737 or via e-mail at bbalenson@tydingslaw.com.

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