Good news for heirs: Maryland inheritance tax decreases

By Carol I. Katz, CPA, CFP
Leonard J. Miller & Associates
MACPA Estate and Gift Taxation Committee

The 2000 Maryland legislative year brought a long awaited decrease to some of the Maryland inheritance tax provisions. Although 1999 law changes had reduced the tax somewhat, this year there was actually elimination (repeal) of part of the tax. What had been a 0.9 percent tax on lineal heirs (parent, grandparent, stepparent, stepchild, child and grandchild) and a spouse (and spouse of a child) was completely eliminated. Not only that, the definition of lineal was broadened to include siblings — brothers and sisters (but not nieces and nephews). Also excluded from inheritance tax is property passing from a decedent to or for the use of a corporation owned only by (these same category of) relatives of the decedent. The Governor has already signed this bill and it becomes effective for decedents dying on or after July 1, 2000.

What does this mean? This provision helps heirs of estates that would be below the federal estate tax filing threshold and that generate no federal estate tax. For example, an estate of $600,000 passing from a parent to a child will currently generate $5,400 of inheritance tax, even though there would be no federal estate tax return required and no federal estate tax due. For decedents dying on or after July 1, 2000, the $5,400 tax that would have been paid to the county Register of Wills will no longer be applicable.

However, for wealthier families, this provision is not all that beneficial. This is because Maryland has what is called a "sponge" or "pick-up" tax that is coordinated with the Federal estate tax filed on Form 706. If there is a federal estate tax, that calculation includes a state tax credit for tax paid to the state. Maryland will "sponge" or "pick-up" whatever that state tax credit is calculated to be.

For example, for a decedent dying in 1999 with an estate of $800,000 the federal estate tax, before the unified credit, would be $267,000. The federal unified credit would be $211,300, leaving a balance of $56,500 of federal tax due. However, the state tax credit allowed on the Form 706 is calculated to be $22,800, leaving a federal balance due of $33,700. This means the actual out of pocket dollars is still $56,500, but is remitted with two checks — one to the IRS and one to Maryland. If the inheritance tax had been $7,200, the heirs would still owe Maryland $15,600 (the difference between the state tax due from the calculation on Form 706 and the inheritance tax). This is because the inheritance tax is allowed as an offset to the Maryland estate tax. Therefore, even if there is no inheritance tax, the heirs are still out of pocket the $22,800 owed to Maryland for estate tax.

The other situation that would not be helped by the new provision is for collateral heirs — those nieces and nephews and other non-related heirs. The inheritance tax for these heirs is still 10%. So for an estate of $800,000 that is willed to collateral heirs, the inheritance tax would be $80,000, which is even more than the federal credit. The total federal and state outlay using the example above would be $113,700 = $80,000 plus $33,700.

The bottom line is that the new law is a very beneficial provision that could save thousands of dollars for a large majority of the Maryland population that is not subject to the federal estate tax and who will leave their estates to lineal heirs.

NOTE: For information on this provision and other Maryland laws, try the General Assembly Web site at http://mlis.state.md.us/.

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