Maryland estate tax: What's new?

By John N. Sigler, JD, MBA, MS, CPA
Phillip J. Korb, CPA, MS Taxation, MBA
and Thomas E. Vermeer, Ph.D, CPA

The Maryland estate tax, similar to the estate tax of other states, is a pick-up tax. Basically, the tax is designed to pick up the difference between the inheritance tax and other state death taxes of the particular estate and the amount allowed as a credit for state death taxes on the federal return.

The reason for paying this difference is because the amount allowed as a credit for state death taxes on the federal estate tax return is limited to the amount actually paid. When a credit was first allowed on the federal estate tax return for state death taxes, states with death taxes less than the maximum federal credit passed legislation authorizing an estate tax. The logic was simple: The estate paid more in state death taxes to the state, but paid less in taxes to the federal government in an equal amount. So the states benefited at the expense of the federal government with no net effect on the estate.

Effective for decedents dying after Dec. 31, 2003 and before Jan. 1, 2005, Maryland has decided not to go along with the federal increase in the estate tax credit from $345,800 (an exemption equivalent of $1 million) to $555,800 (an exemption equivalent of $1.5 million). Therefore, when an individual has a taxable estate of greater than $1 million and less than or equal to $1.5 million and pays no federal estate tax, that same individual's estate could be subject to the Maryland estate tax.

This increase in the federal estate tax credit was not matched by an increase in the federal gift tax credit; the federal gift tax credit was "frozen" at $345,800. Thus, although Maryland has no state gift tax, for a Maryland taxpayer making taxable gift(s), some of the unified federal tax credit will be used up first as federal gift tax credit before the taxpayer's estate arises and a reduced federal estate tax credit comes into play.

This decoupling of federal and state estate taxing plans is not the first for Maryland, nor is it the first in the estate tax area. When the federal government began phasing out the credit for state death taxes calculated under the federal tables and claimed on the federal estate tax return, Maryland chose to base its estate tax on the full amount calculated under the federal tables. However, this most recent decoupling is even more confiscatory. Where previously at least some benefit was derived on the federal return through a credit for paying Maryland death taxes, now a Maryland estate tax may still have to be paid when no federal return is required and no taxes are due.

What is also unique about this decoupling is that a considerable amount of additional work is required. With the previous decoupling from the phase-out of the credit for state death taxes, the work associated with preparing a federal estate tax return still had to be done. However, this decoupling requires all the work associated with preparing the federal estate tax return, including the "pro forma" filing of the federal return with the state return, even though no federal estate tax return itself needs to be filed. Examples of items that would need to be calculated include the following:

Accrued dividends on stocks
Accrued interest on bonds
Businesses valuations — special use
Farms valuations — special use
Debts of the decedent

The value of non-probate assets, including pensions, IRAs, assets in joint tenancies and tenancies in common, etc.

The amount of miscellaneous receivables

These items would not necessarily be readily available from the amounts generated in the course of filing an administration account.

Effective July 1, 2000 for decedents dying on or after July 1, 2000, estates that were bequeathed or devised to lineal descendants or brothers and sisters were relieved from the inheritance tax. So until this most recent change in the law, if an estate was less than the federal exemption equivalent and it passed to lineal descendants or brothers or sisters, the estate paid no estate taxes or inheritance taxes.

However, with Maryland choosing to decouple itself from the increase in the federal exemption equivalent, it is ironic that these same estates with a federal taxable estate of greater than $1 million and less than or equal to $1.5 million now would pay up to $64,400 of Maryland estate taxes. What Maryland recently giveth, Maryland has now taketh away.

John N. Sigler, JD, MBA, MS, CPA, is an associate professor at the University of Baltimore and a member of the Maryland Bar and Maryland State Bar Association. Phillip J. Korb, CPA, MS Taxation, MBA, is an associate professor at the University of Baltimore. Thomas E. Vermeer, Ph.D, CPA, is an associate professor at the University of Baltimore.

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