Inheritance Tax

Maryland is one of the few states that still imposes an inheritance tax. This tax can significantly impact the distribution of an estate and the amount beneficiaries receive. Understanding the nuances of Maryland’s inheritance tax is crucial for estate planning and beneficiaries.

Real estate and tangible personal property outside Maryland are not subject to Maryland inheritance tax, even if the decedent was a Maryland resident.

It’s also important to note that Maryland inheritance tax is separate from federal and Maryland estate taxes. Depending on its value and the beneficiaries’ relationship to the decedent, an estate may be subject to none, one, two, or all three of these taxes.

What is Inheritance Tax?

Inheritance tax is a state tax imposed on property transfer from a deceased person (the decedent) to specific beneficiaries. Unlike estate tax, which the estate pays before assets are distributed, inheritance tax is paid by the individual beneficiaries who receive assets from the estate.

Maryland imposes a flat 10% inheritance tax rate on the precise value of property that passes from a decedent to certain beneficiaries. The “clear value” refers to the property’s fair market value minus any debts or encumbrances on the property.

Who is Subject to Maryland Inheritance Tax?

Not all beneficiaries are subject to the inheritance tax. Maryland law divides beneficiaries into two categories:

Exempt Beneficiaries: These individuals and entities are not required to pay inheritance tax. They include:

Spouse of the decedent
Children (including stepchildren and former stepchildren)
Parents
Grandparents
Siblings
Son-in-law or daughter-in-law who has not remarried
Charities and other tax-exempt organizations

Non-Exempt Beneficiaries: All other individuals and entities not listed above are subject to the 10% inheritance tax. Examples include:

Nieces and nephews
Friends
Cousins
More distant relatives
Domestic partners (unless they inherit a primary residence that was jointly owned)

Exemptions and Exclusions

Certain types of property transfers may be exempt from Maryland inheritance tax, even when passing to non-exempt beneficiaries. These include:

The first $1,000 of property inherited by any single beneficiary

Property passing to or for the use of a grandparent, parent, spouse, child or other lineal descendant, spouse of a child or other lineal descendant, sibling, or corporation having only certain of these persons as stockholders

Property passing to a trust for the sole benefit of exempt beneficiaries

Property passing to or for the use of a qualified domestic partner for a joint primary residence

When and How to Pay Maryland Inheritance Tax

The inheritance tax is due within nine months after the decedent’s death. The beneficiary is responsible for paying the tax to the Register of Wills in the county where the decedent lived (or where the property is located for non-resident decedents).

If the tax is not paid within this timeframe, interest will accrue at 1.5% per month, potentially significantly increasing the total amount due. In some cases, the Register of Wills may allow for an extension of time to pay the tax if good cause is shown, but it’s best to avoid this situation by ensuring timely payment.

Seeking Professional Guidance

Given the complexities of Maryland’s inheritance tax and its interaction with other estate planning and administration areas, seeking professional guidance is not just advisable; it’s essential. An experienced attorney can provide you with the necessary advice to navigate these issues and develop strategies to minimize tax liability while ensuring compliance with all applicable laws.

At Azarvand Tax Law, we are dedicated to helping clients understand and manage their Maryland inheritance tax obligations. Whether you’re planning your estate or are a beneficiary dealing with an inheritance, our experienced attorneys can provide the guidance you need to navigate Maryland’s inheritance tax laws effectively.