Under current law, the Federal estate tax exemption is $2,000,000 and will increase to $3,500,000 in 2009. The estate tax exemption in Maryland and DC, however, will remain at its current amount of $1,000,000. Please note that the estate tax in Maryland and DC is imposed on estates that exceed $1,000,000 not only for decedents domiciled in Maryland or DC at the time of death but also for nonresidents who owned real or tangible personal property located in Maryland and/or DC at the time of death.
The differential between the Federal estate tax exemption and the Maryland or DC estate tax exemption forces married clients to make a decision as to whether or not they will pay the Maryland or DC tax on this differential at the death of the first spouse or defer it until the death of the surviving spouse. With the increase in the Federal exemption in 2009, the Maryland or DC estate tax on this differential will increase from $99,600 to $229,200.
For some clients, it often is beneficial to pay the state estate tax upon the first spouse’s death in order for such property to grow for the next generation free of Federal estate tax (which is imposed at much higher rates than the Maryland and DC estate tax) and additional state estate tax. However, with the increase in the amount of state estate tax that will be owed in 2009, many clients may wish to defer the state estate tax until the surviving spouse’s death without losing the benefit of the full Federal estate tax exemption.
In Maryland, this result can be accomplished (with properly drafted documents) by making a “Maryland QTIP election” on the deceased spouse’s Maryland estate tax return. With this election, the Personal Representative elects to hold the amount equal to the difference between the Federal exemption and the Maryland exemption (which difference currently is $1,000,000, but will increase to $2,500,000 in 2009 in the absence of further Maryland legislation) in a trust for the sole benefit of the surviving spouse.
This election does not prevent the Personal Representative from using the full Federal exemption on the Federal estate tax return. As the requirements of deferral may be counter to a client’s non-tax estate planning objectives, the decision of whether to defer the tax should be made after consultation with counsel. [Note: DC has not enacted legislation that would allow for the deferral of DC estate tax until the death of the surviving spouse while still utilizing the deceased spouse’s full Federal exemption amount.]
Current estate planning documents may need to be revised to take advantage of this deferral technique.