On May 15, 2014, Governor Martin O’Malley signed into law a bipartisan bill (House Bill 739/Senate Bill 602) that over the course of the next five years - beginning in 2015 - will link (or “re-couple”) the Maryland estate tax exclusion amount (sometimes referred to as the Maryland estate tax exemption amount) to the value of the applicable unified credit allowed against the federal estate tax as in effect on the date of a decedent’s death. As a result, the number of Maryland estates that will be exposed to the Maryland estate tax will be significantly reduced. This re-coupling will be accomplished through gradual increases to the Maryland estate tax exclusion amount - the amount of assets that a Maryland resident can pass at death without incurring Maryland estate tax liability - which is currently set at $1,000,000, with a maximum estate tax rate of 16 percent.
Effective January 1, 2013, the American Taxpayer Relief Act of 2012 set the unified federal estate tax and gift tax exclusion amounts at $5,000,000 per person, indexed for inflation. In 2014, the federal exclusion amount is $5,340,000. This means that an individual who dies in 2014 could transfer over the course of his or her lifetime and at death, assets valued up to $5,340,000 without incurring federal estate or gift tax liability; a married couple could pass up to twice that amount.
In prior years, the federal and Maryland estate tax exclusion amounts were the same, with the result that if there were no federal estate tax liability, then there would be no Maryland estate tax liability. In 2004, Maryland de-coupled from the federal estate tax regime, freezing the Maryland estate tax exclusion amount at its current $1,000,000. The disparity between the federal and Maryland estate tax exclusion amounts has resulted in complex and complicated (some would say, “overly” complicated) estate planning for Maryland residents.
Changes to the Maryland Estate Tax Exclusion Amount
Although the new law becomes effective July 1, 2014, it does not impact the existing Maryland estate tax exclusion amount of $1,000,000 for a decedent who dies in 2014. The phase-in under the new law is:
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- Maryland residents who die after 2014, may pass a larger portion of their wealth to their beneficiaries without incurring Maryland estate tax liability.
- Rising income tax rates and falling federal and state estate tax liability have transformed the tax landscape, and the use of trusts (sometimes referred to as a “Bypass” or “Credit Shelter” trust) in an estate plan for purely estate tax avoidance reasons should be reviewed to allow the surviving spouse the flexibility to weigh income tax saving strategies – such as minimizing exposure to capital gains – against estate tax avoidance strategies, and choose the appropriate approach.
- Estate planning strategies with a focus on estate tax minimization may shift to family-driven estate planning strategies with a focus on total wealth preservation and probate litigation avoidance.
- A re-coupled estate tax regime may allow for less complicated estate planning documents.
- Residents will have one less tax reason to migrate out of Maryland when they retire.