Mid-Atlantic Health Law TOPICS

Governor O'Malley recently signed into law legislation making a significant change to Maryland's estate tax law. Prior to this new law, Maryland imposed an estate tax on estates valued at more than $1,000,000. This was so even though the federal estate tax applicable exclusion amount (commonly referred to as the "estate tax exemption") is currently $5,340,000 (and is inflation indexed).

Maryland has been "decoupled" from the federal estate tax exemption since 2004. Many believe that this decoupling has been an important factor in quite a few Maryland residents changing their residency to states that have no state estate tax at all, such as Florida and Virginia.

A. New Maryland Estate Tax Exemption

The new law returns Maryland to the federal estate tax exemption amount on a phased in basis, as follows:

B. What to Do Until 2019?

In the years since Maryland has been decoupled from the federal estate tax, many married couples have chosen to include language in their Wills or Revocable Trusts designed to take full advantage of their federal estate tax exemptions, but postpone any Maryland estate tax until the death of the surviving spouse. For those who want to delay any Maryland estate tax until the survivor's death, this type of language should still be included until 2019.

Additionally, because Maryland does not have a gift tax, some have made large gifts to reduce their estates below $1,000,000 to eliminate any Maryland estate tax, or to at least lessen the eventual Maryland estate tax even if those gifts do not bring the estate below the $1,000,000 threshold. In the computation of Maryland estate tax, Maryland does not add back gifts made during life (whereas federal law requires gifts in excess of annual exclusion, currently $14,000 per recipient, and exclusions for gifts for tuition and medical expenses, be added back in calculating federal estate tax).

However, one should not make gifts without first consulting an estate tax planning attorney or CPA. There are important factors that should be considered, such as the donor's economic needs, and the income tax consequences the recipient would incur upon the sale of assets received by a lifetime gift versus inheritance.

Generally, assets received through a lifetime gift have an income tax basis equal to the donor's income tax basis, and assets received by inheritance receive an income tax basis equal to their date of death value. (There are exceptions to this rule, a notable one being that the assets in a retirement account, such as an IRA, do not receive the benefit of a "step-up" in basis upon the owner's death.)

The bottom line is that Maryland's new law is good news for Marylanders, even if it may be bad news for Florida real estate agents.