A Maryland-only credit shelter trust is a type of estate planning tool designed to maximize the use of the Maryland estate tax exemption, which is significantly lower than the federal estate tax exemption. It helps mitigate Maryland estate taxes while preserving the federal exemption for later use. Here’s how it works:

Features of a Maryland-Only Credit Shelter Trust

1. Purpose

•Maryland imposes an estate tax with a lower exemption threshold ($5 million in 2024) compared to the federal exemption ($12.92 million in 2024).

•A credit shelter trust is designed to fully utilize the Maryland estate tax exemption at the first spouse’s death, minimizing Maryland estate taxes at the second spouse’s death.

2. Structure

•At the first spouse’s death, their estate is divided into two parts:

•Maryland Credit Shelter Trust: An amount equal to Maryland’s estate tax exemption ($5 million in 2024) is placed in this trust.

•Remaining Assets: The remaining estate can pass outright to the surviving spouse, sheltered by the federal marital deduction or placed in other trusts (such as a federal QTIP trust or marital trust).

3. Operation

•The Maryland credit shelter trust is irrevocable upon the first spouse’s death.

•The trust can provide income and principal distributions to the surviving spouse and/or other beneficiaries as outlined in the trust document.

•At the surviving spouse’s death, the assets in this trust are not included in their taxable estate for Maryland or federal estate tax purposes.

Benefits of a Maryland-Only Credit Shelter Trust

1. Maximizes Tax Savings:

•By funding the trust up to Maryland’s estate tax exemption, the first spouse’s exemption is fully utilized, avoiding estate tax on those assets at the second spouse’s death.

2. Preserves Federal Exemption:

•Assets in the credit shelter trust are not included in the surviving spouse’s estate, allowing the federal exemption to be preserved for other assets.

3. Asset Protection:

•Assets in the trust are protected from creditors or future remarriage complications.

4. Control Over Asset Distribution:

•The first spouse can dictate how the trust assets are managed and distributed after the surviving spouse’s death.

Example

Assume a married couple has a $10 million estate in 2024. At the first spouse’s death:

•$5 million (equal to Maryland’s exemption) is placed in the Maryland credit shelter trust.

•The remaining $5 million passes to the surviving spouse, either outright or in a marital trust.

Result:

•No Maryland estate tax is due at the first spouse’s death.

•At the second spouse’s death, the credit shelter trust assets are not taxed, but the surviving spouse’s estate may be subject to Maryland and federal estate taxes on assets above the respective exemptions.

Considerations

1. Portability Limitation in Maryland:

•Maryland does not allow portability of the unused estate tax exemption between spouses, making this strategy essential for utilizing the first spouse’s exemption.

2. Flexibility for the Surviving Spouse:

•The trust terms can provide access to income and principal, but this access must be carefully drafted to avoid including the trust assets in the surviving spouse’s taxable estate.

3. Complexity:

•Establishing and administering the trust requires careful planning and ongoing management.

4. Potential for Federal Overlap:

•For estates large enough to trigger federal estate tax, coordination with federal estate planning strategies (e.g., QTIP trusts or DSUE portability) is essential.

Summary

A Maryland-only credit shelter trust is a valuable tool for married couples with estates large enough to be subject to Maryland estate tax but below the federal exemption. It ensures the efficient use of the Maryland exemption while providing asset protection and control. To set up this type of trust, work with an estate planning attorney experienced in Maryland tax laws.