Where Not to Die This Year

Q. I own a home in Bethesda, MD, but was told I should sell it and move to another state. My 96-year old best friend Sheila insists that “it is expensive to die in Maryland” and I’m beginning to think she is right. Sheila lives in DC, and from what I gather, it is expensive to die there too!

As of now, the property will be left to my only daughter, Adrienne, when I pass away. With the new tax laws, will she have to pay estate or inheritance taxes on it, and if so, how much will it be?
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A. When the Tax Cuts and Jobs Act (TCJA) was signed into law in 2017, it ushered in the largest federal estate tax exemption since the federal estate tax was first imposed. After Trump’s estate tax cut, the federal estate tax is now reserved for the richest of the rich, but in the 17 states and the District of Columbia that levy their own state-level estate and inheritance taxes, it’s another story. Maryland and DC are unfortunately among the states with an estate tax. In fact, Maryland is one of only two states that have not one but two separate and distinct death-related taxes. In Maryland, there is an inheritance tax and an estate tax, whereas DC has only an estate tax. Maryland and New Jersey are currently the only states that assess both an inheritance tax and a separate estate tax. And four other states collect a state inheritance tax but no estate tax — Iowa, Kentucky, Nebraska, and Pennsylvania.

Difference between estate tax and inheritance tax

• An estate tax is charged against the entire estate regardless of who the beneficiaries of the estate are.
• An inheritance tax is only charged against the shares of certain beneficiaries of an estate.

Let’s talk first about Maryland death-related taxes, and then we’ll take a look at DC and briefly at Virginia.

Maryland Inheritance Tax

The Maryland inheritance tax is assessed against certain individuals who inherit property of any kind, except life insurance, from a Maryland decedent (person who died) or from a decedent who did not live in Maryland but who owned real estate in Maryland. What is important to understand about the Maryland inheritance tax is that it is only imposed if the recipient of the inheritance is unrelated or distantly related to the decedent. The Maryland inheritance tax is therefore not applicable if the inheritance is payable to a spouse, child or other descendant, or a sibling, but is applicable if the recipient is a niece or nephew or other more distant relative.

If imposed, the Maryland inheritance tax rate is 10%. Let’s say you have three nephews and you leave each of them $50,000. Each nephew will receive $45,000 and the inheritance tax of $5,000 for each of the three bequests will be paid to the Register of Wills for the county where you lived at the time of your death. You would have the option to include provisions in your Will or revocable trust agreement to shift the liability for the inheritance tax from your nephews (thus allowing each to receive $50,000) to your estate.

Maryland Estate Tax

The Maryland estate tax is imposed on all Maryland estates as well as non-Maryland decedents who own Maryland real estate whose “taxable estates” exceed an exempt amount. In 2019, the exempt amount is $5 million. The Maryland estate tax rates range from 0.8% to a maximum of 16%.

What Determines the Value of an Estate?

The Maryland “taxable estate” is the total market value of the decedent’s assets reduced by the balance of all mortgages secured by the decedent’s assets, other debts, and administration costs. The tax is not imposed on transfers to a surviving spouse or to certain trusts for the benefit of the surviving spouse or to charities. For non-Maryland residents, the estate tax is imposed only on the value of the decedent’s real estate located in Maryland.

Minimizing Double Taxation in Maryland

If your estate is subject to both the Maryland inheritance tax and the Maryland estate tax, some relief is available. The Maryland estate tax is reduced by the amount of the inheritance tax. For example, if your estate’s inheritance tax liability was $15,000 and the computation of your Maryland estate tax yields a Maryland estate tax of $100,000, the actual estate tax payment will be $85,000 to the State of Maryland and $15,000 for the inheritance tax will be paid to the Register of Wills in your County.

DC Estate Tax

When TCJA was passed, DC found its exemption amount increasing from $2 million in 2017 to $11.18 million in 2018, as it was scheduled to keep pace with the federal estate tax exemption. In response, ten of the 13 DC Council members proposed a bill in February 2018 to reduce DC’s estate exemption back to the expected $5.6 million per person, where it is now.

Virginia

Virginia repealed its estate tax effective July 1, 2007, and thus was not affected by the estate provisions of TCJA. Several bills in recent sessions of the Virginia General Assembly proposed reinstating the estate tax, but the efforts gained little traction.

Are You Affected by Estate Taxes?

For several years, the Capital Region jurisdictions (District of Columbia, Maryland, and Virginia) were moving toward consistency, but as you can see, that hasn’t happened. Still, very few people will ever have to worry about estate taxes.

For residents of DC with estates of $5.6 million or more, it is wise to work with an experienced estate planning attorney for strategies to lower the value of your taxable estate using specialized trusts.

Maryland residents with estates of $5 million or more should revisit their estate plans, as well. Residents of DC and Maryland can all utilize strategic trust planning and/or gift planning to lower the value of their estates so they are not taxable (note that state gift tax is not imposed in any of these states, and federal gift taxes don’t apply to the states under $11.4 million or double that for a married couple). However, always beware of making lifetime gifts if you are over the age of 65 — read the Perils of Gifting webpage on our website for more details.

Keep your Estate Plan Up to Date

With all of the changes that take place in the tax laws, I recommend that everyone should revisit their estate plans every year. The Farr Law Firm’s Lifetime Protection Program ensures that your estate planning documents in Virginia, DC, and Maryland are properly reviewed and updated as needed, so that they will have the proper effect under the law.
If you don’t have your estate planning in place yet, please call us to make an appointment for an initial consultation:

Estate Planning Attorney Fairfax: 703-691-1888
Estate Planning Attorney Rockville: 301-519-8041
Estate Planning Attorney DC: 202-587-2797
Estate Planning Attorney Fredericksburg: 540-479-1435