Not many states have an inheritance tax, but it’s essential to be aware of which ones do when planning your estate. By knowing which states enforce this tax you are able to have a clear idea of how much you will actually be gifting your loved ones once you have passed on. You’ll be aware of who is exempt from paying these taxes and can even choose during your estate planning whether to have your estate pay any inheritance tax that may fall onto any of the recipients.

The few states that have an inheritance tax in the United States are Iowa, Kentucky, Nebraska, New Jersey, Pennsylvania, and Maryland. Each state has its own set of rules following this tax and typically this includes an exemption from those closest to the deceased, like a spouse or close relatives. New Jersey and Kentucky have the highest inheritance tax, while Maryland is the only state that imposes both an inheritance and an estate tax.

Maryland’s inheritance tax is 10% of the clear value of the gift. This means that if you were to be gifted $10,000, you would actually only receive $9,000 as the other $1,000 would be taxed. Some estates will include paying the inheritance in their governing document and the recipient will receive the gift in full.

What is Inheritance Tax?

Inheritance taxes, also known as death taxes, are taxes levied against the beneficiaries of the inheritance and are owed after the inheritance is gifted. The amount of the gift that is taxed, along with who is required to pay it, depends on the inheritance tax law of the state in which the deceased resided. After the probate process is completed and the personal representative of the estate distributes your share of the assets, you then may be required to pay an inheritance tax if you do not meet the exemption.

Deathbed gifts or contemplation of death gifts that are given within two years of the Maryland resident's date of death can also be subject to the inheritance tax.

Who is exempt from the Maryland inheritance tax?

The heirs that are currently exempt from paying the inheritance tax in Maryland are spouses, children, stepchildren, children’s spouses, parents, grandparents, brothers, and sisters. Some of these heirs used to not be included in the exemption though so it's important to keep up to date with any changes to this list that may occur.

You are required to make the inheritance tax payment and are not exempt if you are the deceased niece, nephew, friend, or distant relative.

What other inheritance tax exemptions are there?

While certain individuals are exempt from paying inheritance taxes, an interesting thing to note is that a business can also be exempt from paying inheritance taxes if all of the owners (stockholders, members, or partners) are exempt. This means that if the deceased person would like to gift money to their family company owned by their surviving spouse and siblings, then the amount gifted would not receive the inheritance tax.

Nonprofits as also exempt from paying inheritance taxes in Maryland including those that are under tax-exempt status under section 501.

If the estate in question’s total property value is less than $50,000 and is considered a small estate and qualifies for simplified probate under Maryland law, there also is no inheritance tax due.

Another exemption is on the deceased primary residence when it transfers to their domestic partner as long as it was owned by both individuals under joint tenancy.

How much money can you inherit without being taxed?

If you inherit less than $1,000 from an estate in Maryland, you are also exempt from paying the inheritance tax.

What is the 7-year rule for inheritance?

The seven-year rule for inheritance states that no inheritance tax is due on any gift that you give if you live for seven years after giving it. This however excludes gifts that are part of a trust. The amount of inheritance tax that needs to be paid if this rule is broken (you die within seven years of gifting) is determined based on when it was given.

Do I have to pay inheritance tax in Maryland?

This depends on your relationship with the deceased, if the deceased was a Maryland resident, and if the estate has paid the inheritance tax for you. If you are a niece, nephew, or friend of the grantor and the estate has chosen not to pay the inheritance tax related to the gift, then yes you do have to pay 10% of the value of the gift in taxes.

What is the estate tax in Maryland?

An estate tax is not the same as an inheritance tax. This tax is paid for on any value of the estate that is over the threshold. Estate tax laws differ in each state. The threshold in Maryland is $5 million, or $10 million for a married couple. Maryland estate taxes have rates from .8% to 16% and this is paid on the amount of the entire estate that is over the $5 million threshold. The taxable estate will have to pay all taxes before the money can be dispersed to your heirs.

Is there a Federal Inheritance Tax?

The federal government does not currently have an inheritance tax, although there are federal estate taxes. That means that estates are required to also pay a federal estate tax if their total value is more than a certain threshold. The federal estate tax exemption for this year has increased to $12.92 million.

Conclusion

The state of Maryland has both an inheritance and an estate tax that can affect the amount of your wealth that can be passed onto your heirs. If you plan on making your estate in Maryland I highly suggest seeking legal advice and reaching out to a professional to make sure that your estate is planned according to your wants. Keep the state's laws in mind and make sure that it is up to date as tax laws vary from state to state and change throughout the years.

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