If you inherited property or expect to in the near future, you need to know whether you’ll be required to pay tax on any or all of it. Just as with income tax, you need to consider taxation requirements at the federal and state levels.
Maryland imposes both an inheritance tax and an estate tax. However, the laws provide exemptions in many situations, so it is important to review the rules closely to see what is required in your situation. A probate attorney could review the facts and assist you with the process.
Maryland Inheritance Tax
Although technically an inheritance refers only to property that passes to someone when a deceased person has left no will, Maryland inheritance tax is imposed on property that passes:
- Through a will
- Under the laws of intestate succession (no will)
- Under a trust
- Through a deed
- Through any form of joint ownership
The tax rate is 10% of the “clear value” of the property. Under Section 7-204 of the Maryland Tax Code, clear value is defined as “fair market value minus expenses.” The tax is collected by the Register of Wills in the county where the deceased person lived or owned property. It is the residence of the deceased person that matters for inheritance tax purposes, rather than the location of the beneficiary.
Not everyone who receives property will need to pay this tax, however.
Exemptions to the Maryland Inheritance Tax Requirements
Inheritance tax rules have changed a few times over the years. The most recent amendments created an exemption for property passing to many family members. Children who inherit, any “lineal descendant” who inherits, and the spouses of any of these descendants do not pay inheritance tax. Spouses, siblings, parents, and grandparents of the deceased are also exempt. Additionally, stepchildren and stepparents are exempt from tax as well.
If partners own a home together as joint tenants and one passes away, the other partner is not required to pay inheritance tax even though they are not related.
Maryland and Federal Estate Tax
Maryland is one of few states that impose two types of death taxes. In addition to the inheritance tax owed by the recipients, the deceased person’s estate itself may be required to pay taxes known as estate taxes. The federal government also collects estate taxes.
The estate is the property left behind by the deceased person, and it is managed by the executor or personal representative, so that person has the official duty of paying the estate tax. While beneficiaries do not need to pay these taxes directly, of course it does decrease the value of property they receive.
Both federal and state estate tax rules have an exemption amount that changes regularly. In Maryland, estates valued at over approximately $5 million may pay state estate taxes, but only estates valued at roughly $12 million will need to pay federal estate tax. The good news is that there is no federal inheritance tax.
A Probate Attorney Could Assist with Tax Inheritance Obligations in Maryland
In addition to confusion about who owes inheritance tax in Maryland, it can also be confusing to determine whether an inheritance tax has been paid. Technically, if tax is owed, the personal representative is supposed to pay it before distributing the property to beneficiaries. However, that does not always happen and if the tax has not been paid, it becomes the responsibility of the recipient.
At the Law Office of Ralph W. Powers, Jr., P.C., we understand how confusing Maryland requirements can be after someone passes away. If you need help with probate or related matters, our knowledgeable attorneys would be happy to assist. Contact us at any time to schedule a confidential consultation.