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MARYLAND ESTATE TAX – How lifetime gifts can eliminate the tax

Recent tax law changes have significantly increased both the Federal Estate Tax and Maryland Estate Tax exemptions.  As of January 1, 2019, the Federal exemption per individual is $11.4 Million and scheduled to increase annually with inflation.  The Maryland exemption is frozen at $5 Million per individual.  Married couples can double both the Federal and Maryland individual exemptions.

The exemption increases mean that fewer families need to worry about estate tax.  But for those that are still subject to Maryland Estate Tax, the higher Federal exemption presents a significant opportunity to reduce or eliminate Maryland Estate Tax.

The Federal exemption referenced above is really a unified lifetime exemption, meaning that it can be used to exempt gifts during life or inheritance at death.  In other words, if you give $1 Million to your children during your lifetime, your exemption decreases accordingly, leaving $10.4 Million that can pass tax-free at your death.  Maryland, however, ignores lifetime gifts entirely.  A $1 Million lifetime gift does not reduce your $5 Million Maryland exemption at all.  Thus, one can make substantial lifetime gifts, even immediately before death, to reduce the Maryland Estate Tax that will be due at death.  As long as the lifetime gifts do not exceed the donor’s Federal exemption, no gift tax will be due.

Of course, substantial gifts raise other considerations – e.g., cost basis step up, donee responsibility and control, etc.  We are happy to discuss appropriate gifting strategies with you.