Does Maryland Have an Inheritance Tax?

Maryland is one of the few states that imposes an inheritance tax on assets transferred to beneficiaries after a person’s death. The amount of tax owed, if any, depends entirely on the relationship between the person who has died, known as the decedent, and the person receiving the inheritance, the beneficiary. Many beneficiaries find they are completely exempt from this tax.

The state is the only one to levy both an inheritance tax and a separate estate tax.

Differentiating Maryland’s Inheritance and Estate Taxes

The inheritance tax is paid by the beneficiary, the person who receives the property. The tax is calculated on the value of the assets each individual beneficiary receives. The estate tax, on the other hand, is levied on the total value of the decedent’s entire estate before any assets are distributed. This tax is paid by the estate itself, not the individual heirs.

The primary determinant for the estate tax is the overall net worth of the estate, and it only applies if the value exceeds a specific exemption amount, which is $5 million. An estate in Maryland could potentially be subject to both of these taxes. If an estate owes both Maryland taxes, the amount paid for the inheritance tax is credited against the total estate tax liability, which prevents double taxation on the same assets.

Who Pays the Maryland Inheritance Tax

The obligation to pay the Maryland inheritance tax is determined by the familial relationship between the decedent and the beneficiary. The law creates two distinct classes of heirs: those who are exempt and those who are subject to the tax.

Exempt Beneficiaries

A broad category of beneficiaries is completely exempt from paying the inheritance tax. These are primarily direct relatives. This exempt group includes:

• The decedent’s spouse, children, stepchildren, and former stepchildren
• Grandchildren and any other direct lineal descendants
• Parents, stepparents, and grandparents
• The decedent’s siblings
• The spouse of a child or other lineal descendant
• Charities that are recognized as tax-exempt under the Internal Revenue Code

Taxable Beneficiaries

Beneficiaries who fall outside the circle of immediate family are considered taxable. This group includes nieces, nephews, cousins, and friends of the decedent. Any beneficiary not explicitly listed in the exempt category is subject to the tax. For these taxable beneficiaries, the inheritance tax is applied at a flat rate of 10%.

There is a minor exemption where property passing to any single person with a total value of $1,000 or less is not taxed.

Property Subject to the Inheritance Tax

The tax applies to a wide range of property types. This includes real estate located within Maryland, such as a primary residence, vacation homes, or land. Bank accounts, stocks, bonds, and other investment portfolios are subject to the tax.

Tangible personal property, which includes items like vehicles, jewelry, art, and collectibles, is also included in the calculation. The tax is based on the clear market value of the property at the time of the decedent’s death, minus any associated debts or expenses.

Certain assets are not subject to the inheritance tax. Life insurance proceeds payable to a named beneficiary other than the estate are exempt. Real and tangible personal property located outside of Maryland is not subject to the state’s inheritance tax, even if the decedent was a Maryland resident.

The Inheritance Tax Filing and Payment Process

The administration of the inheritance tax is a procedural process managed by the estate’s Personal Representative, also known as an executor. This individual is responsible for handling the affairs of the decedent’s estate. The Personal Representative calculates the inheritance tax due from any taxable beneficiaries.

This amount is typically withheld from the beneficiary’s distribution and paid directly to the Register of Wills in the county where the decedent lived. The primary document used in this process is the Maryland Inheritance Tax Return, which is filed with the Register of Wills.

The tax payment is generally due when the Personal Representative distributes the property to the beneficiary. There is an incentive for prompt payment; a discount may be available if the tax is paid within a certain period after the decedent’s death. Conversely, penalties and interest will accrue if the payment is late. If there is no formal probate process, the Register of Wills will send a bill directly to the person responsible for paying the tax.