After a twelve-year struggle, proponents of reforming Maryland’s estate tax laws have won a major victory in the 2014 Maryland General Assembly. HB739 (the Maryland Unified Credit Act) has recently been enacted into law. This new law will, over the next five years, gradually increase Maryland’s estate tax exemption from its current $1,000,000 level and recouple it with the federal estate tax amount (currently $5,300,000). To understand the significance of this legislation, we need to take a brief look at the history of the federal and Maryland estate tax laws over the past twelve years.
As part of the “Bush Tax Cuts,” Congress enacted legislation which over time gradually increased the federal estate tax exemption (the amount of property that can be passed at a person’s death without incurring federal estate taxes) from $1,000,000 to the current level of $5,300,000. When that legislation was enacted, most of the states also had state estate tax laws in place. Since then, the overwhelming majority of the states followed the lead of the federal government by increasing the amount of property that a person can pass at his or her death without incurring state estate taxes. Some states, such as Virginia and Florida, have abolished their state estate taxes all together.
Maryland, and a few other states, chose not to follow the federal lead. Maryland enacted legislation which “decoupled” Maryland’s estate tax system from the federal system. By “decoupling”, Maryland chose to adopt its own exemption amounts instead of following those established by Congress.
Although Maryland had hoped to increase revenue by decoupling from the federal system, several studies suggest the opposite occurred. Those studies indicate that many wealthy individuals changed their residence from Maryland to other states to avoid Maryland taxes. States such as Virginia and Florida, which have no state estate taxes, appear to be primary beneficiaries of Maryland’s decoupling from the federal system.
With HB739 becoming law, Maryland’s state tax exemption is scheduled to increase as follows:
For persons dying in 2015, the estate tax exemption will increase to $1,500,000;
For persons dying in 2016, the estate tax exemption will increase to $2,000,000;
For persons dying in 2017, the estate tax exemption will increase to $3,000,000;
For persons dying in 2018, the estate tax exemption will increase to $4,000,000; and
In 2019, Maryland will recouple with the federal amount (currently $5,000,000 indexed for inflation — which amount is anticipated to be approximately $5,900,000 in 2019).
In addition to increasing the amount that an individual can pass at his or her death free of estate taxes, Maryland’s new estate tax law will add “portability” for persons dying in 2019 and subsequent years. “Portability” simply means that if one spouse does not use all of his or her estate tax exemption, and if certain elections are made, the surviving spouse can add the unused portion to his or her estate tax exemption. This is designed to ensure that married couples, in aggregate, receive double the individual estate tax exemption.
An example of portability is as follows. For simplicity let’s ignore for the moment the indexing for inflation and assume that the estate tax exemption was a flat $5,000,000 for each of the years in question for both federal and state estate tax purposes. Further assume that the combined federal and state estate tax rate is a flat 50%. If my wife had $2,000,000 of property in her name at the time of her death, she could pass all of that property to our children free of estate tax. Since she only used $2,000,000 of her $5,000,000 exemption, her $3,000,000 unused portion could then be added to my exemption. If I had $8,000,000 in property in my name when I die, all of my property can be passed down to our children free of estate tax (my $5,000,000 plus her $3,000,000 unused amount). Without portability, her unused $3,000,000 would be lost at her death and I could only exclude $5,000,000 of my property on my death. The result without portability would be that $3,000,000 of my property would be subject to estate taxes, resulting in $1,500,000 estate taxes owed.
The question you may ask is how does all of this impact you? First, these changes will be phased in gradually over the next five years. If something were to happen during this time frame, a portion of your estate may still be subject to Maryland only estate taxes. So estate planning remains important. Secondly, changes in the law may require language in current estate planning documents (wills and trusts) be revised.
Although Maryland’s estate tax news is welcome relief, individuals impacted by these changes should contact a qualified estate planning attorney to have their estate plans reviewed in light of these new developments.
Miller, Miller & Canby has assisted clients with estate & tax planning for over 65 years. Glenn Anderson leads the Business & Tax and Estates & Trusts practice groups at Miller, Miller & Canby. As both a CPA and a practicing attorney, he has developed a recognized expertise in taxation law. Please feel free to contact Glenn or any of the estate planning attorneys at Miller, Miller & Canby with your estate & tax planning needs. View more information about Miller, Miller & Canby's Estates & Trusts practice by clicking here.