If you live in Maryland and leave behind more than $5 million (for deaths occurring in 2021), your estate might have to pay the Maryland estate tax. The Maryland estate tax is separate from the federal estate tax, which is imposed only on estates worth more than $11.7 million (for deaths in 2021). So even if your estate isn't large enough to owe federal estate tax, it might still owe Maryland estate tax.
But it's not just Maryland residents who might owe Maryland estate tax. If you're a nonresident but own real estate or other tangible assets (a boat or plane, for example) located in Maryland, your estate might also need to file a Maryland estate tax return.
Estate tax versus inheritance tax. Just to make matters more confusing, Maryland also imposes another type of death tax, called an inheritance tax. (In fact, Maryland is the only remaining state in the U.S. that has both a state estate tax and a state inheritance tax. But before you despair, know that the amount of estate tax due will be reduced by the amount of inheritance tax paid—so your inheritors are not really being doubly taxed.) In addition, how much inheritance tax your inheritors will pay is based on your inheritors' relationship to you. In Maryland, spouses, children, grandchildren, siblings, and other close family members don't pay any inheritance tax at all. For more details, see Maryland Inheritance Tax.
If you die while a resident of Maryland, the personal representative or executor of your estate must file the Maryland estate tax return if your "gross estate" plus all taxable gifts you made in the year prior to your death add up to more than $5 million.
The gross estate will include just about all of the property you leave behind, such as:
Co-owned property. If you own assets with someone else, generally only your share will be included in your estate. In other words, if you and your spouse own your house together, half of its value would be included in your estate.
Nonprobate assets. Notably, your gross estate also includes non-probate assets. For example, the property you hold in a revocable living trust avoids probate, but it does not avoid estate taxes, and is counted in your gross estate.
Portability. The federal estate tax regime allows a surviving spouse to use the deceased spouse's unused portion of the exemption—a feature called "portability." Most states with state estate taxes do not allow this, but Maryland does. For example, if one spouse dies with an estate of $3 million, the surviving spouse may use the "unused" $2 million of the first spouse's exemption; when the surviving spouse dies, estate tax is not due unless the surviving spouse's estate exceeds $7 million (the individual $5 million exemption plus the unused $2 million from the spouse's exemption).
Nonresidents. If you're a nonresident owning real estate or tangible property in Maryland, your executor will need to file a Maryland estate tax return if your gross estate exceeds $5 million. As discussed below, the actual tax due will be based on the percentage of Maryland property in your total estate.
Even if a Maryland estate tax return must be filed, it doesn't necessarily mean that the estate will owe estate tax. Your estate might be able to take certain deductions that lower the value of your estate below $5 million, in which case no estate tax will be due. These deductions include:
If your estate owes estate tax, how much will it actually owe? In Maryland, the first $5 million of the estate is not taxed. On the portion that exceeds $5 million, the estate tax rate is 16%. (Compare this to the current federal estate tax rate of 40%.) Because of the way the estate tax is structured, your estate might end up paying less than what amounts to a 16% rate, but it would not pay more.
If you're a nonresident of Maryland, a ratio (essentially the value of your property that is located in Maryland to the total value of your gross estate) is further used to determine the tax your estate owes.
If your inheritors also owe an inheritance tax, the amount of inheritance tax paid is subtracted from the amount of estate tax owed.
If a Maryland estate tax return is required, it's due nine months after the date of death. If your estate misses the deadline, the tax collector mails a notice and demand for the return, and the tax is due 30 days after the the notice is mailed. Failure to file within that time will result in a penalty of 25%.
If you owe Maryland estate tax but not federal estate tax (that is, if you fall between the state and federal exclusion amounts), you'll also have to attach a "pro forma" version of the federal estate tax return with Maryland—this federal return is not actually filed with the federal government, but is used by Maryland as supporting documentation.
Your executor will likely have to hire professional help (an experienced lawyer or CPA) to prepare the Maryland estate tax return. The estate's funds can be used to pay for professional fees. The Maryland Comptroller provides state tax forms, instructions, and further information.