Maryland Inheritance Tax

Maryland is the only state in the country that collects two types of "death taxes"—an inheritance tax as well as a state estate tax. (Read more about the Maryland estate tax specifically.) But before you despair, know that there are ample exemptions to the Maryland inheritance tax, listed below. Typically, if you are a resident of a state that imposes an inheritance tax, or if you own real estate or tangible property in that state, the people who inherit your property would have to pay a tax on the amount they inherit. Fortunately, in Maryland, close relatives and charities, as well as some not-so-close relatives, are completely exempt from the tax. Other inheritors pay the tax at a 10% rate.

Maryland Inheritance Tax Exemptions

There are many exemptions to Maryland's inheritance tax. The inheritance tax does not apply when property is inherited by the deceased person's:

• spouse
• child (biological or legally adopted), stepchild, former stepchild, grandchild, or other lineal descendant
• parent (including stepparent or former stepparent)
• grandparent, or
• brother or sister.

The law also exempts these beneficiaries from tax:

• the spouse of a child, grandchild, or other lineal descendant of the deceased person
• the surviving spouse of a deceased child (or other lineal descendant) of the deceased person
• a business (corporation, partnership, or limited liability company) if all of its owners (stockholders, partners, or members) are exempt—for example, if all the partners of a partnership are family members of the deceased
• Maryland nonprofit organizations that have tax-exempt status under section 501(c)(3) of the Internal Revenue Code
• other nonprofits, depending on the inheritance tax laws of the states where they are organized.

And that isn't even the entire list of exemptions. No tax is imposed on the transfer of:

• the proceeds of a life insurance policy that go to a named beneficiary (not to the deceased person's estate)
• inheritances of less than $1,000
• amounts the deceased person received as compensation for Holocaust-related losses
• the deceased person's primary residence when it transfers to the deceased person's domestic partner, if it was owned by the deceased person and domestic partner as joint tenants.

Finally, if the estate qualifies for simplified probate as a small estate under Maryland law (meaning the total value of all probate property is less than $50,000), there is no inheritance tax due.

Gifts Made Before Death

Some gifts are subject to Maryland inheritance tax even if they're made while you're alive. Gifts made "in contemplation of death"—so-called "deathbed gifts"—are subject to the tax. So are gifts that are a "material part" of your property made within two years of your death. (Md. Code Ann. [Tax-Gen] § 7-201.)

How Much Inheritance Tax Is Due

The Maryland inheritance tax is 10% of the "clear value" of the inherited property. Clear value means the fair market value of the property, less certain expenses. The personal representative must file an inventory (either with the probate court or, if there is no formal administration of the estate, with the county register) of the deceased person's property.

Based on the inventory, the county register calculates the amount of inheritance tax owed and notifies the personal representative. The personal representative must pay the tax before distributing the property to the people who inherit it; if the personal representative doesn't pay it, it's up to the recipient. If there's no formal probate court proceeding, the county register in the county where the deceased person lived or owned property sends a bill to each person responsible for paying the tax.

Installment payments. If the inheritors would have to sell a small business they inherited from the deceased person in order to pay the inheritance tax, they may be able to make the tax payments over an extended period, up to five years.

Maryland's Inheritance Tax and State Estate Tax

If, by chance, you're an inheritor of property who owes both inheritance tax and state estate tax, you can subtract the amount of inheritance tax paid from the amount of state estate tax due. If the amount of inheritance tax due exceeds the amount of state estate tax due, you will not have to pay state estate tax. For more details on the intersection of inheritance tax and state estate tax, visit the Comptroller of Maryland.