Among the proposals in Governor Wes Moore’s fiscal year 2026 budget is a significant change to the Maryland Estate and Inheritance Tax. The new proposal, which claims to be revenue neutral, would eliminate the inheritance tax but make up for it by lowering the estate tax exemption threshold from $5 million per person to $2 million per person. So, what could this mean for you?
Brief Background on the Law
The Maryland Estate Tax is a tax on all property over the exemption amount that passes in the event of a Maryland resident’s death.[1] The exemption amount is currently $5 million, and the tax rate is 16%. It is paid by the estate, not the beneficiaries directly. The Governor’s proposed budget would reduce the exemption amount from $5 million to $2 million. It is important to note that the exemption amount is not adjusted for inflation (federal estate tax does adjust for inflation), so while we can expect that inflation and cost of living will rise annually, the exemption will remain $2 million in 5, 10, and 20 years, resulting in more and more estates meeting or exceeding the exemption amount and being subject to the Estate Tax.
The Maryland Inheritance Tax is not based on the value of someone’s estate but the relationship of the person they leave the assets to. Spouses, lineal ancestors (e.g., parents and grandparents), lineal descendants (e.g., children and grandchildren), siblings, a former spouse of a deceased child, and qualified charities are exempt.[2] All others are subject to the 10% tax. Unless a Will states otherwise, the tax is paid by the beneficiary, not the estate. The Governor’s proposal would eliminate the inheritance tax.
Impact of the Law
The impact of these changes would be far-reaching and significant; notably, many of our clients who would not have been subject to the Maryland Estate Tax under the current legislation could be negatively affected by the proposed changes. While our firm serves businesses, individuals, and families throughout Maryland and the mid-Atlantic region, let’s examine a brief case study of an individual and a family located in Howard County, MD.
Take a person who bought a home in Columbia in the 1970s and worked for the federal government, investing in their retirement all the way. It’s not difficult to imagine that, with regular appreciation, they would be above the $2 million threshold but still under the $5 million threshold. If their entire taxable estate – including retirement account, real property, death benefits on life insurance, brokerage accounts, etc. – was $2.5 million, their estate would have an $80,000 tax obligation under the new proposed law.
On the other hand, take a couple who never had children, have an estate valued collectively at $2.5 million, and chose to leave everything to their nieces and nephews (many couples in this situation choose to benefit their nieces and nephews instead of siblings or other friends or relatives). Because a married couple can use both spouses’ exemptions (meaning, under the proposed law, they could pass $4 million Maryland Estate Tax free), they would be free from estate tax under both versions of the law. However, eliminating the 10% inheritance tax also removes the $250,000 tax burden from their nieces and nephews.
Looking Forward
Our attorneys will continue to monitor this bill and will keep our clients informed of any significant updates. In addition, we continue to track related bills, including HB 1153, which would pair the Maryland exemption with the federal exemption, and HB 1014, a standalone bill which would reduce the exemption to $2 million. Similar bills are introduced annually.
Depending on your situation, there may be strategies you can implement to reduce or eliminate the imposition of the Maryland Estate Tax. For more information about how a change in the law might impact you, please contact the Davis, Agnor, Rapaport & Skalny attorney with whom you typically work, or an attorney in our Estate Planning Practice Group.
[1] As with most things in the law, a simple sentence can come with several caveats. The tax is only imposed on assets in someone’s “taxable estate” as defined in 26 USC § 1014. It is also imposed on non-Maryland residents who have a federally taxable estate and own Maryland real property. Married couples can “port”, or transfer, a deceased spouse’s unused exemption. So, while an individual can currently pass $5 million Maryland estate tax free, a married couple can pass $10 million Maryland estate tax free.
[2] Step-children, grandchildren, etc.
