You may be aware that when a person dies, their estate may be required to pay a federal estate tax if the estate is over a certain size. However, you may be less aware that Maryland also imposes its own inheritance tax in certain situations. Understanding the Maryland Inheritance Tax can help you plan your estate to avoid any unanticipated tax consequences to the beneficiaries of your estate.
What is Maryland Inheritance Tax?
The Maryland Inheritance Tax is a tax imposed on the value of property that passes from a decedent to certain beneficiaries. The tax is assessed on property that passes under a will, the intestate laws of succession (when someone dies without a will), and property that passes under a trust, deed, joint ownership, or otherwise. The Maryland inheritance tax is collected by the Register of Wills located in the county where the decedent either lived or owned Maryland property.
To Whom Does the Maryland Inheritance Tax Apply?
The Maryland Inheritance Tax applies to all beneficiaries unless they have a specific exemption from the tax. A decedent’s spouse, child, stepchild, grandchild, step-grandchild, parent, grandparent or sibling are exempt from paying Maryland Inheritance Tax. Assets passing to anyone else are subject to inheritance tax and must be reported to the Register of Wills for the county of domicile where the decedent died as a part of the estate administration process. Even if the assets pass directly to a beneficiary outside of probate (e.g. to the named beneficiary of a retirement account or a revocable trust), the value of those assets must be reported to the state and inheritance tax will be assessed if the recipient is not exempt.
How is the Maryland Inheritance Tax Assessed?
The inheritance tax on probate assets is assessed against the beneficiaries when the assets and distributions are reported to the Register of Wills by filing an Information Report during the estate administration (i.e. probate). If an estate does not go through probate, the distributor of the assets must file a full and complete inventory of the property subject to tax with the Register of Wills in the county where the decedent lived or owned Maryland property within 90 days of the death of the decedent. If the inventory is not filed within the 90-day period, the Register can initiate the process. If there is no distributor (e.g. property passes by survivorship), the person who receives the property must file the inventory. The inheritance tax must be determined before the assets are distributed.
Who is responsible for paying Maryland Inheritance Tax?
According to MD Tax-Gen Code § 7-216, the inheritance tax on property that passes from a decedent shall be paid, before it is distributed, by the person who distributes the property. The person who distributes property is liable for the inheritance tax on the distributed property until the tax is paid. In a probate estate, the person who distributes property is the Personal Representative. In a trust, distributions are the responsibility of the Trustee. Unless a decedent specified a source for paying the inheritance tax and there is sufficient money from that source, the Orphans’ Court may order sale of property to pay the inheritance tax on the property.
The inheritance tax on property that passes from a decedent shall be paid by the recipient of the property if the person who distributes the property does not pay the tax as required, or if the property passes from the decedent to the recipient without distribution (e.g. via a beneficiary pay on death provision) .
The responsibility for payment of inheritance tax can be modified by specific directions outlined in a will or trust agreement. Many wills and trusts contain provisions that direct the estate or trust to pay any inheritance tax that is due.
If you have questions about inheritance tax, or estate administration, please contact an attorney in our Estate, Probate & Trust Administration practice area.