Maryland Estate Tax

Even if the estate you’re handling doesn’t owe federal estate tax, it might still owe Maryland a separate estate tax. For 2011 deaths, estates with a total value of more than $1 million are subject to Maryland estate tax. The state estate tax rate is 16%, assessed on the taxable amount that exceeds $1 million.

There is also an inheritance tax in Maryland; unlike the estate tax, the inheritance tax rate is based how closely an inheritor is related to the deceased person.

Which Estates Must File

If the estate of a Maryland resident has a gross value of more than $1 million, the executor must file a state estate tax return. (In contrast, federal estate tax returns are required only for estates of more than $5 million.) But because you can deduct many expenses from the gross estate, the value of the taxable estate may actually fall below $1 million. In that case, the estate won’t owe any tax, but a Maryland return must still be filed.

The estate of someone who was not a state resident may also need to file a Maryland estate tax return. A return is required if the person owned valuable Maryland real estate or kept other tangible assets (for example, a boat or other vehicle) in the state.

The Value of the Gross Estate

To determine whether or not you’ll need to file a Maryland estate tax return, add up the value of the deceased person’s gross estate. Count all kinds of assets, including:

• Real estate in Maryland
• Bank accounts, certificates of deposit, and investment accounts, including those for which a payable-on-death beneficiary was named
• Vehicles and other personal property kept in the state
• Proceeds from life insurance policies on the deceased person’s life, unless that person didn’t own the policy
• Retirement account funds
• Business interests (sole proprietorship, limited liability company, or small corporation)

If an asset was owned with someone else, count only the value of the deceased person’s interest. If property was held in joint tenancy with someone else, then include the total value except for funds that the other person contributed. For example, if the deceased person contributed all the money to a joint bank account, then you would include the entire amount in his or her estate.

Also include these assets:

• Taxable gifts made during life. If the deceased person made taxable gifts (more than the annual exclusion amount, which is currently $13,000 per year per recipient), then add the taxable amount of those gifts to the value of the estate.
• Some transfers made fewer than three years before death. If the deceased person transferred a life insurance policy to an irrevocable life insurance trust within three years of death, you must include the value of the policy in the estate. 
• Assets held in a trust. The value of assets the deceased person held in a revocable living trust or other trusts the deceased person controlled is included in the taxable estate.

No ‘Portability’ for Spouses

Beginning with deaths in 2011, federal tax law allows spouses to share their individual federal estate tax exemptions. If the first spouse to die doesn’t use up of his or her entire $5 million federal estate tax exemption, then the second spouse’s estate can use anything that was left over by the first spouse. This is called “portability” of exemptions. It is currently set to expire at the end of 2012, but Congress may extend it—or end it sooner.

Maryland does not allow spouses to share their individual exemptions.

Property Left to a Surviving Spouse

Property left to a surviving spouse is exempt from state estate tax, no matter what the amount. 

Forms to File

The Maryland estate tax return, Form MET-1, must be filed nine months after the death unless you apply for and receive an extension of time to file. (Use Form MET-1E to request an extension.) Any tax due must be paid nine months after the death, whether or not you get an extension to file, unless you have been granted an alternative payment schedule. Alternative arrangements include deferring payment for up to a year or paying in installments.

The return is filed with the Comptroller of Maryland or the register of wills in the county in which you’re conducting the probate. With the return, submit a certified copy of the death certificate and the will or trust, if any.

If you file with the Comptroller, you must also submit a document certifying that you’ve paid the inheritance tax; the certification form is available from the county register of wills. If you file with the register of wills, the register’s office will complete Section III of the estate tax return, certifying that the inheritance taxes have been paid.

Even if the estate isn’t required to file a federal estate tax return (IRS Form 706), you must complete the federal return and file it with the state return.

You can find state estate tax forms and instructions on the Maryland Comptroller’s website.

Get Expert Help With the Returns

If you are required to file a Maryland estate tax return, it’s time to get expert help. Both the state and federal returns are long and complicated, and if you’ll need both if the gross value of the estate exceeds $1 million. Hire a lawyer or CPA who has lots of recent experience with Maryland estate tax returns and procedures; the fee will almost certainly be several thousand dollars to prepare both returns, but it will be well worth it.