Maryland Estate Tax Increase
The Maryland General Assembly passed the Budget Reconciliation and Financing Act of 2004 on April 7, 2004, and the Governor signed the bill on May 26, 2004. This legislation causes a substantial increase in the Maryland estate tax, and it affects individuals and couples having more than $1 million in total assets.
Until the passage of this legislation, the exemption from the Maryland estate tax was the same as the exemption from the federal estate tax. The exemptions had been $600,000 since the mid 1980s, and they began to increase gradually in the late 1990s. By 2001 the exemptions had reached $675,000. The exemptions increased to $1 million in 2002, and to $1.5 million in January 2004.
The legislation passed by the Maryland General Assembly reduces the exemption from the Maryland estate tax to $1 million. Individuals with assets in excess of $1 million may wish to consider methods to reduce their potential exposure to the Maryland estate tax, such as by making gifts.
In addition, many married couples have wills that are designed to take advantage of the exemption from the federal estate tax through the use of a “bypass trust” (also known as a “credit shelter trust” or a “family trust”). As a result of this legislation, existing wills inadvertently could cause payment of a significant Maryland estate tax at the death of the first spouse to die. If the bypass trust is fully funded at the first spouse’s death to take advantage of the $1.5 million federal exemption, this will cause a Maryland estate tax of $64,400.
There are several ways to deal with this situation. One option simply is to pay the additional Maryland estate tax at the first spouse’s death. By doing so, it is possible that the family could save a greater amount in federal estate tax at the second spouse’s death. Nevertheless, the exemption from the federal estate tax is scheduled to increase to $2 million in 2006, and to $3.5 million in 2009. Depending on the value of a couple’s assets, there might not be any federal estate tax at the second death.
Another option is to cap the amount funding the bypass trust at $1 million. This would prevent the imposition of Maryland estate tax at the death of the first spouse, but it would result in wasting a portion of the first spouse’s exemption from the federal estate tax. Other options involve the use of a disclaimer bypass trust or a QTIP (“qualified terminable interest property”) marital trust. An explanation of these latter options is beyond the scope of this alert. The bottom line is that you should determine the current value of your assets, and you should contact us to discuss whether it is necessary to make any changes in your estate planning documents.
This WTP Alert has been prepared for general informational purposes only and is not intended as legal advice.