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Wills and Estates Blog

5 Things to Understand About Maryland’s Inheritance Tax

Thursday, September 22, 2016

1. It’s All About Who Inherits

Maryland has both an estate tax and inheritance tax. The estate tax is assessable if more than one million dollars passes at death. The total dollar value of the property determines whether there is an estate tax. The inheritance tax is not dependent upon the value of the estate, as even very small estates can have inheritance tax imposed. Inheritance tax is assessed on property given to a person who is further removed in relationship than a sibling. Thus, for example, a 10% tax will be assessed on property passing to a cousin, niece, nephew or friend.

2. It Applies to Non-Probate Property

Inheritance taxes, like estate taxes, are assessed on all property passing as a result of the death, not just the probate property. Thus, non-probate assets, such as life insurance and IRAs, which pass directly to the beneficiary, are still subject to inheritance tax if the person receiving the property is further removed in relationship than a brother or sister.

3. Think Carefully About Nieces & Nephews

If you are considering including your niece or nephew in your Will (or as a beneficiary on a non-probate asset) remember that they will be subject to the inheritance tax. It is worth considering whether the property should be given to your brother or sister with the hope that the property will be used for the benefit of a niece or nephew. This option requires trust that the brother or sister will use the property for the niece or nephew as this cannot be specified in the Will.

4. Giving Away a Car or a House Can Cause Problems

Be careful about giving anything other than cash to someone who will be subject to an inheritance tax. If you give someone $10,000 in cash, the inheritance tax will simply reduce the amount inherited – in this case to $9,000. (10% comes off the top to pay the inheritance tax). But if you give them a car with a bluebook value of $20,000, they will need to come up with $2,000 to pay the inheritance tax. If they can’t afford the tax, they will have to sell the car. The same is true for houses. If you give a niece your $300,000 house she will need to come up with $30,000 to pay the inheritance taxes. Thus it is important to make sure that your intended beneficiary can pay the inheritance taxes due.

5. Same Sex Couples Beware

Same sex couples who jointly own their primary residence can be for a nasty surprise after the death of their partner. Same sex partners, if not legally married, are further removed in relationship than a brother or sister. In fact, they are not related at all. Thus the inheritance tax would apply to any property the surviving partner receives. Thus the surviving partner would be subject to 10% inheritance tax on half of the value of the house inherited as a result of their partner’s death. See Domestic Partnerships: How to Avoid Costly Inheritance Taxes on the Family Home for how to avoid this problem. 

Domestic Partnerships: How to Avoid Costly Inheritance Taxes on the Family Home

Tuesday, September 20, 2016

In this modern era, families come in all shapes in sizes. It has become fairly common for same sex couples to buy a home and raise children. Then there are opposite sex couples who share their lives, including buying a house together, but forego the formalities of marriage. In 2009 the Maryland legislature enacted legislation providing some measure of protection to these more nontraditional families. Specifically, the legislature created “domestic partnerships” and imbued them with one of the legal advantages of marriage.

At death Maryland imposes an inheritance tax of 10% on all assets that pass to people who are unrelated to the decedent or who are further removed in relationship than a brother or sister. Importantly, there is no inheritance tax imposed on assets passing to a spouse. Thus when the family house, often times the most valuable asset in the estate, passes to the surviving spouse, it is subject to no inheritance tax.

People who are neither married or closely related, but who jointly own their own house have a problem. When the first dies, the second becomes the legal owner of the property but is now subject to a 10% inheritance tax on the amount inherited. Thus, for a house worth $300,000 the survivor owes the state of Maryland $15,000 (10% of the half inherited by the surviving spouse).

The 2009 legislation creates a class of people called “domestic partners.” Domestic partners are exempt from inheritance tax on a jointly owned primary residence. Second houses (or any other types of assets, for that matter) don’t get the exemption, only the primary residence. In addition, if only one of the domestic partners names is on the deed to the house, the exemption does not apply.

So how do people become “domestic partners?” They must be at least 18 years old and not related to one another. Their sex does not matter, they can be same sex or opposite sex couples. They must sign an affidavit indicating their agreement to be in a relationship of mutual interdependence. Attached to the affidavit must be two documents as proof of the interdependence. The types of documents that satisfy the statute are:

 

  • joint lease, mortgage or loan,
  • designation of one of the individuals as the primary beneficiary on the other’s life insurance or retirement plan,
  • designation of one of the individuals as the primary beneficiary of the will of the other,
  • health care or financial power of attorney granted by one of the individuals to the other,
  • joint ownership or lease of a motor vehicle,
  • joint checking account, investment or credit card,
  • joint renter’s or homeowner’s insurance,
  • coverage on a health insurance policy,
  • joint responsibility for child care, such as a guardianship or school document, and
  • relationship or cohabitation agreement.

 

The surviving domestic partner must present the affidavit and accompanying documents to the Register of Wills to be exempt from inheritance tax on the primary residence. Thus the affidavit and documents should be kept in a safe place - theoretically along with the Will and other important legal papers.

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