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.