|July 1, 2014|
Previously published on June 13, 2014
The Maryland General Assembly has passed a bill gradually raising the estate value, that is exempt from the Maryland estate tax to match the amount exempt from the federal estate tax. Governor Martin O’Malley is expected to sign the bill. The current Maryland estate tax exemption is $1 million. The bill gradually increases the amount of the Maryland estate tax exemption- to $1.5 million in 2015, $2 million in 2016, $3 million in 2017, and $4 million in 2018. The bill provides that in 2019 the Maryland exemption will be the same as the federal exemption. The federal exemption is currently $5.34 million and it increases each year for inflation. In comparison, the State of Virginia does not impose an estate tax, and the District of Columbia imposes an estate tax with an exemption of $1 million.
Changes Do Not Affect 10% Inheritance Tax
It should be noted that Maryland also imposes an inheritance tax at a rate of 10% for assets left by the deceased to individuals other than his or her grandparents, parents (including stepparents), spouse, lineal descendants, spouses of lineal descendants, brothers, or sisters. Therefore, an inheritance left to a niece, nephew, or friend would incur a Maryland inheritance tax. The recently passed bill does not alter the Maryland inheritance tax.
If, as anticipated, the bill becomes law it is recommended that individuals have their estate planning documents, and particularly their wills, reviewed in order to determine if modifications are appropriate. One of the modifications that may be appropriate is to eliminate from wills the provisions creating what is known as a “credit shelter trust.” The wills of many married individuals provide for establishing and funding a credit shelter trust upon their death for the benefit of their spouse. The purpose of the trust is to minimize estate taxes when the surviving spouse dies.
Now that the federal exemption is $5.34 million, many Maryland residents will not be subject to the federal estate tax. However, until now they have been subject to the Maryland estate tax and the purpose of the credit shelter trust has been to minimize Maryland estate taxes upon the death of the spouse. Because the Maryland estate tax exemption may be at least $5.34 million by 2019, for many individuals, there no longer may be a need for a credit shelter trust in order to minimize Maryland estate taxes.
Non-Tax Benefits of Credit Shelter Trusts
Note that minimizing estate taxes is not the only reason for credit shelter trusts. A credit shelter trust also may serve non-tax reasons, such as providing a mechanism for managing assets for the benefit of the spouse, as well as enabling the spouse to qualify for Medicaid if the need for long term nursing home services arises. In addition, the benefit of a credit shelter trust in the context of a second marriage permits an individual to provide for their spouse and at the same time provide that any remaining assets of the credit shelter trust pass upon the spouse’s death to his or her children from a prior marriage.