By Jessica L. Estes
Effective July 1, 2018, for individuals dying on or after January 1, 2019, the Maryland estate tax exemption will be $5 million. This is a drastic change from the 2014 law that gradually increased the Maryland estate tax exemption each year until 2019 when it was scheduled to match the federal basic exclusion amount.
Under the 2014 law, Maryland’s estate tax exemption was scheduled to increase beginning January 1, 2019 to match the federal exclusion amount, which was anticipated to be $11.4 million. Further, under the 2014 law, Maryland’s estate tax exemption would have continued to increase based on inflation. Now, however, Maryland has decoupled from the federal exclusion amount and Maryland’s exemption amount will remain static at $5 million, with no adjustment for inflation in the future.
Though, Maryland’s new law does provide that a surviving spouse may use any unused portion of his/her deceased spouse’s Maryland exemption (“portability”). The unused portion of the deceased spouse’s exemption would be in addition to the surviving spouse’s $5 million exemption, but only if certain requirements are met. For predeceased spouses dying on or after January 1, 2019, there must be a timely filed Maryland Estate Tax return on which is calculated the unused portion and an irrevocable election is made to use such unused portion at the surviving spouse’s death. For predeceased spouses dying before January 1, 2019, or who were not Maryland residents and did not have taxable property within Maryland, there must be an election under §2010(c) of the Internal Revenue Code (“IRC”) on the predeceased spouse’s Federal Estate Tax return.
Moreover, Maryland’s new law does not provide any retroactivity, so if you have a predeceased spouse that died before July 1, 2018 (the date this new law takes effect) and there was no Federal Estate Tax return filed with an election under §2010(c) of the IRC, you will not be able to take advantage of the portability component of the new law. Similarly, if you have a spouse that dies prior to the end of this year, you will want to consult with an attorney to make sure a timely election is made to preserve any unused portion of your predeceased spouse’s Maryland exemption.
In summary, instead of an estimated $11.4 million exemption per person, both federally and for Maryland, individuals dying on or after January 1, 2019 will now be limited to a $5 million exemption for Maryland, with the possibility of portability for married couples, but only if timely elections are made. Even though this is roughly a $6.4 million difference, Maryland still does not have a gift tax so any gifts during an individual’s lifetime would not count against their $5 million Maryland exemption at death.