The End of the 12 Year Maryland Estate Tax Experiment

The Maryland legislative session of 2014 began with a bang. Specifically, the House introduced HB 739 that presumably could cause major changes to the way you and I plan for the inevitable. Yesterday, the Maryland Senate approved Maryland State HouseHB 739 that will recouple the Maryland estate tax exclusion with that of the federal government.

For over a decade, Maryland has taken the position that it would operate separate from the federal system regarding the taxation of estates. When the federal government began making changes to the federal estate tax system in the early 2000’s, Maryland froze the estate tax exclusion at $1,000,000 per estate and capped the tax rate on any amount in excess of the exclusion at 16% and completely decoupled itself from the federal system.

Meanwhile, the federal estate tax exclusion has grown to over $5,000,000 and the concept of portability for married individuals was created. However, Maryland stood strong and chose to remain decoupled.

After a dramatic 12 year experiment, Maryland has decided to recouple itself to the federal system. With a vote of 119 to 14, HB739 passed in the House on March 7, 2014 and the bill passed in the Senate with a 36 to 10 vote on March 20, 2014. All that remains before this bill becomes law is Governor O’Malley’s signature of approval. Specifically, HB 739 proposes to gradually increase the estate tax exclusion, which currently sits at $1,000,000 per estate, to the federal level at $5,000,000 per estate.

Current Law
In 2002, the federal government began making substantial changes to the federal estate tax system. To avoid eliminating state estate tax revenue, Maryland enacted several pieces of legislation between 2002 and 2006, which froze the state estate tax exclusion at $1,000,000 and capped the tax rate on any amount in excess of the exclusion at 16%.

While the concept of portability has been presented on multiple occasions, the Maryland legislature has yet to approve the device.

As the law currently stands, if you or a loved one passes away this year, your estate will be able to exclude $1,000,000 of your taxable estate from estate tax. Any excess above and beyond the exclusion will be taxed at a rate of 16% and your estate will need to file a return and pay the outstanding tax liability.

HB 739 Changes
Upon enactment of the bill, the Maryland estate tax exclusion will gradually increase as follows:

• If you (or a loved one) passes away in 2014, the estate will be able to exclude $1,000,000.
• If you pass away in 2015, your estate will be able to exclude $1,500,000;
• If you pass away in 2016, your estate will be able to exclude $2,000,000;
• If you pass away in 2017, your estate will be able to exclude $3,000,000; AND
• If you pass away in 2018, your estate could exclude up to $4,000,000.

The proposed bill does not change the cap of 16% on the excess over the exclusion amount. Therefore, any excess above and beyond the exclusion amount for a given year will continue to be taxed at a rate of 16%.

More Changes to Come?
Portability is a term used in the federal estate tax realm, where the estate of a married individual would pass any unused estate tax exclusion amount to the surviving spouse’s estate upon his/her death. The surviving spouse may exclude the sum of any unused exclusion from the deceased spouse’s estate and her own estate exclusion amount.

Currently, Maryland estate tax does not allow for portability of unused estate tax exclusion that may remain after a married individual dies. Early this month, the House introduced HB 1214 which proposes to establish portability as a mechanism that may be used for married individuals that do not exhaust their individual estate tax exclusion. By allowing “portability” the surviving spouse whose estate increased as a result of deceased spouse’s death would then be able to include the unused exclusion of the deceased’s estate with surviving spouse’s estate tax exclusion amount. In essence, if you die in 2014 and your estate tax exclusion only amounted to $500,000, then your surviving spouse would be able to claim your unused portion estate tax exclusion. Thus, your surviving spouse’s estate tax exclusion would increase to $1,500,000[1].

What does this mean to you?
With recoupling to the federal system in sight, the stresses of planning for the inevitable may have been relieved ever so slightly. By recoupling with the federal system, you as an individual can plan with ease, as your estate plan will accounts for both the Maryland and federal systems without requiring creative planning to address each system separately. Unless your estate exceeds $5,000,000 and potentially $10,000,000 if you are married, creative planning for estate tax purposes may no longer be necessary.

[1] Your unused exclusion amount ($500,000) + Surviving Spouse’s exclusion amount ($1,000,000) = Surviving Spouse’s Total Exclusion ($1,500,000).