FROM: Craig Berman, Esquire

On May 26, 2004, the Governor signed the Budget Reconciliation and Financing Act of 2004, which now causes a Maryland estate tax to be due on decedent’s dying on January 1, 2004, or later, on a taxable estate in excess of $1,000,000.

The reason for the new Maryland estate tax is the potential loss of revenue from the federal estate tax. Prior to the new Maryland estate tax law, the Maryland estate tax was linked to the federal estate tax. The federal estate tax had allowed a tax credit against the federal estate tax for estate taxes and other death taxes paid to Maryland. Maryland took advantage of this credit by imposing an estate tax equal to the federal state death tax credit. Therefore, there was no additional tax burden for Maryland estate taxes. However, since 2001, the federal estate tax has been phasing out with exemptions increasing each year, to an eventual repeal in 2010 (but the federal estate tax will be reinstated in 2011, unless the repeal is made permanent).

So, what does this mean? A Maryland estate tax return may have to be prepared and a Maryland estate tax may be due, even if a federal estate is exempt from the federal estate tax. Maryland estate tax rates for taxable estates in excess of $1,100,000 will range between 5.6% and 16% (16% rate for estates in excess of $10,100,000).

So, what should you do? (1) Revisit your estate planning documents if the new Maryland estate tax did not exist when your estate plan was created. Your Wills and Revocable Trusts can be changed to include provisions to deal with the new Maryland estate tax. For instance, Wills for married couples could include “disclaimer trusts” in conjunction with credit shelter bypass trusts which are designed to permit a surviving spouse to fund a federal estate tax saving credit shelter bypass trust with appropriate assets, or, allow assets to pass to himself or herself to defer Maryland and federal estate taxes. (2) Revisit your gift planning to minimize taxable estates. For instance, life insurance policies can be transferred to life insurance trusts to remove their value from the taxable estate. Or, $11,000 annual exclusion gifts can be considered to reduce the value of taxable estates.

The bottom line is that even if federal estate taxes are repealed, or do not effect your personal estate, the Maryland estate tax probably will be a factor. Please call me if you want to discuss the new system and how it may impact your estate plan.