Maryland Increases its Estate Tax Exemption and Introduces Portability

Are you a Maryland resident facing the possibility of incurring Maryland estate tax because your estate – including house, life insurance, retirement assets, and investments – exceeds $1 million?

If so, you may be considering moving away from Maryland – possibly to Virginia, Florida, North Carolina, or one of the other 28 states without estate tax – to reduce your tax burden. Between 1992 and 2011, many Marylanders moved to other states, taking with them over $7 billion in income, as well as the related taxes on income, sales, and property. Clearly, Maryland’s estate tax has contributed to the impetus to move. For more evidence, check out Forbes’ “Where Not to Die” list for 2014.

In an effort to stem the outgoing financial tide and enhance Maryland’s economic competitiveness, Maryland has recently enacted changes to its estate tax law. The state has

raised the tax exemption in stages from the current $1M to $4M by 2018 and, in 2019, will “recouple” the Maryland exemption with the federal exemption.

The federal exemption currently is $5.34M, and is indexed for inflation.  Assuming 2% annual inflation, by 2019 the federal exemption – and the then recoupled Maryland exemption – could approach $6M.  For Maryland residents, this change should reduce the Maryland estate tax burden and may eventually make estate planning easier, although perhaps not for a few years.

Gifting, however, may continue to be a good planning strategy since Maryland does not have a gift tax.

Beginning in 2019, Maryland will introduce “portability.” This will allow a surviving spouse to use both his or her own Maryland exemption plus the unused portion of their deceased spouse’s exemption – namely, the portion of the deceased spouse’s exemption not needed by the deceased spouse’s estate to save estate tax. In effect, in 2019 a married couple may have a combined estate tax exemption of about $12 million, even with the use of simple wills.

With these changes to the Maryland estate tax, moving from Maryland to save tax may be losing some of its appeal. Good news for those who would prefer to stay in the area.