As of press time, there were several bills pending in the Maryland General Assembly that would dramatically affect the Maryland estate tax. Senate Bill 99 and House Bill 321 are identical bills that were crossfiled in both chambers of the legislature. These bills would repeal the changes that were made to the Maryland estate tax in 2004. Another piece of legislation, House Bill 136, would repeal not only the 2004 changes, but also changes to the Maryland estate tax that were made in 2002. To understand the pending legislation, a brief summary of the recent history of the Maryland estate tax is in order.

In response to the 2001 changes to the federal estate tax, the 2002 Maryland General Assembly amended the Maryland estate tax. Under federal law in effect prior to 2002, a decedent’s estate received a federal estate tax credit for state death taxes paid. Like many other states, Maryland has an estate tax that is based on this federal credit. As part of the federal Economic Growth and Tax Relief Reconciliation Act of 2001, the federal credit for state death taxes was reduced gradually from 2002 to 2004, and the credit was replaced by a deduction in 2005. For a more detailed description of the federal changes, see “The Uncertainty of Death Taxes”, Bar Bulletin (February 2003) and “Is the Death of the Death Tax Greatly Exaggerated?” Bar Bulletin (February 2002).

If the Maryland General Assembly had not acted, then the Maryland estate tax would have been reduced gradually until it was eliminated in 2005. To prevent this reduction in state tax revenue, the General Assembly amended the Maryland estate tax as part of the Budget Reconciliation and Financing Act of 2002 (enacted as Senate Bill 323 and signed into law by the governor as Chapter 440). For those dying in 2002 or later, the Maryland estate tax is calculated as if the federal credit for state death taxes had not been reduced.

Last year, in an effort to balance the state budget deficit, the Maryland General Assembly passed the Budget Reconciliation and Financing Act of 2004 (introduced as Senate Bill 508, signed by the Governor on May 26, 2004, and enacted as Chapter 430). Until the passage of this legislation, the exemption from the Maryland estate tax was the same as the exemption from the federal estate tax. The exemptions had been $600,000 since the mid-1980s, and they began to increase in $25,000 increments in the late-1990s. By 2001 the exemptions had reached $675,000. Due to changes in the federal tax law, the federal and Maryland exemptions increased to $1 million in 2002 and to $1.5 million in January 2004. Nevertheless, the legislation passed by the Maryland General Assembly in 2004 reduced the exemption from the Maryland estate tax back to $1 million, retroactive to January 1, 2004. For more a more detailed description of the 2004 changes, see “Maryland Estate Tax Increases,” Bar Bulletin (September 2004).

Senate Bill 99 and House Bill 321 would repeal the 2004 changes, and the Maryland estate tax exemption would increase to $1.5 million again. These bills would take effect on July 1, 2005, and would be applicable to decedents dying after December 31, 2004. Unfortunately, the estates of decedents who died in 2004 would receive no relief from these bills.

House Bill 136 would repeal not only the 2004 changes to the Maryland estate tax but also the 2002 changes. As a result, the Maryland estate tax would be eliminated. This bill would have the same effective date as Senate Bill 99 and House Bill 321; accordingly, the estates of decedents who died in 2004 would receive no relief from this bill, either.

The Senate Budget and Taxation Committee held a hearing on Senate Bill 99 on February 2, but as of press time no further action had been taken on that bill. The House Ways and Means Committee held a hearing on House Bill 136 and House Bill 321 on February 8, but as of press time no further action had been taken on those bills, either. This inactivity could be an indication that these bills are unlikely to pass. Nevertheless, many estates and trusts practitioners were surprised by the passage of the 2004 changes late in the legislative session. Therefore, it would be prudent to monitor pending legislation until the adjournment of the Maryland General Assembly in April.

In anticipation that the bills discussed above would not pass, the MSBA Estate & Trust Law Section Council has drafted legislation that would permit a qualified terminable interest property election for state purposes only. This legislation would allow a trust to receive the marital deduction for purposes of the Maryland estate tax and to be treated as part of the credit shelter (or bypass) trust for federal estate tax purposes. As a result, the full federal exemption would be preserved at the first spouse’s death, and the Maryland estate tax would be deferred until the surviving spouse’s death. As of press time, this legislation had not been introduced.

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Publications : Bar Bulletin: March, 2005