TAX TALK

Published by the Section of Taxation of the Maryland State Bar Association, Inc.

· Jonathan Z. May, Chair ·  
Stephanie Ketchum, Editor, 
Catherine Mary Rafferty, Asst. Editor

Changes to Maryland Estate Tax
By Edwin G. Fee, Jr.

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. Maryland, like many other states, 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 permitted for those dying in 2002 is 75% of what it would have been in 2001. This percentage is reduced to 50% in 2003 and 25% in 2004. In 2005 the credit is replaced by a deduction.

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 (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. This amendment to the Maryland estate tax is known as a "partial decoupling" from the federal estate tax.

In the past, the Maryland estate tax reduced the federal estate tax on a dollar for dollar basis. In 2002, however, an estate may have to pay Maryland estate tax equal to 100% of the amount of the federal credit for state death taxes, but the estate will only receive a federal credit for 75% of the amount. The 25% difference represents a net increase in the total tax. This difference will become greater as the federal credit is reduced even further between 2003 and 2005.

Fortunately, the 2001 federal tax act provided some relief from the federal estate tax, and, in turn, from the Maryland estate tax. In general, an estate of someone who died in 2001 was not subject to the federal estate tax or the Maryland estate tax unless the estate was greater than $675,000. This was the amount that was exempt from tax based on the federal unified credit. The 2001 federal tax act increased the amount of the credit so that the applicable exclusion amount is $1,000,000 in 2002 and 2003; $1,500,000 in 2004 and 2005; $2,000,000 in 2006, 2007, and 2008; and $3,500,000 in 2009. Thus, in general, an estate of someone dying in 2002 is not subject to federal or Maryland estate tax unless the estate exceeds $1,000,000. In 2009, there will be no federal or Mary land estate tax unless the estate exceeds $3,500,000.

In 2010, the federal estate tax is scheduled to be repealed. At that point the Maryland estate tax would be calculated based on the $3,500,000 applicable exclusion amount in effect immediately prior to repeal. Due to a quirk in the 2001 federal tax act, the federal estate tax would reappear in 2011, and the applicable exclusion amount would drop down to $1,000,000 again. The Maryland estate tax also would be based on the lower exclusion amount again.

Although most estate and trust practitioners believe it is unlikely that Congress would allow the estate tax to disappear in 2010, only to reappear in 2011, that is what current law provides. Many estate and trust practitioners believe that Congress either will vote to repeal the federal estate tax completely in 2010 and subsequent years or will enact a more generous exclusion amount (e.g., $4,000,000 or $5,000,000). For a fuller discussion of the 2001 changes to the federal estate tax, see "So-Called Repeal of the Estate Tax," The Advocate (July/Aug. 2001).