Maryland is the only state in America with both inheritance and estate taxes. How did this happen and what is our Governor Moore doing about it?
Maryland is the only U.S. state that imposes both an estate tax and an inheritance tax. Each of these taxes occur when a resident (known as “the decedent”) dies, leaving their wealth to their heirs.
The Maryland estate tax is based on the value of the decedent’s holdings at the time of their death, and currently a Maryland resident can leave up to $5 million to their heirs without paying an estate tax. The estates of Decedents leaving more than $5 million are taxed at rates as high as 16%. Surviving spouses and charitable organizations are exempt from the Maryland estate tax.
In contrast, the Maryland inheritance tax is based on the relationship between the decedent and the person receiving the inheritance. Assets passing to a decedent’s parent, sibling, spouse or descendant - known as “lineal heirs” -are exempt from the tax, while other beneficiaries, known as “collateral heirs” must pay a 10% inheritance tax.
Historical Context
The coexistence of these taxes in Maryland stems from the state's need to maintain revenue streams to finance government services for its residents. Like many other states, Maryland traditionally received a portion of the estate taxes collected by the federal government on Maryland residents’ estates. As the federal exemption was steadily raised from just $600,000 to the current $14 million per person, Maryland experienced a reduction in revenues prompting the state to “decouple” from the federal scheme in an effort to preserve state revenue. This move ensured that the state could continue to collect estate taxes independently of federal changes. Simultaneously, the inheritance tax, which predates the estate tax, remained in effect, leading to the dual-tax structure observed today.
Governor Moore's Reform Initiatives
In January 2025, Governor Wes Moore unveiled a comprehensive fiscal year 2026 budget proposal aimed at overhauling Maryland's tax landscape. One feature the Governor’s proposal would eliminate the state's 10% inheritance tax. By abolishing this tax, Maryland would align with many states that do not impose such a levy, potentially simplifying the tax system and reducing the burden on beneficiaries. According to the Maryland Comptroller, however, inheritance tax revenues in 2023 accounted for $71 million dollars in revenue.
To offset the revenue loss from eliminating the inheritance tax, Governor Moore proposes reducing the estate tax exemption threshold from the current $5 million per person to $2 million per person. Maryland’s estate tax generated $225 Million in revenue in 2023. The proposed change in the law would mean that estates valued over $2 million would now be subject to the state's estate tax, thereby broadening the tax base. The administration projects that this change will be revenue-neutral, maintaining the state's fiscal health while restructuring its tax system.
Implications for Estate Planning
The proposed changes carry significant implications forestate planning within Maryland. Eliminating the inheritance tax would simplify the process for beneficiaries, particularly those who are not direct descendants or spouses, who currently would pay the 10% tax. However, lowering the estate tax exemption to $2 million will subject more estates to taxation, necessitating more complex planning for individuals whose assets exceed this threshold. Estate planners and law firms must stay abreast of these developments to provide informed guidance to their clients, ensuring strategies are adjusted to mitigate potential tax liabilities effectively.
Conclusion
Maryland's unique position of imposing both estate and inheritance taxes is a product of its historical legislative choices aimed at maintaining state revenues amidst shifting federal tax policies. Governor Moore's recent proposals seek to modernize this framework by eliminating the inheritance tax and adjusting the estate tax parameters. As these changes progress through the legislative process, the estate planning professionals at Stouffer Legal will remain vigilant, adapting strategies for their clients to align their estate plans with the evolving tax landscape and ensuring compliance while optimizing financial outcomes.
The attorneys and professional staff at Stouffer Legal help families secure their hard-earned and inherited resources. To learn how to get your estate planning process started visit https://www.stoufferlegal.com/steps-to-estate-planning-in-baltimore-maryland-stouffer-legal
Citations:
https://www.marylandtaxes.gov/individual/estate-inheritance/estate-inheritance-tax.php
https://registers.maryland.gov/main/publications/Maryland%20Estate%20Tax%20Pamphlet.pdf
https://www.darslaw.com/news/what-governor-moores-proposed-budget-could-mean-for-your-estate-taxes/
