Let's face it: tax law can be confusing. But when it comes to understanding inheritance tax and estate tax, it doesn't have to be. As a Maryland Estate and Trust Law Firm, we're here to simplify these concepts for you, ensuring you can make informed decisions about your financial future.
In a nutshell, both inheritance and estate taxes relate to the money or property you leave behind when you pass away. However, they differ in who is responsible for paying the tax and what exactly is taxed. Let's explore these differences further.
First, the estate tax. This is a tax on your right to transfer property at your death. It takes into account everything you owned or had certain interests in at the date of death—your "gross estate." This can include cash, real estate, insurance, trusts, annuities, business interests, and other assets.
Here's where the good news comes in: as of 2023, the federal government exempts estates worth less than $12.92 million from this tax. And in Maryland, the state exemption is $5 million. This means if the total value of your estate is less than these amounts, your heirs won't owe any estate tax. It's worth noting that these exemptions are adjusted periodically for inflation or changed by law, so it's essential to keep an eye on changes.
Additionally, any property transferred to a surviving spouse is generally exempt from the tax, regardless of the estate's size. This is known as the "unlimited marital deduction." Beware: this “free ride” provided to surviving spouses: when the entire estate is left to the surviving spouse, the lifetime exemption amount of the first spouse is lost. This can be a costly mistake for high net worth families.
The tax is calculated based on the net value of your estate—what remains after deductions like funeral expenses, debts, and bequests to charity. So, even if your gross estate is over the exemption limit, you may find the taxable amount is below the threshold after all deductions.
Now, let's talk about inheritance tax. This is a state tax that some (but not all) states impose on people who inherit property. It's not based on the total value of the estate, but on who receives the property and the value of the specific bequest.
Maryland is one of the few states that impose an inheritance tax. But again, there's good news. Certain family members are entirely exempt from this tax, including spouses, children (including adopted children and stepchildren), parents, and siblings.
For those who aren't exempt, the tax is generally a flat 10% of the property's value that they inherit. However, there are exemptions for real property passed to a domestic partner and for individuals if the total value they receive is $1,000 or less.
It's crucial to remember that these taxes are typically the responsibility of the estate or the person inheriting, not the person who passed away. With estate tax, the executor of the estate usually pays it from the estate's funds before distribution to the heirs. For inheritance tax, the person who inherits the property generally pays it. You can specify who will be responsible for the payment of taxes in your will or trust.
In conclusion, both estate and inheritance taxes can affect what you leave to your loved ones when you pass away. The good news, however, is that due to exemptions and who the taxes apply to, most Marylanders won't have to worry about either. But as with all tax matters, situations can vary widely. For peace of mind and to ensure you understand how these taxes might impact you, it's always wise to consult with a knowledgeable estate planning attorney or tax professional.
To learn more about inheritance and estate taxes and how Stouffer Legal can help guide you through the estate planning process, you can click here to view our online Estate Planning, Asset Protection and Elder Law workshop.
