By: Shannon K. Mumaw – Associate Attorney
Just as there are taxes owed during life, there are taxes owed upon death. One such tax imposed after death is inheritance tax. Inheritance tax is imposed on any property passing from a decedent to a beneficiary, except for property passing to those beneficiaries who are statutorily exempt from inheritance tax. It is seen as a privilege to receive an inheritance, so naturally a tax will follow.
The tax is imposed on the beneficiary who receives the property; however, the personal representative or trustee who is making the distribution is ultimately liable until the tax is paid. A will or trust may shift the burden of payment and provide that the tax shall be paid from the estate or trust funds, but the tax is still imposed on the individual who receives the distribution. This tax is determined at the time the property is received. Therefore, if at the time of receipt the property is subject to a lien such amounts are deductible.
Persons Exempt from Inheritance Tax
Under Maryland Code, Tax-General § 7-203, the following persons related to the decedent are exempt from inheritance tax: a spouse of the decedent; a child of the decedent; a grandchild of the decedent; a great-grandchild of the decedent (and further lineal descendants of a child of the decedent); a parent of the decedent; a grandparent of the decedent; a spouse of a child of the decedent or a spouse of further lineal descendants of a child of the decedent; a sibling of the decedent; or a charitable organization. For the purpose of determining exemption status, a “child” includes a stepchild or former stepchild and a “parent” includes a stepparent or former stepparent.
Persons subject to inheritance tax include friends of the decedent, nieces and nephews, aunts and uncles, cousins, and more distant relatives.
Property Subject to Inheritance Tax
What property is subject to inheritance tax? The quick answer is all property having a taxable situs in Maryland. Any real property located outside of Maryland is not subject to Maryland inheritance tax, rather the laws of the state in which the property is located will apply. All other property is deemed to have a taxable situs in Maryland if the decedent was a Maryland resident at the time of his or her passing. This includes – but is not limited to – tangible personal property such as personal effects, vehicles, and jewelry, retirement and non-retirement assets, stocks, and bonds.
However, there are a few limitations that help narrow the broad application of inheritance tax on all property deemed to have a taxable situs in Maryland. One such limitation applies to income earned after the decedent’s date of death. This tax does not apply to the income, including gains and losses, that accrues on probate assets after the decedent’s death. However, it is important to note that this limitation is only applicable to probate assets.
The value of the property itself may also affect whether the tax will be imposed. If the total value of the property passing to any one person does not exceed $1,000, inheritance tax will not apply, regardless of that individual’s relation to the decedent. Additionally, this tax will not be imposed on the receipt of property that is distributed from a small estate.
Another exception exists for life insurance proceeds. This tax is not assessed on the receipt of life insurance proceeds, regardless of the individual’s exemption status – unless the proceeds are payable to the decedent’s estate. If life insurance proceeds are payable to the decedent’s estate, the proceeds will ultimately pass to the individual designated under the decedent’s will or by the laws of intestacy, and the individual’s relation to the decedent will thereby determine whether inheritance tax is imposed.
It is a common misperception that placing an asset in a trust will shield the asset from inheritance tax at death. Inheritance tax applies to both probate and non-probate assets. In other words, nonexempt transfers from a decedent’s trust are subject to inheritance tax just as all other nonexempt transfers after death.
It is also a common misperception that inheritance tax and estate tax are one and the same. Inheritance and estate taxes are both assessed after death, but each are assessed differently and independently – perhaps this will be our topic of discussion next time.
Shannon K. Mumaw is an Associate Attorney with Elville and Associates and the leader of the firm’s busy Estate and Trust Administration Department. Through her guidance, she partners with clients as they address the sometimes complex matters of the administration of loved ones’ estates from start to finish, including helping navigate the probate process, inventory and information reports, accountings, and much more. She also addresses clients’ needs as they relate to the estate planning process. Shannon may be reached at email@example.com, or by phone at 443-393-7696 x116.