How Are Trusts Taxed in Maryland?

Trusts allow individuals to safeguard their wealth, minimize tax liabilities, and ensure a smoother transition of assets to beneficiaries. Still, these estate planning instruments may be subject to unique tax obligations. It is important for settlors, trustees, and beneficiaries to be aware of these obligations and their potential impacts.

In Maryland, trusts face distinct tax implications based on their classification, residency status, and the intricacies of state and federal tax laws. For instance, resident trusts are taxed on their worldwide income, while non-resident trusts are subject to taxation only on income derived from Maryland sources. Moreover, the impact of Maryland’s inheritance tax and federal taxation rules further contributes to the complexity of how trusts are taxed in our state. Thankfully, our legal team can review the specifics of your case to determine how your trust may be taxed.

Seek assistance from our Maryland estate and trusts lawyers at Rice, Murtha & Psoras by dialing (410) 694-7291.

Tax Implications for Different Types of Trusts in Maryland

In Maryland, trusts are subject to specific taxation rules that vary based on their classification. There are revocable trusts, irrevocable trusts, and testamentary trusts, each with its own set of tax implications.

Revocable Trusts

Revocable trusts in Maryland are subject to specific tax implications. As these trusts allow the grantor to modify or revoke them during their lifetime, they are typically treated as a pass-through entity for tax purposes. This means that income earned by the revocable trust is reported on the grantor’s individual income tax return. Consequently, the trust itself does not file a separate income tax return. This simplifies the tax process for the grantor.

Irrevocable Trusts

Irrevocable trusts, on the other hand, have distinct tax considerations in Maryland. Irrevocable trusts are treated as separate legal entities, and they are responsible for filing their own income tax returns. The income generated by the irrevocable trust is taxed at the trust level, using the state’s graduated income tax rates. Our Baltimore estate and trusts lawyers can help trustees and beneficiaries of irrevocable trusts remain aware of these tax obligations and plan accordingly.

Testamentary Trusts

Testamentary trusts, created through the provisions of a will, also have specific tax implications in Maryland. Similar to irrevocable trusts, testamentary trusts are separate taxable entities. They file income tax returns, and the income they generate is subject to state income tax. Trustees and beneficiaries of testamentary trusts should be attentive to the specific tax rules governing these trusts to ensure compliance with Maryland tax regulations and to optimize tax planning strategies.

Taxation for Resident vs. Nonresident Trusts in Maryland

In Maryland, there are also different income tax obligations for resident and non-resident trusts. Fortunately, during your free case review, our legal professionals can explain how your trust may be impacted by either of the following:

Income Tax for Resident Trusts

Resident trusts in Maryland are subject to particular income tax regulations. These trusts, established by residents of the state, are taxed on their worldwide income. This includes income generated from various sources such as interest, dividends, and capital gains. The state applies its graduated income tax rates to determine the tax liability of resident trusts. Trustees and beneficiaries of resident trusts should be cognizant of these tax obligations when managing the trust’s financial affairs.

Income Tax for Non-Resident Trusts

Non-resident trusts in Maryland are also subject to income tax, but the taxation is more limited in scope. These trusts are taxed only on income derived from Maryland sources. Income generated outside the state is not subject to Maryland income tax. Non-resident trusts must carefully assess and segregate income earned within and outside Maryland to ensure accurate tax reporting. Understanding the distinctions in income taxation for resident and non-resident trusts is crucial for trustees and beneficiaries to comply with Maryland’s tax laws and optimize tax planning strategies.

Are Trusts Impacted by Maryland’s Inheritance Tax?

Maryland’s inheritance tax is a state-level tax imposed on the right to receive property from a deceased individual’s estate. The tax rates vary based on the relationship between the decedent and the beneficiary, ranging from zero for certain close relatives to higher rates for more distant relatives and non-relatives. Unlike an estate tax, which is based on the overall value of the estate, the inheritance tax is specific to the individual beneficiaries and the amounts they inherit.

Maryland’s inheritance tax, although not directly applicable to trusts, can influence how these entities are taxed within the state. While the inheritance tax itself does not affect trusts, it becomes relevant when trust assets are distributed to beneficiaries subject to this tax. In such cases, the distributed assets may incur varying tax rates based on the relationship between the decedent and the beneficiary, adding a layer of complexity to the overall tax landscape for trusts in Maryland. Trust planners and beneficiaries need to consider the inheritance tax implications, as they can impact the ultimate tax liabilities associated with the distribution of trust assets in the state.

How Do Federal Taxes Impact Trusts in Maryland?

Trusts are significantly impacted by federal taxation. Understanding these implications is crucial for effective estate planning and management.

Trusts are separate legal entities for federal tax purposes and they are subject to income tax on their earnings. The federal government imposes a complex set of rules and rates for trust income, and trustees must file a separate income tax return for their trusts.

Additionally, the classification of trusts, such as revocable or irrevocable, influences their federal tax treatment. Revocable living trusts, where the grantor retains control and can revoke the trust, are typically disregarded for income tax purposes. For these trusts, the grantor reports income on their individual tax return. In contrast, irrevocable trusts are taxed separately at the trust level.

Moreover, federal estate tax considerations come into play when assets are transferred through a trust. The value of assets placed into an irrevocable trust is often removed from the grantor’s taxable estate, potentially reducing their estate tax liability. Estate tax rules, exemptions, and rates are subject to change, necessitating ongoing attention to ensure that trusts align with current federal tax regulations. The team at our law firm can help individuals navigate this intricate federal tax landscape to optimize tax planning for the trusts they manage.

Contact Our Lawyers for Help with Your Estate Plan in Maryland

Get help from our Bel Air, MD estate and trusts attorneys by calling Rice, Murtha & Psoras at (410) 694-7291.