How Do Maryland Trusts Deal with Inheritance Tax?

In Maryland, the inheritance tax can have a significant impact on estate planning. Even if you plan on placing your assets in a trust, the inheritance tax might still apply.

Fortunately, our knowledgeable team is here to assist you with navigating the complexities of inheritance tax laws and developing a comprehensive estate plan that ensures your assets are distributed according to your wishes. The inheritance tax is broadly applied, so it usually needs to be paid, even with a trust. However, the type of trust you choose can change that. Certain trusts allow you to avoid these taxes, saving you a great deal of time and money.

For a free case evaluation with our Maryland estate lawyers, contact Rice, Murtha & Psoras by calling (410) 694-7291.

Does Maryland Place an Inheritance Tax on Trusts?

Inheritance and other estate taxes can be a complex and confusing topic. If you are a Maryland resident and receive an inheritance, you might be required to pay a percentage of the value of the inheritance to the state. The percentage can vary depending on your relationship with the deceased and the size of the inheritance. Fortunately, our Annapolis estate lawyers can help determine what taxes you owe on your trust and whether they can be avoided. While a trust will allow you to receive assets without going through probate, some taxes, like the inheritance tax, usually cannot be averted.

The Maryland Inheritance Tax

The Maryland inheritance tax is a state-level tax levied on the value of property transferred from a deceased individual to certain beneficiaries. This tax is assessed on all types of property that pass under a will, as well as on property that passes under a trust.

The Maryland inheritance tax is collected by the Register of Wills, an office in the county where the decedent either lived or owned property in Maryland. The amount of the inheritance tax varies based on the relationship between the decedent and the beneficiary and the transferred property’s value. Furthermore, some beneficiaries, such as spouses, parents, or children, might be exempt from this tax.

How the Maryland Inheritance Tax is Calculated

When a person passes away, their assets might be subject to an inheritance tax, which is assessed against the beneficiaries when the assets and distributions are reported as probate.

However, suppose an estate does not go through probate, which can be accomplished through a trust. In that case, the distributor of the assets is responsible for filing a complete inventory of the property with the Register of Wills. The report must be made within 90 days of the decedent’s death. Failure to file the inventory within 90 days can result in the Register initiating the process independently.

In cases with no distributor, such as when the property passes by survivorship, the person who receives the property must file the inventory.

Who Must Pay the Inheritance Tax on Trusts in Maryland?

According to Md. Code, Est. & Trst. Art., § 7-307, the inheritance tax on property transferred from a deceased person must be paid before it is distributed by the person responsible for distributing the property. The person who distributes the property is held responsible for the inheritance tax on the property until the tax is paid in full.

In a trust, the responsibility of making distributions lies with the Trustee. Unless the deceased person has specified a source for paying the inheritance tax and there is sufficient money from that source, the Orphans’ Court might order the sale of the property to pay the inheritance tax on the property.

If the individual who distributes the assets fails to fulfill their tax obligations, or if the property is transferred to the recipient without distribution, the recipient of the assets is responsible for paying the inheritance tax on the property. However, the responsibility for paying the inheritance tax can be modified by specific instructions outlined in the trust.

Many trusts include provisions that direct the estate or trust to cover any required inheritance tax. As a result, it is crucial to thoroughly examine the trust to determine the extent of responsibility for payment of inheritance tax.

What Types of Trusts Are Available in Maryland and How Does the Inheritance Tax Apply?

When planning an estate in Maryland, various types of trusts play a significant role in managing assets and minimizing tax obligations. The inheritance tax can be hard to avoid, but certain trusts are designed for this very purpose.

Testamentary Trusts

One of the most common types of trust in Maryland is the testamentary trust. According to Md. Code, Est. & Trst. Art., § 4-412, a testamentary trust is created through the provisions of a person’s will and takes effect upon their death. This type of trust allows the grantor to specify how their assets will be distributed and managed to benefit designated beneficiaries.

For inheritance tax purposes, assets held in a testamentary trust are subject to the applicable tax rates based on the relationship between the deceased individual and the beneficiaries.

Revocable Trusts

Another frequently utilized trust in Maryland is the revocable trust, also known as a living trust. Under Md. Code, Est. & Trst. Art., § 14.5–602, a revocable trust allows the grantor to retain control over the trust assets during their lifetime and can modify or revoke the trust as desired. The primary advantage of a revocable trust is the ability to avoid probate, ensuring a smoother transition of assets upon the grantor’s death.

Assets held in a revocable trust are usually considered part of the grantor’s taxable estate for inheritance tax purposes. Therefore, when the grantor passes away, the assets will be subject to inheritance tax based on the applicable rates and the parties’ relationship.

Irrevocable Trusts

Irrevocable trusts offer greater asset protection and can effectively manage inheritance tax liabilities. These trusts cannot be modified or revoked once established, providing more certainty in asset distribution and tax planning.

According to Md. Code, Est. & Trst. Art., § 8-115, irrevocable trusts can help reduce or eliminate inheritance tax. For example, an irrevocable life insurance trust allows the grantor to transfer life insurance policies into the trust, removing the policy proceeds from the taxable estate and potentially reducing inheritance tax liability.

Special Needs Trusts

Special needs trusts, also known as supplemental needs trusts, are designed to provide for individuals with disabilities while preserving their eligibility for government benefit programs like Medicaid. Per Md. Code, Est. & Trst. Art., § 14.5–1002, these trusts can help ensure the beneficiary’s needs are met without jeopardizing their access to necessary support.

Regarding the inheritance tax, special needs trusts can be structured as either revocable or irrevocable. However, revocable special needs trusts will likely be subject to inheritance taxes, while a properly structured irrevocable special needs trust can minimize or eliminate these taxes.

Our Maryland Inheritance Tax Attorneys Can Help You Choose the Trust that Works Best for Your Situation

Call Rice, Murtha & Psoras at (410) 694-7291 for a free review of your case with our Columbia, MD estate tax attorneys today.