Maryland Probate and Estate Tax Laws: A Primer
After your close relative dies, you might find yourself overwhelmed with having to handle all the estate administration tasks. It might seem as if there is a never-ending list of things you must do and impossible deadlines by which to do them. The good news is Maryland law does not require you to perform these functions by yourself.
Because probate matters in Maryland can be complicated, many people engage a Maryland estate administration lawyer to handle everything so they need not do so. Whether you are trying to do everything by yourself or you are working with a lawyer, you might find it useful to have a primer on Maryland probate and estate tax laws.
What Is an Estate?
An estate consists of the things a decedent (the person who died) owned at the time of death. The estate can include things like real property, personal property, bank accounts, household items, investments, retirement accounts, insurance policies, intellectual property, and other items.
The court will appoint a personal representative to settle and distribute the estate of the decedent following Maryland probate law and state and federal tax laws. The personal representative will have to take possession of and marshal the estate assets, prepare and file an inventory and information report with the Register of Wills, prepare and file an accounting with the Register of Wills, evaluate and pay the valid debts of the estate, prepare and file the state and federal tax returns of the decedent and the estate, and pay the taxes out of the estate assets, pay the administration costs of the estate, and distribute the remaining assets to the heirs and legatees.
What Is Inheritance Tax and Is There a Federal Inheritance Tax?
Only a handful of states, including Maryland, have inheritance tax. Maryland does not charge inheritance tax against the estate, because this type of tax gets assessed against the people who receive assets from an estate. Charities are exempt from inheritance tax.
Also, close relatives, like a surviving spouse or child of the decedent, do not have to pay inheritance tax. If a non-relative or a distant relative inherits, that recipient has to pay an inheritance tax of 10 percent of the value of the assets distributed.
There is no federal inheritance tax in the United States. There is, however, a federal estate tax and a Maryland estate tax.
Is an Estate in Maryland Subject to Both Federal and State Estate Tax?
Most states do not impose a state estate tax, but Maryland does. All decedent estates in America are subject to federal estate tax. The amount of state and federal estate tax depends on the date of death and the value of the estate time.
After calculating the credit for state estate taxes, the total inheritance taxes paid to the Register of Wills get subtracted from that amount. If the heirs and legatees paid inheritance taxes that equal or exceed the credit for state estate taxes, the estate will owe no Maryland estate tax. There could, however, be interest and penalties if the inheritance taxes do not get paid before the Maryland estate taxes are due.
Does a Person Have to Pay Income Tax After Dying?
When you administer the estate of a deceased person, the personal representative has an obligation to prepare and file income tax returns for the last year of the person’s life. If the decedent owed taxes, they are a debt of the estate. Also, the estate may be required to file income tax returns for the estate reporting income received by the estate during the probate period.
What Different Kinds of Estate Administration Are Available in Maryland?
Maryland offers two forms of estate administration, small estate, and regular estate administration. A small estate is a simpler and less expensive process than regular estate administration.
If the sole legatee is the surviving spouse (the sole heir), and the value of the decedent’s estate is $100,000 or less, the estate qualifies for small estate administration. In estates in which the surviving spouse is not the sole heir, the probate assets must be $50,000 or less to qualify for small estate administration.
Estates that do not meet one of these two qualifications must follow regular estate administration procedures. A Maryland probate lawyer can explain whether your loved one’s estate can go through small estate administration or must go through the full-blown regular estate administration.
Is There a Way to Have Some Assets Skip Going Through Probate?
Yes. Some types of assets are not considered part of the decedent’s estate, so they do not go through probate process. With some other assets, careful estate planning can involve designating beneficiaries in such a way as to keep those items out of the probate estate.
The third party that administers those accounts would act upon the decedent’s death for the property passing directly to the beneficiaries named by the decedent. Since those assets pass to the beneficiaries by law, they are not included in the probate estate.
Here are a few examples of some assets that can skip going through probate:
One of the best ways to keep assets out of your estate and avoid going through probate is to set up a revocable trust. You would title your assets in the name of the trust. After your death, your assets would get distributed according to the terms of your trust and not your will. Most people name themselves as the trustee of their revocable trust during their lifetime so they can manage their assets and make changes. You cannot change an irrevocable trust, but revocable trusts can get amended.
Let's say that you have checking and savings accounts at your bank. You do not want to have the complications of a joint account with someone, but you would like to have that person get immediate access to those funds upon your death. You can fill out a form and send it to your bank to make the account “Transfer on Death (TOD)” or “Payable on Death (POD)” to the individual you designate on the form. You can also do this on investment accounts.
In Maryland, assets the decedent and at least one other person owned as joint owners with right of survivorship and assets the decedent and spouse owned as tenants by the entirety pass directly to the surviving joint owner or surviving tenant by the entirety (spouse). These items do not go through the probate process and are not considered a component of the decedent’s estate.
Life insurance proceeds can pass directly to the beneficiary if you named a person or party on the beneficiary designation form with the life insurance company. The proceeds will not go through the probate process or count toward the taxable estate. But if you leave the beneficiary designation blank or name your estate as the beneficiary, the life insurance proceeds must go through probate and will be included in the value of your estate.
Depending on the terms of your account, certain pension benefits or annuities could get paid directly to the beneficiary or beneficiaries, avoiding probate and not counting toward the total value of your estate.
There are different types of revocable trusts available. Your Maryland estate planning lawyer can discuss the type of revocable trust that could provide the most benefits for you based on your needs and goals. Also, your lawyer could review your assets and make recommendations on how to avoid probate.
What Is a Family Allowance?
Maryland law provides for the immediate family members, specifically the surviving spouse and each unmarried child of the decedent under the age of 18 at the time of the decedent's death, to get paid a family allowance. The personal representative is to pay the surviving spouse $10,000 for personal use and $5,000 to each qualifying child.
The family allowance does not apply to adult children, or a married child, or other lineal descendants of the decedent. Many people mistakenly assume that their children and grandchildren will automatically receive an inheritance from them. In reality, if your child is married or an adult or if you have a grandchild, you will need to name them in your will or trust for them to receive assets from you.
What Happens if the Decedent Did Not Have a Will or Trust?
When a person dies without leaving a valid will or trust, the person is intestate. The entire estate must go through probate. The assets will have to get marshaled and valued or appraised. Maryland law will determine which loved ones receive what assets.
Intestacy might seem like a way to save money because the person did not pay for a will or revocable trust. The reality, however, is there will be less money to distribute to loved ones because an intestate estate costs more to administer than one in which the person had a will or revocable trust. The people you would want to inherit from you might receive nothing.
A Maryland estate planning lawyer can sort out the Maryland and federal laws that apply to estate administration, federal estate tax, Maryland estate tax, and Maryland inheritance tax. Your lawyer can also navigate the probate court forms, reports, hearings, and other procedures on your behalf so you can focus on rebuilding your life.
