(Photo by Scott Wykoff)Recently, Maryland’s House of Delegates approved a bill to raise the state’s notoriously low estate tax exemption.  The measure, which rolled through the House by a vote of 120:13, would increase the current $1 million threshold to the federal level – about $5.3 Million ­– by 2019.

With an overwhelming amount of bipartisan support in the House, the bill moves on to the state Senate, where it is expected to receive a similar backing.

The legislation is seen as long overdue by its proponents.  A high estate tax, they argue, drives wealthy retirees out-of state, sometimes just across the river to Virginia, which imposes no estate tax. 

Del. Herb McMillan (R – Anne Arundel) is one of the bill’s most vocal supporters.  “I strongly support this bill,” he said, “but it’s a shame in Maryland you have to die to get a tax break.”

Although several groups, such as Maryland Nonprofits, oppose increasing the exemption on the grounds that it will cost the state too much tax revenue, gubernatorial candidate Heather Mizeur (D-Montgomery) was the lone dissenter to speak in opposition to the bill before the House:

“It’s conservative propaganda to suggest that we have to pass this legislation in order to hold onto millionaires in Maryland. [This bill] will exacerbate the income inequality gap that exists in our state. This is the exact opposite of progress,” Mizeur said. 

Other Democratic hopefuls for Governor were split on the issue; Lt. Gov. Anthony Brown expressed concerns over taking a “piecemeal” approach to tax reform while Attorney General Douglas F. Gansler (D) supported the bill whole-heartedly.

Gov. Martin O’Malley has been pressured by some members of his party to veto the bill should it reach his desk.  The Governor has kept quiet on the estate tax question so far, although his spokeswoman stated O’Malley is, “eager to continue working with the General Assembly on reform ideas that will make our state even more competitive, without hurting our ability to invest in key priorities like our number one schools, keeping college affordable, and creating new innovative jobs.”

Speaking before the House, McMillan drew attention to O’Malley’s record on tax reform since taking office.  “Seven years and 80 tax increases later, I’m surprised one tax reduction would cause this much outrage,” McMillan said.

 Maryland was recently featured in a Forbes Magazine story titled, “Where not to die in 2013.”  It is one of only 16 states to impose its own estate tax in addition to the Federal tax, and one of seven with a tax-free limit less than or equal to $1 million.  Despite being in the minority, defendants point out that raising the limit to the federal level would cost Maryland about $130 million per year in tax revenue, roughly a 1% drop in total current revenue.

Estate taxes apply to the decedent’s gross estate – which includes everything that the person had incidence of ownership over on the date of their death, such as real estate, tangible personal property (stuff) and automobiles. 

“When we first meet with estate administration clients and we ask if the decedent passed away with more than $1 million in assets, the first answer that we get is an astonished exclamation of ‘no!,'” says Jeremy Rachlin, a senior associate at JDKatz, P.C.,  “However, when we dig deeper and discuss all of the different types of holdings which count towards the estate tax, just 30 minutes later many of these same folks are equally astonished to learn that yes, in fact, the decedent’s estate is over $1 million and subject to a Maryland estate tax.”

Jeffrey D. Katz, Managing Partner, added, “People are really surprised when they learn that life insurance benefits may be included in the value of the taxable estate, so even when those benefits are paid outside of the estate, the remaining beneficiaries may end up paying taxes on them.”

The Maryland estate tax begins at 9% and caps out at 16% of the estate’s value over $1,000,000.  If a Marylander had, for example, a $600,000 house, $300,000 life insurance policy, $100,000 of tangible personal property, and a brokerage account worth $200,000, they would owe the state about $32,000 upon their death.  That’s in addition to probate administration and attorney’s fees, a final income tax return, and potential inheritance tax paid on every dollar transferred to non-lineal beneficiaries.

Advanced estate planning techniques can help shield Maryland residents from burdensome estate taxes, but we also encourage our clients to call their representative and voice their support of raising the exemption.  The Maryland General Assembly main switchboard can be reached at 800-492-7122 or 301-858-3000.

Written by: Davis Burroughs