Maryland Inheritance Tax vs. Estate Tax: A Guide for Rockville Families from Grant, Riffkin & Strauss, P.C.

Maryland is one of the few places in the country that imposes both an inheritance tax and an estate tax. For families in Rockville and the surrounding area, that often comes as a surprise during what is already a difficult time. The two taxes work differently, apply to different people, and call for different planning strategies. At Grant, Riffkin & Strauss, P.C., we regularly help clients understand how each one might affect them and what steps can be taken in advance to reduce the burden.

Most people use "inheritance" and "estate" interchangeably in conversation, but Maryland law treats them as two separate things. The distinction matters once it is time to settle an estate.

How the Maryland Estate Tax Works

The estate tax is paid by the estate itself, before any property is distributed to beneficiaries. The personal representative files the return and pays the tax out of estate assets.

Maryland's estate tax applies when the gross estate exceeds the state exemption, currently set at $5 million. Anything below that amount passes free of state estate tax. Above the threshold, a graduated rate applies, topping out at 16 percent. The federal estate tax exemption is significantly higher, so many estates that owe nothing federally still owe Maryland.

What counts toward the gross estate is often broader than people expect. It includes real estate, bank accounts, investment accounts, retirement accounts, life insurance proceeds payable to the estate, business interests, and personal property. A house in Rockville plus a retirement account and a life insurance policy can move someone closer to the threshold than they realize.

Property left to a surviving spouse passes free of estate tax under the unlimited marital deduction. Portability is also available, which allows a surviving spouse to use any unused portion of the deceased spouse's exemption, but only if the estate files a timely return to elect it.

How the Maryland Inheritance Tax Works

The inheritance tax is different in nearly every respect. It is paid by the person receiving the property, not by the estate, and it is calculated based on the relationship between the decedent and the beneficiary.

Close family members are exempt. A spouse, child, stepchild, grandchild, parent, grandparent, sibling, son-in-law, or daughter-in-law pays no inheritance tax on what they receive. The same is true for property passing to a qualifying charity.

When the beneficiary falls outside that exempt group, a flat 10 percent tax applies to the value of the inheritance. That is where the surprises tend to happen. A favorite niece, a longtime friend, an aunt, a cousin, or an unmarried partner will see 10 percent of their inheritance go to the state. There are narrow exclusions for very small bequests of personal property, but for any meaningful gift to a non-exempt person, the tax is real.

Why Both Taxes Can Apply to the Same Estate

A single estate can owe both taxes, and this is where families often get caught off guard. Picture a Rockville widow with a $5.5 million estate who wants to leave part of her assets to her sister and part to her favorite niece. Her estate may owe Maryland estate tax on the amount above $5 million. Separately, the niece's share is subject to the 10 percent inheritance tax, while the sister's share is exempt. The two taxes do not cancel each other out, and a beneficiary cannot avoid one by paying the other.

Planning Strategies Worth Considering

A well-built estate plan can reduce both taxes substantially. Tools that come up regularly in our practice include:

Lifetime gifting to use the federal annual exclusion and shrink the taxable estate over time. Irrevocable life insurance trusts, which keep insurance proceeds out of the gross estate. Credit shelter or disclaimer trusts for married couples, designed to preserve both exemptions. Charitable giving structured to reduce the taxable estate. Reviewing how property is titled, since jointly owned and beneficiary-designated assets often behave differently than people expect.

The right combination depends on the size and makeup of the estate, the family situation, and the goals of the people involved. There is no single answer that fits every household, which is why these conversations are best had with an attorney who knows Maryland law and can look at the full picture.

Talk With Grant, Riffkin & Strauss, P.C. Before the Plan Becomes a Problem

Inheritance and estate tax questions are easier to address while there is still time to plan. Updating beneficiary designations, restructuring how property is titled, or building the right kind of trust can save a family meaningful money and stress later. To learn more about how Maryland's tax rules might affect your family, reach out to Grant, Riffkin & Strauss, P.C. and let an experienced estate planning attorney walk you through the options that make sense for your situation.