As the crow flies, very small physical distances may separate residents of the District of Columbia, Maryland, and Virginia. However, the tax consequences of dying while a resident of each of these three states may vary significantly.
What is “Inheritance Tax”?
Inheritance tax is a tax that is levied on the privilege of transferring wealth to specific “non-exempt” individuals.
Assessment of the tax has nothing to do with how much is being transferred and everything to do with the beneficiary’s relationship to the deceased.
What is “Estate Tax”?
Estate tax is a tax that is levied on an estate for the privilege of transferring wealth to non-exempt individuals in amounts above exempt amounts.
Generally speaking, an unlimited amount of wealth can transfer to surviving spouses and charitable beneficiaries, all of whom are usually exempt from estate tax.
When it comes to non-exempt recipients (i.e., children or other non-spousal recipients), there are “exemptions” which relate to a certain amount of wealth that can transfer which will be exempt from estate tax.
| State | Inheritance Tax | Estate Tax Exemption |
| Maryland | Inheritance is taxed at a rate of 10.0% or 11.1111% (depending upon allocation) based upon who receives the bequest.
Spouses, children, further descendants (and step-children and step-descendants), parents, siblings, children-in-law, and charitable beneficiaries are exempt. |
Unlimited exemption for a surviving spouse or charitable beneficiary.
For non-spouses/non-charitable beneficiaries, a $5,000,000.00 exemption is permitted, with a portability election permitted by a surviving spouse. To claim portability, the Personal Representative of the deceased spouse’s estate must file a Maryland estate tax return, and the surviving spouse cannot remarry (a return filed for a portability election only must be filed within 2 years of the deceased spouse’s death). This permits married couples to effectively transfer up to $10,000,000.00 to the next generation.
Everything above the exemption is taxed at a graduated rate of 0.8% to 16%. |
| Virginia | No state inheritance tax. | No state estate tax. |
| Washington, D.C. | No local inheritance tax. | Unlimited exemption for a surviving spouse or charitable beneficiary.
For non-spouses/non-charitable beneficiaries, a $4,988,400.00 exemption is permitted, with no portability election.
Everything above the exemption is taxed at a graduated rate of 11.2% to 16% |
| Federal | No federal inheritance tax | Unlimited exemption for a surviving spouse or charitable beneficiary.
US citizens and permanent residents enjoy a $15,000,000.00 exemption for non-spouses/non-charitable beneficiaries, less lifetime reported gifts. A portability election is permitted by a surviving spouse. To claim portability, the personal representative of the deceased spouse’s estate must file a United States estate tax return, and the surviving spouse cannot remarry (a return filed for a portability election only must be filed within 5 years of the deceased spouse’s death). This permits married couples to effectively transfer up to $30,000,000.00 to the next generation.
Everything above the exemption is taxed at a graduated rate of 18% to 40% |
Am I Liable for Both Federal and State Estate Tax?
For estate planning clients who are over the exempt amounts for both state and federal estate taxes, yes, both state and federal estate taxes will be due. However, there are deductions available to reduce the amount of assets exposed to federal estate tax for state estate tax paid.
Many Maryland and DC residents find themselves over the state exemption but under the federal exemption. Those clients may find themselves owing state estate tax but not owing federal estate tax and may find particular benefit by establishing domicile in a jurisdiction with no state estate tax, or considering gifting strategies to reduce their taxable estate below the state exemption.
Are The Only Assets Exposed To Tax Those Which Pass Under My Will?
No. Inheritance tax and estate tax apply to nearly all transfers caused by your death, whether the assets pass by a Last Will and Testament, a revocable living trust, or a transfer-on-death or pay-on-death designation. The test for whether an asset is subject to the tax is usually whether you controlled the asset during your lifetime.
Concluding Thoughts
When a loved one passes away, even if there is a skillfully drafted estate plan to minimize the need for probate, it is urgent to consult with an estate attorney to determine if portability elections need to be made and if estate or inheritance tax is due. If estate tax is due, the estate tax return will need to be filed or placed on extension (and tax paid) within 9 months of the decedent’s death (10 months for a District of Columbia return).
For clients with exposure to estate tax, careful planning can reduce exposure to estate tax, or develop a plan that includes a dedicated funding source earmarked to pay estate tax liability.
How can we help you with your estate plan? Contact attorneys Jeremy Rachlin or Liz Farley for a complimentary consultation or review appointment.
