WHAT IS THE MARYLAND ESTATE TAX MARITAL DEDUCTION?

“As you go through life traversing your career path, at every turn you are required to pay taxes. Of course there is a federal income tax, and here in Maryland where we practice law, there is a state

income tax. Then you have property taxes, capital gains taxes, sales tax on your purchases, and so-called “hidden” taxes on

things like gasoline, alcohol, hotel rooms, etc.”

Colleen Sinclair Prosser

Annapolis, Maryland Estate Planning Attorney

What Is the Maryland Estate Tax Marital Deduction? www.sinclairprosserlaw.com 2

As you go through life

traversing your career path, at

every turn you are required to

pay taxes. Of course there is a

federal income tax, and here in

Maryland where we practice

law, there is a state income

tax. Then you have property

taxes, capital gains taxes,

sales tax on your purchases,

and so-called “hidden” taxes

on things like gasoline, alcohol,

hotel rooms, etc.

Since you pay all of these

taxes while you are alive, you

would probably like to think

that the taxation will end when

you pass away. Many people would say this would be the fair approach, but the

reality is that there are estate taxes that can come into play.

FEDERAL ESTATE TAX

The estate tax on the federal level carries a 40 percent maximum rate, and this

can have a significant impact on your legacy if you are exposed. Fortunately,

What Is the Maryland Estate Tax Marital Deduction? www.sinclairprosserlaw.com 3

most Americans are exempt, because there is a relatively large exclusion or

credit. The exclusion is the amount you can transfer before the estate tax would

kick in.

This paper is being written in 2016. For the rest of this calendar year, the exact

amount of the federal exclusion is $5.45 million. Each year since 2012 there have

been inflation adjustments, so

the figure could rise when the

new year rolls around.

In addition to the federal estate

tax, there is also a federal gift

tax. This tax exists to stop

people from giving gifts to avoid

the estate tax. The exclusion is a

unified exclusion. It applies to your estate, but it also applies to large gifts that

you give during your life. As you give lifetime gifts, you would be reducing the

amount of the exclusion that would be left to apply to your estate.

ESTATE TAX MARITAL DEDUCTION

Now that you understand the ins and outs of the federal estate tax, we can look

at the estate tax marital deduction. You can transfer unlimited assets to your

spouse free of taxation using this deduction. This is true for gifts that you give

during your life, and you can also arrange for unlimited tax-free transfers after

you pass away.

What Is the Maryland Estate Tax Marital Deduction? www.sinclairprosserlaw.com 4

To be clear, because of this deduction, you would not be using any of your

unified exclusion to transfer assets to your spouse.

However, if you are married to someone who is a citizen of a country other than

the United States, the situation is different. The unlimited marital deduction is

not available to non-

citizens.

There is a solution that

exists if you are married to

a citizen of another

country as a person who is

exposed to the estate tax.

You could convey assets

into a legal structure called

a qualified domestic trust.

If you establish this type of

trust, and you predecease

your spouse, the trustee

could distribute the

earnings from the trust to

your surviving spouse, and

the estate tax would not be applicable. Of course, regular income taxes would

apply.

What Is the Maryland Estate Tax Marital Deduction? www.sinclairprosserlaw.com 5

STATE-LEVEL ESTATE TAX

As we stated previously, our firm practices law in the state of Maryland. There

are 15 states in the union that impose state-level estate taxes, and as luck would

have it, Maryland is one of them. At the present time, the exclusion on the state

level is just $2 million. As a result, your estate could be exposed on the state

level, even if you are exempt on the federal level.

There is also an unlimited marital deduction on the state level, so you can

transfer any amount of money and/or property to your spouse without incurring

any Maryland state estate tax exposure.

What Is the Maryland Estate Tax Marital Deduction? www.sinclairprosserlaw.com 6

SUMMARY

You should understand the lay of

the land when it comes to

taxation when you are devising

your estate plan. Transfer taxes

can enter the picture if you have

been particularly successful from a

financial standpoint.

There is a federal estate tax, and

here in the state of Maryland,

there is also a state-level estate

tax that can be applicable to you

even if you are exempt from the

federal tax.

The good news is that there is an

unlimited marital estate tax

deduction that applies on both levels. You can use this deduction to transfer

unlimited assets to your citizen spouse tax-free.

Transferring everything to your spouse tax-free is not necessarily an estate tax

solution, because your spouse would then be in possession of an estate that

could be taxed after his or her passing. There are comprehensive tax efficiency

strategies that can be implemented. To explore them, schedule a consultation

with a licensed estate planning attorney.

What Is the Maryland Estate Tax Marital Deduction? www.sinclairprosserlaw.com 7

REFERENCES

Internal Revenue Service

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax

Forbes

http://www.forbes.com/sites/deborahljacobs/2013/01/09/a-married-couples-

guide-to-estate-planning/

Comptroller of Maryland

http://taxes.marylandtaxes.com/Individual_Taxes/Individual_Tax_Types/Estate_a

nd_Inheritance_Tax/

What Is the Maryland Estate Tax Marital Deduction? www.sinclairprosserlaw.com 8

About the Author

Colleen Sinclair Prosser Currently the owner and manager of SinclairProsser Law, LLC, Colleen steers her firm with both a guiding hand and direct involvement with the clients, bringing to the table a wealth of Estate Planning experience from many years spent at the helm of a busy law practice. In the past Ms. Prosser served on the Board of Trustees for By Their Side, Lifelong Advocates for

Marylanders with Developmental Disabilities, and on the Board of Governors of the American Academy of Estate Planning Attorneys. EXPERIENCE An established member of the American Academy of Estate Planning Attorneys, Colleen offers years of experience in estate preservation and transfer. A strong proponent of the living trust, she also focuses on wills, powers of attorney, living wills, probate, trust administration, prenuptial agreements, nursing home planning, and special needs planning. She strongly endorses long-term care insurance and, in certain cases, life insurance and some annuities as valuable estate preservation vehicles, and strives to assure the compatibility of her clients’ estate plan and financial plan. Sensitive to the challenges presented by lifestyle and circumstance, Colleen addresses each situation with personal attention, wisdom, and skill.

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