Life Insurance Trusts Help Avoid Maryland’s Complex Estate Taxes

When it comes to the most expensive places to die in the United States, Maryland is high up there on the list. You have to pay a pretty steep price for the right to transfer your assets to your heirs, and your heirs may have to pay an inheritance tax for receiving them. On top of that, the entire probate process is expensive, due to Maryland’s requirements for valuation and the need to notify multiple agencies when settling an estate. The good news is that we can help!

Probate Complexities in Maryland

People entering probate in Maryland have a lengthy, complicated process ahead of them. Inheritance and estate taxes could both be due but are paid to different entities and change based on what is being inherited. They also have different due dates and penalties, adding more complexity to an already unwieldy process.

The threshold that requires your executor to file an estate tax return in the state of Maryland is currently $2 million, but this amount is slowly moving upward. Below is a table showing future thresholds.

Year Gross Estate Threshold
2015 $1.5 million
2016 $2 million
2017 $3 million
2018 $4 million
2019 Matches federal exemption

This threshold is based on your overall gross estate, which includes items in probate and any items that pass through contract, including certain life insurance policies, annuities, and joint assets with survivorship rights. In addition, the value of the property must be based on the results of a certified appraiser.

Once you meet that exemption, your estate could have to pay taxes of up to 16%. These taxes are due within nine months of the date of death and penalties of up to 10% could be due if these taxes are not paid on time.

Inheritance tax is imposed when someone is receiving property from your estate. It should be noted that inheritance tax is paid first, and your heirs won’t get double taxed on it through estate tax. Instead, they’ll have to pay the inheritance tax on the property they receive. Then, that inheritance tax is subtracted from the overall estate tax.

This provision can become somewhat complex and can seriously complicate the probate process. While estate tax is paid to the state comptroller, inheritance tax is paid to the register of wills in the county where the property is owned. This requires a lot of different filings, appraisals, and documentation to manage.

Minimizing Your Maryland Estate With Life Insurance

All of this complexity is why it’s best to work around Maryland’s estate tax by minimizing the size of your estate. For this, we recommend turning to irrevocable life insurance trusts (ILIT). Only trusts held in your name are considered part of your estate. ILITs are not part of your estate and the proceeds pass on to your heirs both estate and inheritance tax free.

We recommend ILITs for Maryland residents because they:

  • Allow you to reduce your overall estate while increasing the amount of tax-free wealth.
  • Bypass probate and the need for certified appraisals.
  • Limit the paperwork required to settle an estate through both the state comptroller and the county register of wills.
  • Reduce the risk of mistakes in the calculations of estate tax due, which could lead to fines and penalties.
  • Reduce the overall costs of the estate settlement process.

The bigger your estate in Maryland, the harder it will be to settle. This can be a lengthy process that requires reporting at the state and county levels, which increases the administration costs. At Howard Kaye, we’ve successfully used ILITs funded by life insurance as a means to reduce the size of estates and discount estate tax costs by as much as 90%. Contact us today at 800-DIE-RICH for more information on managing your estate through the use of ILITs.