Will the Maryland Legislature Continue to Use Estate Taxes to Procure your Neighbor’s Eviction?

by Reed Spellman
January 31st, 2014

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Two bills in the Maryland legislature could affect which estates would be subject to Maryland estate tax in the future and should be carefully watched by estate and tax attorneys and those Marylanders looking to protect their estate assets.

Back in 2001, the federal government decided to increase the exemption for estate taxes. Prior to that time, the exemption was $1,000,000 and any net assets in excess of this amount were subject to a hefty tax. Over the next 10 years the new exemption amounts would increase from $1,000,000 to $5,000,000. In order to help offset the imminent loss of revenue, the federal government cast aside the “state death tax credit,” a dollar-for-dollar tax credit for state death taxes paid. A portion of the federal estate tax was set aside and paid directly to the state in which the decedent resided.

In response to the potential loss of revenue that would come with the abandonment of the state death tax credit, the Maryland legislature, between 2002 and 2006, passed a series of new estate tax laws. These new laws effectively reinstated the Maryland estate tax that would have otherwise been paid had the federal estate tax laws remained as they were in 2001. Thus, Maryland estate tax was, and still is, applied to net estate assets in excess of $1,000,000.

There are voices across the state that have, for many years, screamed that the estate tax laws in Maryland are the impetus for many wealthy Marylanders to flee the state. Those individuals point out that the bordering states of Virginia and Delaware have both abandoned the estate tax and, given their proximity to Maryland, are very attractive to Maryland millionaires looking to avoid the potential burden imposed on their families that would result if they were to pass away while residing in Maryland. And, if you don’t mind traveling a little further, you could move to Florida, to avoid estate taxes, income taxes and below-zero wind chills brought here by the “polar vortex.” This point of view is bolstered by reports such as the Tax Foundation’s review of state to state migration[i] that showed that between 2000 and 2010, Maryland lost $5.5 billion dollars in taxable income from net migration. During that same period, only seven states suffered higher domestic migration losses in taxable income.

There are many, however, that argue that most people leaving Maryland are doing so for other reasons, like warmer weather, housing prices or other personal reasons. These voices point to opposing studies that show Maryland is a desirable place for millionaires to reside. For the third consecutive year, Maryland ranked first in Phoenix Marketing International’s annual ranking of millionaires per capita,[ii] moving up the from the second place position it held from 2007 through 2010. This would seem to show that at least some millionaires hold an affinity for Maryland despite the current status of its estate tax. Or, they simply haven’t moved yet.

Well, the flight from Maryland that may or may not be driven by the Maryland estate tax, has not gone unnoticed by the Maryland legislature. There are currently two bills moving through the legislature that would bring the Maryland estate tax exemption back in line with the federal estate tax exemption amount.

Senate Bill 163 (2014) proposes tying the Maryland exemption to the federal exemption amount effective for anyone dying after December 31, 2013.  This bill has been introduced during previous legislative sessions and has never garnered enough support to pass.

The other bill, Senate Bill 155 (2014) proposes a staggered increase in the exemption amount; beginning with an increase from $1,000,000 to $2,000,000 for individuals dying in 2014 and culminating in 2017, when the Maryland exemption amount will fall in line with and continue to follow the federal exemption amount. Unlike Senate Bill 163, Senate Bill 155 has received significant bi-partisan support. It is sponsored by Senate Minority leader, David Brinkley, and is co-sponsored by Senate President Thomas V. Mike Miller, Jr., among other co-sponsors. This bill would seem to have the best chance of passage of any proposed since the current laws were enacted; however we will have to wait and see.

 

 

[i] Richard Borean, “Monday Map: Migration of Personal Income,” Tax Foundation, 19 Aug. 2013, http://taxfoundation.org/blog/monday-map-migration-personal-income (accessed 29 Jan. 2014).

[ii] Phoenix Marketing International, Ranking of U.S. States by Millionaires Per Capita, 2014.

Reed Spellman is a senior counsel in Joseph, Greenwald & Laake’s Estates and Trusts practice. He counsels individuals and families in a wide range of estate planning and post-mortem planning issues, including anything from a simple will to advanced tax planning, as well as probate administration, trust administration, and estate tax filings and issues.

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