How to avoid Maryland inheritance tax?

It is true that Maryland is one of the few states that imposes both an estate tax and an inheritance tax. The state’s estate tax applies to the overall estate before distribution. But the inheritance tax is charged after assets pass to beneficiaries. Fortunately, there are structured ways to prevent or reduce Maryland inheritance tax with legal and smart strategies.

Who Pays the Maryland Inheritance Tax?

The answer depends entirely on the relationship between the heir and the person who passed away. Spouses, children, parents, grandparents, and siblings are generally exempt. However, anyone outside this category—like nieces, nephews, cousins, or friends—could be subject to a 10% inheritance tax on what they receive.

Legitimate Ways to Avoid Maryland Inheritance Tax

The following planning techniques might present assistance in reducing the inheritance tax exposure:

• Lifetime Gifting:  Maryland does not tax gifts made while the individual is alive. Transferring assets early might have an eliminating impact on future inheritance tax.
• Use of Trusts:  Trusts can be structured to shift assets in a way that bypasses taxable inheritance. Irrevocable trusts and generation-skipping trusts are common tools used in this context.
• Naming Exempt Beneficiaries: Structuring inheritance plans to include only exempt individuals aids in eliminating the tax burden altogether.
• Charitable Bequests: Leaving property to recognized charities results in no inheritance tax. It also presents the added benefit of philanthropic impact.
• Joint Ownership: In specific cases, adding a family member (who satisfies the exemption criteria) as a joint owner on assets might avoid the inheritance tax, provided that legal ownership passes appropriately.

Planning Ahead Is Key

As a final note, it is not the size of the inheritance that typically triggers the tax—it is who receives it. Even modest amounts passed to a non-exempt heir can be subject to Maryland’s 10% rule. Establishing a smart plan early makes sure that more of the estate reaches the intended recipients with minimal taxation burden.

For those managing estates near the $5 million Maryland estate tax limit, combining these inheritance taxation strategies with estate planning tools becomes even more important. Contact Watter CPA today for expert assistance with estate tax and inheritance tax in Maryland.

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