A client recently told me that the accountant who had been appointed executor of her mother’s estate had advised her that her mother’s entire estate would be taxed, including the value of farmland located in the mid-West. Knowing that Maryland law does not tax real property or tangible personal property permanently located outside of Maryland, I advised my client that that advice appeared to be wrong.
Unfortunately, the accountant was not wrong. But neither was I.
Maryland law defines the taxable estate as “the part of an estate that this State has the power to subject to the Maryland estate tax”. Because of this language, estate taxes that are actually paid on real property located outside of Maryland do not reduce the amount of taxes due in Maryland. Moreover, the estate tax is not calculated by computing the tax applicable on the Maryland property. Instead, the tax is calculated based on the value of the decedent’s entire estate and then an amount is lopped off proportionate to the value of the non-Maryland assets as compared to the estate value as a whole.
When my client told me that the executor was computing the tax on the entire estate, she left out an important detail, which is that the accountant was also applying the discount applicable to the non-Maryland property.
But by telling my client that Maryland law does not tax real property or tangible personal property permanently located outside of Maryland, I had slightly misled my client.
Because of the way Maryland computes the estate tax, it will often happen that someone with Maryland assets that are less than the $1 million threshold for taxability will have total assets that exceed that amount. That person will still have to pay taxes. For example, Aaron dies owning a small house in Maryland worth $300,000 as well as a vacation home in North Carolina worth $900,000. His Maryland assets are less than the taxability threshold, but an estate tax return is still required. The return will show a total estate of $1.2 million (which would have a tax due of $45,200), but after discounting proportionately for the value of property outside of Maryland, the tax due is $11,300.
Thus, you can see that if the Maryland estate tax does not include property outside of Maryland, there would be no tax at all, but in fact the tax applies to all property with a discount for non-Maryland property.