Video - September 2026Key Challenges of Maryland’s Estate Tax
Transcript
Christian Kansler:
I'm Christian Kansler, Director of Advisor Sales for the Towson-headquartered Cromwell Funds.
As one of Maryland's newest asset management firms, we're dedicated to being a resource for local and national financial advisors. In addition to our Advisor-driven investment solutions, we gather insight into what is driving growth for Advisors, where challenges might be emerging and how top practices are positioning for long-term success. Today, we're taking a closer look at the Maryland estate tax, covering the key challenges, planning opportunities, and common questions we encounter when speaking with financial advisors. We'll distill these complex topics in a brief 10-minute Q&A style discussion.
And with that, I'm pleased to be joined today by Jay Oppenheim, Counsel from Saul Ewing's Baltimore office, and one of the foremost experts in estate planning locally. Jay, thanks for joining me today.
Jay Oppenheim:
Glad to be here. Thank you, Christian.
Christian Kansler:
Great. Well, let's get right into it. Jay, can you give us a brief overview of the Maryland estate tax and what's the difference between Maryland's exemption limit and the federal exemption limit?
Jay Oppenheim:
That's a great question, Christian. When people hear estate tax, they're usually thinking about the federal estate tax. But when you're working with clients in Maryland, there's an estate tax that one must pay attention to, and that is that Maryland has an estate tax. In fact, Maryland is one of only a handful of states that still imposes its own estate tax and, unfortunately for Maryland taxpayers, also imposes an inheritance tax. Now, today we won't be discussing the inheritance tax, only the estate tax, because that is where I think many Advisors can add a lot of value.
Now, the most important number to think about when it comes to the estate tax exemption in Maryland is what the exemption is. The exemption is $5 million per person. And unlike the federal exemption, it is not indexed for inflation. It has remained at $5 million since 2019 compared to the federal estate tax exemption, which is significantly higher. As we know, it recently was increased to $15 million.
And since it is indexed for inflation, it will continue to rise.
This results in what many people will refer to as the Maryland gap, where a client can have an estate that is below the federal exemption and owe no federal estate tax, yet still owe a substantial amount of estate tax on the Maryland side. That's a surprise for many clients and it's not something that they're very excited to hear about.
But if you are a Maryland resident and your state exceeds $5 million estate tax planning is something that is very important to be aware of and make part of the conversation.
Christian Kansler:
Very interesting, Jay. So what should be on a Financial Advisor's estate tax checklist, when reviewing a Maryland client's plan?
Jay Oppenheim:
So when reviewing a Maryland client's plan, the first question you should always ask is, what is your net worth? Don't just look at the investment accounts that you're managing, but look at everything that they have, the whole portfolio, look at their real estate, their business interests, life insurance, assets held in revocable trust.
Maryland, just like the federal framework looks at the entire gross estate, not just probate assets. So once a client is reaching $5 million of net worth, the Maryland estate tax is something you need to be paying very careful attention to. Second, ask whether the client is married and whether their estate plan has been designed to use both spouses Maryland exemptions. Too often, everything is left outright to the surviving spouse.
And while that may defer tax initially, it can also waste planning opportunities and result in unnecessary Maryland estate tax at the second death.
Proper trust planning or in some cases, Maryland portability can make a significant difference. So clients, although they may only have $5 million of exemption on their own when married, together they'd have $10 million. Third, review beneficiary designations and ownership, retirement accounts, life insurance, jointly owned assets and transfer on death accounts may avoid probate, but again, not avoid estate tax. These designations should also be reviewed, I can't help but mention, from an inheritance tax perspective, if assets are passing to individuals who are not immediate family.
Fourth, ask when the estate plan was last reviewed. Many plans were drafted years ago under a very different framework for both the federal and state estate tax laws.
Even if the documents are still valid and they likely are, they may no longer reflect the client's current wealth, family circumstances, and importantly, the estate tax ramifications.
Fifth, think about liquidity. Estate taxes have to be paid relatively soon after death within nine months typically. If most of the client's wealth is tied up in a closely held business or in real estate, the family may not have the liquidity to pay the estate tax.
Finally, don't focus exclusively on taxes. Estate planning as always is also about incapacity planning, powers of attorney, healthcare directives, business succession, charitable giving, and just making sure that the assets ultimately pass according to the client's wishes.
Christian Kansler:
That's a great checklist Jay. And kind of bringing it all home for Maryland advisors with high net worth clientele, what would you say is the planning opportunity when it comes to estate tax?
Jay Oppenheim:
I love this question.
In Maryland, one of the greatest planning advantages is that Maryland, although as we mentioned, has an inheritance tax and an estate tax, it does not impose a gift tax. That means that lifetime gifts, meaning gifts that are made by a client while they are alive can reduce the size of the Maryland taxable estate without triggering a gift tax an estate tax or an inheritance tax. Clients can use their annual exclusion gifts and when appropriate, larger gifts can be made using the federal lifetime exemption to move appreciating assets out of their estate.
For married couples, another significant opportunity is making sure both Maryland estate tax exemptions are fully utilized. As we mentioned earlier, although Maryland does have an estate tax, Maryland does offer portability between spouses to combine their exemptions.
The objective is simple, avoid wasting one spouse's exemption and preserve as much wealth as possible for the family. One example in these documents and in the planning is to provide a state-only QTIP election (Qualified Terminable Interest Property election), which allows planners to defer Maryland estate tax in certain situations while preserving favorable federal tax treatment. It's a powerful tool, but it only works if the estate plan has been drafted with sufficient flexibility before the client dies.
That's another reason why it's so important for clients to continually review and update their documents.
Life insurance planning can also be effective and, when appropriately structured through an ILIT (Irrevocable Life Insurance Trust), life insurance proceeds can provide the liquidity needed to pay estate taxes without increasing the taxable estate itself.
Ultimately, the greatest opportunity isn't any single planning technique. It's identifying clients who've crossed or are coming close to that $5 million threshold and starting the conversation early.
Financial Advisors are often the first professionals to recognize that a client's wealth has outgrown their existing estate plan. When advisors coordinate early with estate planning council, the clients have more options, they have more flexibility and often the opportunity to save their family hundreds of thousands of dollars or more in Maryland estate taxes while achieving their broader legacy goals.
Christian Kansler:
Great. Thanks Jay. And thank you to the many Financial Advisors that joined us across the great state of Maryland. If you'd like to explore this topic further or learn more about how local advisors are engaging our solutions here at the Cromwell Funds, please feel free to visit our website or call me directly. Thanks again, Jay. Thank you everyone and have a great day.
Christian Kansler:
I'm Christian Kansler, Director of Advisor Sales for the Towson-headquartered Cromwell Funds.
As one of Maryland's newest asset management firms, we're dedicated to being a resource for local and national financial advisors. In addition to our Advisor-driven investment solutions, we gather insight into what is driving growth for Advisors, where challenges might be emerging and how top practices are positioning for long-term success. Today, we're taking a closer look at the Maryland estate tax, covering the key challenges, planning opportunities, and common questions we encounter when speaking with financial advisors. We'll distill these complex topics in a brief 10-minute Q&A style discussion.
And with that, I'm pleased to be joined today by Jay Oppenheim, Counsel from Saul Ewing's Baltimore office, and one of the foremost experts in estate planning locally. Jay, thanks for joining me today.
Jay Oppenheim:
Glad to be here. Thank you, Christian.
Christian Kansler:
Great. Well, let's get right into it. Jay, can you give us a brief overview of the Maryland estate tax and what's the difference between Maryland's exemption limit and the federal exemption limit?
Jay Oppenheim:
That's a great question, Christian. When people hear estate tax, they're usually thinking about the federal estate tax. But when you're working with clients in Maryland, there's an estate tax that one must pay attention to, and that is that Maryland has an estate tax. In fact, Maryland is one of only a handful of states that still imposes its own estate tax and, unfortunately for Maryland taxpayers, also imposes an inheritance tax. Now, today we won't be discussing the inheritance tax, only the estate tax, because that is where I think many Advisors can add a lot of value.
Now, the most important number to think about when it comes to the estate tax exemption in Maryland is what the exemption is. The exemption is $5 million per person. And unlike the federal exemption, it is not indexed for inflation. It has remained at $5 million since 2019 compared to the federal estate tax exemption, which is significantly higher. As we know, it recently was increased to $15 million.
And since it is indexed for inflation, it will continue to rise.
This results in what many people will refer to as the Maryland gap, where a client can have an estate that is below the federal exemption and owe no federal estate tax, yet still owe a substantial amount of estate tax on the Maryland side. That's a surprise for many clients and it's not something that they're very excited to hear about.
But if you are a Maryland resident and your state exceeds $5 million estate tax planning is something that is very important to be aware of and make part of the conversation.
Christian Kansler:
Very interesting, Jay. So what should be on a Financial Advisor's estate tax checklist, when reviewing a Maryland client's plan?
Jay Oppenheim:
So when reviewing a Maryland client's plan, the first question you should always ask is, what is your net worth? Don't just look at the investment accounts that you're managing, but look at everything that they have, the whole portfolio, look at their real estate, their business interests, life insurance, assets held in revocable trust.
Maryland, just like the federal framework looks at the entire gross estate, not just probate assets. So once a client is reaching $5 million of net worth, the Maryland estate tax is something you need to be paying very careful attention to. Second, ask whether the client is married and whether their estate plan has been designed to use both spouses Maryland exemptions. Too often, everything is left outright to the surviving spouse.
And while that may defer tax initially, it can also waste planning opportunities and result in unnecessary Maryland estate tax at the second death.
Proper trust planning or in some cases, Maryland portability can make a significant difference. So clients, although they may only have $5 million of exemption on their own when married, together they'd have $10 million. Third, review beneficiary designations and ownership, retirement accounts, life insurance, jointly owned assets and transfer on death accounts may avoid probate, but again, not avoid estate tax. These designations should also be reviewed, I can't help but mention, from an inheritance tax perspective, if assets are passing to individuals who are not immediate family.
Fourth, ask when the estate plan was last reviewed. Many plans were drafted years ago under a very different framework for both the federal and state estate tax laws.
Even if the documents are still valid and they likely are, they may no longer reflect the client's current wealth, family circumstances, and importantly, the estate tax ramifications.
Fifth, think about liquidity. Estate taxes have to be paid relatively soon after death within nine months typically. If most of the client's wealth is tied up in a closely held business or in real estate, the family may not have the liquidity to pay the estate tax.
Finally, don't focus exclusively on taxes. Estate planning as always is also about incapacity planning, powers of attorney, healthcare directives, business succession, charitable giving, and just making sure that the assets ultimately pass according to the client's wishes.
Christian Kansler:
That's a great checklist Jay. And kind of bringing it all home for Maryland advisors with high net worth clientele, what would you say is the planning opportunity when it comes to estate tax?
Jay Oppenheim:
I love this question.
In Maryland, one of the greatest planning advantages is that Maryland, although as we mentioned, has an inheritance tax and an estate tax, it does not impose a gift tax. That means that lifetime gifts, meaning gifts that are made by a client while they are alive can reduce the size of the Maryland taxable estate without triggering a gift tax an estate tax or an inheritance tax. Clients can use their annual exclusion gifts and when appropriate, larger gifts can be made using the federal lifetime exemption to move appreciating assets out of their estate.
For married couples, another significant opportunity is making sure both Maryland estate tax exemptions are fully utilized. As we mentioned earlier, although Maryland does have an estate tax, Maryland does offer portability between spouses to combine their exemptions.
The objective is simple, avoid wasting one spouse's exemption and preserve as much wealth as possible for the family. One example in these documents and in the planning is to provide a state-only QTIP election (Qualified Terminable Interest Property election), which allows planners to defer Maryland estate tax in certain situations while preserving favorable federal tax treatment. It's a powerful tool, but it only works if the estate plan has been drafted with sufficient flexibility before the client dies.
That's another reason why it's so important for clients to continually review and update their documents.
Life insurance planning can also be effective and, when appropriately structured through an ILIT (Irrevocable Life Insurance Trust), life insurance proceeds can provide the liquidity needed to pay estate taxes without increasing the taxable estate itself.
Ultimately, the greatest opportunity isn't any single planning technique. It's identifying clients who've crossed or are coming close to that $5 million threshold and starting the conversation early.
Financial Advisors are often the first professionals to recognize that a client's wealth has outgrown their existing estate plan. When advisors coordinate early with estate planning council, the clients have more options, they have more flexibility and often the opportunity to save their family hundreds of thousands of dollars or more in Maryland estate taxes while achieving their broader legacy goals.
Christian Kansler:
Great. Thanks Jay. And thank you to the many Financial Advisors that joined us across the great state of Maryland. If you'd like to explore this topic further or learn more about how local advisors are engaging our solutions here at the Cromwell Funds, please feel free to visit our website or call me directly. Thanks again, Jay. Thank you everyone and have a great day.
Nothing contained in this communication constitutes tax or investment advice. Investors must consult their tax advisor for advice and information concerning their particular situation.