How Are Estate Taxes Different from Inheritance Taxes in Maryland?
Yesterday a client asked me a question I hear all the time: "Are estate tax and inheritance tax just two names for the same thing?" It's a fair question, and the answer is that they're two separate taxes with their own rules. Maryland is the only state that imposes both an estate tax and an inheritance tax, which is exactly why untangling the difference matters if you live here.
If you're trying to plan ahead for your own estate, or you're settling the estate of someone you love, this distinction matters. It can shape how much ends up going to the people you care about, and how much goes toward taxes instead.
Estate Tax: A Tax on the Estate Itself
The estate tax is calculated on the total value of everything someone owned at the time of their death: real estate, bank accounts, investments, business interests, and more. This total is called the "gross estate." The tax is owed by the estate before anything is distributed to heirs, and it's based on the overall size of the estate rather than on who receives what.
Maryland's estate tax generally only comes into play for larger estates. There is an exemption amount below which no estate tax is owed at all, and that exemption has changed over the years through legislation. Because the exact threshold and rate can shift, it's worth confirming the current figures with a professional rather than relying on a number you read somewhere online, including here.
Inheritance Tax: A Tax on What Each Person Receives
The inheritance tax works differently. Instead of taxing the estate as a whole, it taxes specific transfers to specific people, based on their relationship to the person who died.
In Maryland, close family members, such as a spouse, children, grandchildren, parents, and siblings, are generally exempt from the inheritance tax. More distant relatives and unrelated beneficiaries, such as friends, cousins, or nieces and nephews, may owe inheritance tax on what they receive. The rate is a flat ten percent on the entire inheritance, although certain types of property or transfers may be exempt.
This is why two people can inherit from the same estate and end up with very different tax outcomes. It isn't about the size of the estate; it's about who is receiving the gift and their legal relationship to the decedent.
Why Maryland Has Both
Having two separate taxes can feel like an unnecessary layer of complexity, and honestly, it is a lot to keep track of. Part of the reason Maryland keeps both on the books comes down to where the money goes: the estate tax supports the state's general fund, while the inheritance tax helps fund the Registers of Wills across the state. Beyond funding, the two taxes also look at different things. The estate tax looks at the big picture, how much wealth is passing on as a whole. The inheritance tax looks at the individual level, who is receiving it and what their relationship is to the person who died. A family with a modest estate and only close relatives as beneficiaries may owe little or nothing in either tax. A larger estate, or one with beneficiaries outside the immediate family, may face exposure to one tax, the other, or both.
Understanding which tax applies, and to whom, is often the first step in figuring out what a family should actually expect when an estate moves through administration.
A Practical Takeaway
Estate and inheritance taxes in Maryland depend on details specific to each family: the value of the estate, the people involved, and the current state of the law, which can change over time. General information like this can help you understand the landscape, but it isn't a substitute for a review of your specific situation.
If you're working through these questions for your own planning, or for a loved one's estate, we'd be glad to sit down and talk through what you're facing. No pressure, just a conversation to help you understand where things stand.
