Opinion: Maryland's Push to Change Estate Tax Law Will Help Middle Class

The following op-ed was written by James A. List and recently published by the Baltimore Business Journal.

Thank you, Annapolis!

No matter what your party affiliation, the bill overwhelmingly passed by Maryland’s House of Delegates and Senate to lower the state’s punitive estate tax is the right thing to do to help their constituents and repair — at least somewhat — the state’s tax unfriendly reputation. Assuming Gov. Martin O’Malley now signs the estate tax bill into law, the state’s legislators finally have provided us with some sense of certainty and fairness on the issue of estate taxes.

But why are estate taxes an issue in the first place? Despite Forbes magazine’s description of Maryland as one of the worst states in which to die, this is simply not an issue on most people’s minds. We tend to think of estate taxes as someone else’s problem, or an issue that only comes into play for the incredibly wealthy.

Nothing could be farther from the truth. While estate taxes have often been painted in class terms — i.e., they only apply to the wealthiest 3 percent of our population — the bottom line in Maryland is that career teachers or government employees who have retirement savings and have paid off their homes frequently accumulate wealth that exceed ’s the state’s $1 million estate threshold.

It is these middle class citizens who find themselves trapped by Maryland’s estate taxes. In my experience, the wealthy generally have advisers and can plan accordingly. It is the middle class, though, whose heirs will be taxed on assets that were already taxed when they initially were acquired. It is the middle class who have worked hard and saved throughout their lives who, thanks to Maryland’s estate tax, find themselves forced to restructure their estates, give away their assets (and hope they don’t run out of money), or move to a tax-friendlier state.

This untenable situation arose in 2002, when Maryland began to pass legislation that imposed its own estate tax system after the federal government increased the amount that each person could pass tax-free to their heirs. So while the federal exemption is now $5.25 million, Maryland taxes estates beyond $1 million, and that amount includes life insurance proceeds, retirement accounts, and real estate, with a graduated tax rate capped at 16 percent.

Why did Maryland and half of the other states take this drastic step? Historically, most states shared a portion of the federal estate taxes paid by their residents. As the federal exemptions increased, though, estate taxes decreased, lowering the federal taxes shared with the states. This loss of estate tax revenue was especially significant to state governments, which are required by law to balance their budgets.

Maryland responded by imposing the current estate tax, in addition to the existing inheritance tax on estates distributed to persons other than spouses, children, siblings, and parents. Gifts to anyone else are subject to a separate inheritance tax of 10 percent, making Maryland one of only a few states with this tax double whammy.

Obviously, this strikes a nerve, especially when Maryland residents realize that the assets which make up their estates were already taxed when they were acquired. Fortunately, our elected officials now understand what many advisers and companies have been saying for years. Maryland residents are relocating or telecommuting from states with more favorable tax laws. They are changing their residency to a state where they maintain a vacation home.

This action by our legislators is a good first step and should be applauded. While more favorable estate laws may not convince a Fortune 500 company to relocate its headquarters to “the land of pleasant living,” it certainly helps in leveling the playing field with our neighbors. Well done.

See the published op-ed here: http://www.bizjournals.com/baltimore/news/2014/03/31/opinion-marylands-push-to-change-estate-tax-law.html

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