Moore’s estate tax proposal prompts concern among planners, clients

ANNAPOLIS — Gov. Wes Moore has proposed lowering Maryland’s estate tax exemption to simplify the tax code, but some legislators and estate planners are concerned that doing so will subject more middle-class filers to the tax, including those whom the governor’s broader tax reform plan is otherwise meant to benefit.

There is also concern about officials inadvertently adding to Maryland’s reputation in the region as a high tax state and creating another reason for people to house their wealth in another jurisdiction.

Maryland is the only state in the country with both an estate tax and an inheritance tax, both of which apply to the transfer of someone’s property and assets after they die.

While the estate tax applies to a decedent’s total estate, the inheritance tax is charged to beneficiaries based on what they inherit. In Maryland, filers who may be subject to both can apply the inheritance tax as a deduction to their estate tax.

As part of an expansive tax reform plan that he said will make Maryland’s code simpler and fairer, Moore has proposed lowering the estate tax exemption from $5 million to $2 million and repealing the inheritance tax.

“The governor thinks this should be simpler,” Eric Luedtke, a senior policy adviser to the governor, said in an interview. “He doesn’t like the idea that we’re charging two taxes to people who are inheriting from a deceased relative.”

With Maryland facing a $3 billion deficit that’s projected to double in the coming years, Moore has brought forward a series of changes to the tax code to generate revenue and help close the gap.

The governor has said that, under his plan, more than eight in 10 filers will either receive a tax cut or have no change to their taxes, while the state’s highest earners will see an increase. The broader plan is expected to generate hundreds of millions of dollars in revenue.

But revenue from lowering the estate tax exemption isn’t expected to help with the deficit.

By repealing the inheritance tax, the state will strip local registers of wills of their main revenue source. Officials are expected to use the added revenue from lowering the estate tax exemption to cover the registers of wills.

Who’s really worth $2 million?

Attorneys and accountants who help people get their affairs in order say it’s easier than many realize to reach $2 million in wealth. The governor hasn’t proposed tying the exemption to inflation, like it is at the federal level, so it may also become increasingly easy to reach the threshold in the coming years.

“People may think that if you’ve got a net worth of $2 million, you’re incredibly wealthy and you should be paying through the nose,” Daryl Sidle, a partner with the firm Baxter Baker, said in a phone interview. “When you look at everything that goes into comprising your assets for estate tax purposes, $2 million is not a huge amount of money.”

For estate planning and tax purposes, an individual’s wealth includes such assets as equity in a home, a balance in a retirement plan and the value of a life insurance policy.

Sidle said it’s common for people to enter his office and not realize that they’re technically millionaires until after he walks them through everything that counts against their estate tax exemption.

One attorney estimated that 40-50% of his clients would have to file an estate tax return under the proposed new exemption.

Luedtke, though, contended that the state would really be “increasing the lowest threshold at which a person’s estate and inheritance could be subject to tax from $50,000 to $2 million.”

For a $2.3 million estate, just $300,000 would be taxable, perhaps to the tune of a couple thousand dollars. The maximum estate tax rate in Maryland is 16%, though that generally applies to large estates over $10 million, administration officials said.

The inheritance tax, meanwhile, applies to wealth as low as $50,000 and is subject to a flat 10% tax rate.

Certainly not everyone who files an estate tax return will have to pay taxes, and there are several deductions that can lower or eliminate the tax for certain filers, including for mortgages or property that passes to a surviving spouse.

But Myrna Mitnick, a partner with Leonard J. Miller and Associates in Baltimore, said just the fact that people have to file a return is “in essence a tax.”

Most people can’t prepare state and federal estate tax filings on their own, so they have to pay to hire a professional, she said.

Chris Walter, who leads estate planning for Columbia-based Davis, Agnor, Rapaport and Skalny, said the inheritance tax has been a “real pain to plan around” for some people and that repealing it would be a positive development for filers.

But, he questioned whether the governor’s broader plan would really simplify the tax code.

“Will there be fewer articles in the tax code? Yes. But, you’re going to have many more people filing estate tax returns, which are really complicated to do,” he said in a phone interview.

Some legislators have also said they’re concerned about the state subjecting another class of filers to the tax, though there doesn’t appear to be enough concern about that part of the equation among top Democrats to derail the proposal.

Republicans have been quicker to denounce the governor’s plan.

“It’s a very punitive thing to do. ‘Estate tax’ sounds like a bunch of rich people, but it’s not,” state Sen. Justin Ready, a Republican representing Frederick and Carroll counties, said in an interview. “It doesn’t take a lot to accumulate $2 million in assets.”

A reason to leave?

Neither Virginia nor Delaware has an estate tax, and the federal exemption is $13.99 million and indexed to inflation.

State Del. Jon Cardin, a Baltimore County Democrat, said the state must determine whether the policy will prompt people to leave Maryland for a lower-tax state.

“Are we actually going to reduce the number of estates in the state of Maryland by increasing the costs to those estates?” Cardin said in an interview. “If that’s the case, then getting taxes on the transfer of wealth from generation to generation may not be a good idea.”

Maryland has already been losing residents at a greater pace than neighboring states, and people who leave the state for tax reasons are generally big-time contributors to the state coffers.

Estate planners have questioned whether lowering the exemption may prompt especially wealthy filers to settle their affairs in more tax-friendly states, whether by moving or filing in another state where they own property. The attorneys said the state could stand to lose tax revenue.

The governor and his team, though, say the change will have the opposite effect.

“By simplifying this,” Luedtke said, “we think it will allow us to tell a good story about our tax system to people that are thinking of relocating here.”