Maryland & Federal Estate Taxes: What Families Need to Know in 2025
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With potential estate tax changes, understanding
their impact is key to preserving wealth and minimizing taxes.
Estate tax laws at both the federal and state levels continue to evolve, with significant potential changes on the horizon. Understanding the current landscape, including exemption thresholds and inheritance tax rules, is critical for effective estate planning.
Current Federal Estate Tax and Exemption
The federal estate tax applies to estates whose value exceeds a certain exemption threshold at the time of a decedent’s death. As of 2025, the federal estate tax exemption is $13.99 million per individual, or $27.98 million for married couples using portability (essentially, the sharing of the exemption). Estates that exceed this threshold are taxed at a top rate of 40%.
This exemption, which is currently at an all-time high, was enacted under the Tax Cuts and Jobs Act (TCJA) of 2017. However, absent further legislative action, this exemption is set to revert to pre-2018 levels, adjusted for inflation, on January 1, 2026. This would lower the exemption to approximately $7 million per individual ($14 million for married couples). This reduction would substantially affect high-net-worth individuals and families, potentially increasing estate tax burdens.
For the higher exemption to continue beyond 2025, Congress must pass new legislation to either make it permanent or set a different threshold. If no such action is taken, the exemption will automatically reduce in 2026.
Current Maryland Estate Tax and Exemption
Maryland also imposes estate taxes, separate from the federal estate tax. For 2025, Maryland’s estate tax exemption is $5 million per individual ($10 million for married couples using portability), significantly lower than the federal threshold. Estates that exceed this threshold are subject to tax at rates ranging from 0.8% to 16%, depending on the estate’s value.
Proposal to Reduce Maryland Estate Tax Exemption
On January 15, 2025, Governor Wes Moore proposed reducing Maryland’s estate tax exemption from $5 million to $2 million per individual (and from $10 million to $4 million per married couple). This proposal is aimed to generate additional state revenue and address concerns about budget deficits. However, it has also raised concerns about the movement of wealth outside of the state of Maryland. Most property is subject to estate tax in the state where the decedent was domiciled at death, so a decreased exemption may motivate high-net-worth individuals to consider relocating to states without estate taxes, such as Virginia, Delaware, or Florida.
Maryland’s Inheritance Tax and Proposal for Elimination
Maryland is one of the few states that still imposes an inheritance tax, which is separate from the estate tax. Maryland levies a 10% inheritance tax on assets transferred to certain beneficiaries, including nieces, nephews, friends, and more distant relatives. However, direct descendants, spouses, and siblings are generally exempt. Unlike the estate tax, there is no inheritance exemption amount. For example, a $100 bequest to a niece or nephew at a decedent’s death would be subject to a $10 inheritance tax.
Governor Moore also recently proposed to eliminate Maryland’s inheritance tax altogether. Supporters of the repeal argue that the inheritance tax places an undue burden on middle-class families and encourages residents to move their wealth out of Maryland. If passed, the elimination of the inheritance tax could significantly reduce the tax burden on beneficiaries who are not immediate family members.
Planning Strategies to Prepare for These Changes
Given the potential changes to both federal and Maryland estate tax laws, proactive planning is essential. Key strategies include:
- High-net-worth individuals should consider making lifetime gifts to take advantage of the current high federal exemption before it decreases in 2026, and the Maryland exemption before it is potentially reduced.
- Irrevocable trusts, such as spousal lifetime access trusts (SLATs), can help shield assets from federal or state estate tax.
- With Maryland’s estate tax exemption potentially decreasing, some residents may consider relocating to states without an estate tax, such as Virginia, Delaware, or Florida.
Conclusion
Federal and Maryland estate tax laws may experience significant changes that would impact many estate plans. The scheduled reduction of the federal estate tax exemption in 2026 and Maryland’s proposed changes to its estate tax and inheritance tax policies underscore the need for proactive planning with a trusted adviser. Even if individuals do not believe these changes will significantly impact their current estate plan, regular review of wills, trusts, and beneficiary designations helps ensure they or their heirs will not be subject to unanticipated taxes.
Reach out to Brittany Oravec at boravec@sgrwlaw.com to review your estate plan and consider strategies to avoid any unnecessary tax liability.