Maine Estate Tax: $7M Exemption, the Cliff & Trust Fix

The decision: Tom and Margaret, $12M, Cape Elizabeth, Maine

Tom and Margaret are married, both 68, Maine residents in Cape Elizabeth. Their combined estate is $12M: a $2.5M home, $6.5M in brokerage and retirement accounts, $2M in a closely held business interest, and $1M in cash and personal property. They file jointly. They have two adult children.

Their existing estate plan is the default most couples land on: everything passes outright to the surviving spouse, then to the children on the second death. It feels simple and it eliminates federal estate tax completely — their $12M is well under the $13.99M federal exemption (IRC § 2010), and even without planning, federal portability lets the survivor stack both spouses’ exemptions to $27.98M.

The problem is Maine. Maine’s estate tax exemption is only $7M, and Maine does not offer portability. If Tom dies first and leaves everything to Margaret, his $7M Maine exemption evaporates. When Margaret later dies with the full $12M in her estate, Maine taxes the $5M above her single $7M exemption — producing a Maine estate tax bill of roughly $440,000 under the 36 M.R.S. § 4103 graduated schedule (8% on the first $3M over the exclusion, then 10%). A credit-shelter trust drops that to $0. That is the entire decision, and it turns on one structural fact: Maine portability does not exist.

What Maine’s estate tax actually says

Maine imposes its own estate tax under 36 M.R.S. § 4102, separate from and on top of the federal system. Two numbers run the whole analysis:

• Exemption: $7M per decedent. Estates valued at or below $7M owe no Maine estate tax. Only the value above $7M is taxed.
• Graduated rates to a 12% top. Under 36 M.R.S. § 4103, the Maine taxable estate over the $7M exclusion is taxed at 8% on the first $3M of excess ($7M–$10M), 10% on the next $3M ($10M–$13M), and 12% on excess above $6M ($13M and up).

Maine is a marginal tax, not a cliff. A $9M estate is taxed on the $2M of excess at 8% — a Maine bill of about $160,000 — not on the entire $9M. That distinction matters because it is the opposite of New York, whose $7.16M estate tax is a true cliff — an estate over roughly 105% of the threshold (about $7.5M) loses the exemption entirely and pays tax on the full estate. Maine is gentler in mechanics but unforgiving in one respect: there is no way to share an exemption between spouses unless you build the structure yourself.

The federal-versus-Maine gap that traps Maine couples

Here is the trap in one table. The federal system is generous and portable; Maine is far smaller and not portable.

Because the couple is below the federal exemption, federal portability is irrelevant to them — they would never owe federal tax anyway. The danger is that the “everything to the survivor” plan that perfectly handles the federal side actively wastes the first spouse’s $7M Maine exemption. The simplest plan is the one that creates the Maine bill.

The math: outright bequest versus credit-shelter trust

Assume Tom dies first. Compare the two structures on the second death (Margaret’s), where Maine actually collects.

Scenario A — everything outright to the survivor

1. Tom dies. His $6M share passes outright to Margaret. The unlimited marital deduction means $0 tax at Tom’s death — but his $7M Maine exemption is used on $0 and is gone forever.
2. Margaret now owns the full $12M.
3. Margaret dies. Her taxable Maine estate is $12M, against her single $7M exemption.
4. Maine taxes the $5M excess: 8% on the first $3M ($240,000) plus 10% on the next $2M ($200,000), for a bill of roughly $440,000 (36 M.R.S. § 4103).

Scenario B — credit-shelter (bypass) trust on the first death

1. Tom dies. Up to $7M of his assets fund a credit-shelter trust for Margaret’s benefit (income, and principal for health, education, maintenance, support). This uses Tom’s $7M Maine exemption — no tax, and the exemption is no longer wasted.
2. Those trust assets are excluded from Margaret’s estate because she holds only a limited beneficial interest, not ownership.
3. Margaret dies owning roughly $5M–$7M in her own name (her original half plus growth), comfortably within her own $7M exemption.
4. Maine tax on the second death: $0. The couple sheltered the full ~$14M of combined exemption.

The trust converts a $440,000 Maine tax into $0, and it does so without raising the federal bill by a dollar — the couple was never going to owe federal tax. The cost is a one-time trust drafting fee (commonly $3,000–$8,000 for a married couple’s plan) and the administrative reality of running a trust after the first death. On a $440,000 saving, the math is not close.

What most people miss: the step-up basis trade-off

The credit-shelter trust is not free of cost — the cost is a tax-basis trade-off that most do-it-yourself planners never see. Under IRC § 1014, assets in a person’s estate at death receive a basis step-up to date-of-death fair market value, wiping out unrealized capital gains for the heirs.

• Outright (Scenario A): every dollar gets stepped up twice — once at Tom’s death, again at Margaret’s. The children inherit with a basis equal to value at the second death. No Maine tax was avoided, but the income-tax basis is maximized.
• Bypass trust (Scenario B): the $7M placed in the trust is stepped up at Tom’s death but is not stepped up again at Margaret’s death, because the trust assets are excluded from her estate. Appreciation inside the trust between the two deaths carries the children’s eventual capital-gains exposure.

So the real comparison is: a guaranteed ~$440,000 Maine estate-tax saving (Scenario B) versus a potential future capital-gains cost on the trust’s growth between deaths. For a Maine couple at $12M, the estate-tax saving almost always wins, because (a) the 8%–12% Maine estate tax hits the whole excess while the federal capital-gains tax (15% or 20% LTCG plus the 3.8% NIIT under IRC § 1411) hits only the appreciation, and (b) modern drafting can recover much of the step-up. A “disclaimer trust” or a trust with a formula general power of appointment lets the surviving spouse pull appreciated assets back into her estate for a second step-up where it helps — capturing the Maine exemption and the basis bump. That flexibility is the part the outright plan can never offer.

Non-residents: the Maine vacation home trap

You do not have to live in Maine to owe Maine estate tax. Under 36 M.R.S. § 4104, Maine taxes the value of real and tangible personal property located in Maine that is included in a non-resident decedent’s federal gross estate.

Consider a Florida retiree with a $3M oceanfront home in Boothbay Harbor and a $20M total estate. Florida has no estate tax. But the $3M Maine-situs home is dragged into the Maine calculation, and because the decedent’s total estate is large, Maine apportions tax to the Maine property. The fix for non-residents is usually to hold the Maine real estate through an entity (an LLC), which can convert Maine-situs real property into intangible personal property that Maine does not tax on a non-resident — a structure worth pricing before you assume your out-of-state residency protects you.

Who should act, and who can skip this

• Combined estate under $7M: no Maine estate tax exposure as a couple if structured so the survivor stays under $7M. Below $7M total, you likely do not need a bypass trust for Maine-tax reasons.
• Combined estate $7M–$14M (Tom & Margaret): this is the sweet spot. A credit-shelter or disclaimer trust can take the Maine tax to $0 by using both $7M exemptions. This is the highest-value, lowest-cost move.
• Combined estate over $14M: the bypass trust shelters the first $14M; the excess still faces Maine tax. Layer in lifetime gifting (the $19,000 annual exclusion per donee, IRC § 2503(b)), a SLAT, or charitable structures to push more out of both estates.
• Non-residents with Maine property: review Maine-situs exposure regardless of your home state’s rules.

The decision lever

If your combined estate is between $7M and $14M and you live in Maine, the single lever that moves the most money is whether your plan funds a credit-shelter (or disclaimer) trust on the first death rather than passing everything outright to the survivor. Maine gives you no portability, so the first spouse’s $7M exemption only counts if a trust catches it. For Tom and Margaret, building that trust converts a $440,000 Maine estate-tax bill into $0 — and a disclaimer-trust version lets the survivor decide, after the first death, exactly how much to shelter versus how much to keep for a second step-up. Pull your current estate-plan documents and check one thing: does the surviving spouse inherit outright, or does a bypass trust fund first? If it is the former, you are sitting on the $440,000 problem.