Maryland Estate + Inheritance Tax: The $5M Double Hit

The decision: Harold’s $6M estate, and who he names

Harold is a 74-year-old widower in Bethesda, Maryland. His estate is worth $6,000,000 — a paid-off home, a brokerage account, and a Roth IRA. He never remarried after his wife died. He is deciding between two beneficiaries: his only child, a daughter in Virginia, or, in an earlier draft of his will, his favorite niece, who helped care for him.

The dollar difference between those two choices is enormous, and almost nobody guesses it correctly. Maryland is the only state in America with both a state estate tax and a state inheritance tax, so the instinct is to assume both bite hard regardless of who inherits. They do not. Here is what actually happens.

• If Harold leaves the $6M to his daughter: Maryland estate tax applies to the $1M over the $5M exemption (roughly $64,000 at the graduated rate up to 16%). His daughter, as a lineal descendant, pays $0 inheritance tax. Federal estate tax: $0, because the estate is under the $13.99M federal exemption.
• If Harold leaves the $6M to his niece: the same estate tax on the $1M excess applies, PLUS a flat 10% inheritance tax on the bequest because a niece is a “collateral” heir — potentially around $600,000 before the offsetting credit. This is the “double hit.”

The decision lever is the relationship of the heir, not the size of the estate. Naming a child instead of a niece on a $6M estate is worth several hundred thousand dollars. The rest of this guide shows exactly how each tax is calculated and where the credit that prevents true double-taxation comes in.

Two separate taxes, two separate rulebooks

People conflate Maryland’s two death taxes because both are triggered by death. They are governed by different statutes, calculated on different bases, and paid by different parties.

The single most important line in that table is the inheritance-tax exemption row. Maryland exempts not just spouses and children but siblings as well. The 10% tax is far narrower than the reputation suggests — it reaches the next ring out: nieces, nephews, cousins, friends, and unrelated beneficiaries.

The $5M estate tax: how the math runs

Maryland’s estate tax exemption is $5,000,000 per person. Critically, it is fixed — it does not rise with inflation the way the federal exemption does. For 2026 the federal estate tax exemption is $13.99M per individual with a 40% top rate (IRC §2010, §2001(c)). That gap creates a band — estates between $5M and $13.99M — that owe Maryland estate tax but $0 federal estate tax. Harold’s $6M estate sits squarely in that band.

On the $1,000,000 above the exemption, Maryland’s graduated rate tops out at 16%. Maryland computes the tax using the old federal state-death-tax-credit table, which means the effective rate on the first dollars over $5M is lower than 16% and climbs from there. On a $1M excess the resulting estate tax lands in the neighborhood of $64,000. The estate — not the heir — writes that check before anything is distributed.

Two features make the estate tax easier to plan around than people assume:

1. Unlimited marital deduction. Property passing to a surviving spouse is fully deductible — an estate of any size owes $0 Maryland estate tax if everything goes to the spouse. The tax is deferred to the second death.
2. Step-up in basis still applies. Under IRC §1014, heirs take inherited assets at date-of-death fair market value. Harold’s daughter inherits the brokerage account with the built-in gains wiped out for income-tax purposes — a separate, federal benefit that the Maryland estate tax does not touch.

The 10% inheritance tax: who actually pays it

This is where the myths live. Maryland’s inheritance tax is a flat 10% on the “clear value” of property passing to a collateral heir — and the list of people who are NOT collateral heirs is long.

Exempt from the inheritance tax entirely (they pay $0 regardless of amount):

• Spouse
• Child, stepchild, and their spouses
• Grandchild and other lineal descendants
• Parent and grandparent
• Brother and sister — exempt since the year 2000

The 10% rate applies to everyone outside that circle: nieces, nephews, aunts, uncles, cousins, friends, business partners, and unrelated individuals or organizations. So in Harold’s case, leaving the estate to his niece triggers the 10%; leaving it to his daughter does not; and — the part almost everyone gets wrong — leaving it to his own brother would also trigger $0 inheritance tax.

What most people miss: the credit that prevents true double-taxation

The phrase “double hit” suggests Maryland taxes the same dollar twice at full freight. It does not. Under Md. Code, Tax-General §7-309, the Maryland estate tax is reduced by the amount of inheritance tax paid on the same property. The inheritance tax is calculated and paid first; the estate tax is then computed and offset by what the inheritance tax already took.

Walk through Harold’s niece scenario with the credit:

The $600,000 inheritance tax swallows the entire ~$64,000 estate tax via the credit, so the estate-tax line drops to $0. The total damage is roughly $600,000 — driven almost entirely by the inheritance tax, not the estate tax. Now compare the daughter scenario: $0 inheritance tax, ~$64,000 estate tax, total roughly $64,000. Choosing a lineal heir over a collateral heir saves Harold’s family on the order of $536,000 on this $6M estate.

The exemption-loss trap: no portability in Maryland

Married Maryland couples face a separate problem the federal system solved years ago. The federal exemption is portable — a surviving spouse can claim the deceased spouse’s unused exemption (up to $27.98M combined for 2026). Maryland does not allow portability. If the first spouse to die leaves everything to the survivor and uses none of their $5M exemption, that $5M is gone forever.

The standard fix is a credit-shelter (bypass) trust. On the first death, up to $5M funds a trust that supports the surviving spouse but is not included in the survivor’s taxable estate. That preserves the first spouse’s $5M exemption, so the couple shelters up to $10M from Maryland estate tax instead of $5M. For a couple worth $8M, skipping the trust can needlessly expose $3M to Maryland’s 16% rate — a six-figure avoidable bill.

Three levers to defuse the Maryland double tax

1. Name lineal heirs, or restructure collateral bequests. If you intend to benefit a niece, nephew, or unrelated person, the 10% inheritance tax is the dominant cost — far larger than the estate tax for most estates. Lifetime gifting (federal annual exclusion of $19,000 per donee for 2026, IRC §2503(b)) moves assets out of the inheritance-tax base because the tax only reaches property passing at death.
2. Use a credit-shelter trust to capture both spouses’ $5M exemptions. Because Maryland has no portability, married couples with combined assets over $5M should not rely on the unlimited marital deduction alone. A bypass trust on the first death locks in the first $5M exemption.
3. Get under $5M with a SLAT or lifetime gifts before the federal exemption changes. A Spousal Lifetime Access Trust removes assets from your taxable estate while your spouse retains indirect access. Pulling a $6M estate down under the $5M Maryland line eliminates the estate tax entirely — and locks in today’s larger federal exemption while it is available.

Common mistakes that cost Maryland families money

• Believing siblings pay the inheritance tax. They do not — brothers and sisters have been exempt since the year 2000. Restructuring a will to avoid leaving assets to a sibling out of inheritance-tax fear is solving a problem that does not exist.
• Assuming the estate tax and inheritance tax stack at full value. The §7-309 credit reduces the estate tax by inheritance tax paid. On a collateral-heir estate the inheritance tax usually absorbs the entire estate tax — you are not paying both in full.
• Counting on portability. Maryland does not have it. A surviving spouse cannot inherit the deceased spouse’s unused $5M. Without a bypass trust, half the couple’s shelter evaporates on the first death.
• Forgetting the exemption is frozen. The $5M figure does not index to inflation. As asset values climb, more Maryland estates cross the line every year even though the dollar threshold never moves.
• Overlooking the federal step-up. Maryland’s estate tax does not eliminate the IRC §1014 basis step-up. Heirs still receive assets at date-of-death value for income-tax purposes — a benefit worth modeling separately from the death-tax exposure.

The bottom line: relationship is the lever

Maryland’s reputation as the “double-tax” state is real but routinely misapplied. The estate tax only touches estates over $5M, the inheritance tax only touches collateral heirs, and the §7-309 credit keeps the two from stacking at full value. For Harold, the entire decision comes down to one line in his will: leave the $6M to his daughter and the family pays roughly $64,000; leave it to his niece and the family pays roughly $600,000. The single most powerful estate-planning move in Maryland is choosing — or restructuring — who inherits, then using a bypass trust or SLAT to keep the estate-tax side under the $5M line.