Understanding Complex Estate Tax Planning
June 9, 2025
Estate tax planning is an essential part of long-term financial strategy, particularly for individuals and families with substantial assets.
In Maryland, where both state and federal estate taxes apply, the need for sophisticated estate planning becomes even more pressing. Without proper planning, heirs could face unexpected tax liabilities that significantly diminish the value of inherited assets. Fortunately, our attorneys at Marvel & Emche, P.A. in Salisbury, Maryland, are here to help with every step of the process.
Proactive estate tax planning not only preserves wealth but also provides a smoother transition of assets to loved ones, minimizes administrative burdens, and aligns with your legacy goals.
Here’s what you should know about the key aspects of complex estate tax planning, including Maryland’s unique tax structure, federal estate considerations, and advanced planning strategies to reduce exposure.
What to Know About Maryland Estate Tax
Maryland is one of only a few states that imposes its own estate tax in addition to the federal estate tax.
As of 2025, the Maryland estate tax exemption stands at $5 million per individual, indexed for inflation, which is significantly lower than the federal threshold. Estates that exceed this exemption are taxed progressively, with rates ranging from 0.8% to 16%. This means that even moderately sized estates in Maryland may face a substantial state-level tax burden.
What makes Maryland particularly unique is its dual taxation system, which combines both estate and inheritance taxes. Moreover, Maryland estate taxes are based on the gross estate, including:
Real property
Bank accounts
Investments
Certain life insurance policies
This expansive definition means many individuals unknowingly exceed the exemption threshold. With the governor's proposal to reduce the exemption to $2 million, more families, especially those with real estate or retirement accounts, will find themselves subject to estate taxes unless they proactively plan for them.
Federal Estate Tax Considerations
While Maryland’s estate tax captures many mid-sized estates, federal estate taxes generally impact ultra-high-net-worth individuals. In 2025, the federal exemption is nearly $14 million per individual and close to $28 million for married couples.
However, this higher exemption is temporary. Under the Tax Cuts and Jobs Act (TCJA), the exemption is set to "sunset" on January 1, 2026, cutting the exemption roughly in half to around $7 million per person—unless Congress acts to extend the current thresholds.
This looming reduction in the federal exemption has led many affluent families to take preemptive action. Strategies such as accelerated gifting or irrevocable trusts allow individuals to use the higher exemption while it’s still available.
Portability Between Spouses
Portability is a powerful tool that allows a surviving spouse to claim the unused portion of their deceased spouse's federal or Maryland estate tax exemption.
For example, if one spouse dies in 2025 having used only $2 million of the $5 million Maryland exemption, the surviving spouse may elect to "port" the remaining $3 million to apply against their own estate in the future. This essentially allows married couples to double their exemption with the proper planning.
However, portability isn’t automatic. To claim it, the estate of the first spouse must file a federal estate tax return (Form 706) within nine months of the date of death—even if no tax is due. Missing this deadline may permanently forfeit the unused exemption.
Additionally, while federal portability is relatively well-established, Maryland’s rules and administrative procedures are less defined, making it critical to consult with a knowledgeable attorney who understands the state’s nuances. In practice, portability requires close coordination between financial professionals, tax preparers, and legal counsel.
Inheritance Tax in Maryland
In addition to estate taxes, Maryland imposes an inheritance tax of 10% on transfers to individuals who aren’t considered “exempt” relatives.
Fortunately, immediate family members—including spouses, children, parents, grandparents, siblings, and stepchildren—are exempt from this tax. However, nieces, nephews, cousins, friends, and unrelated beneficiaries aren’t exempt, and this can create unintended consequences for more complicated or non-traditional families.
For individuals who wish to leave part of their estate to a non-relative or a trusted caregiver, special planning may be needed to minimize or offset the inheritance tax. Charitable transfers, on the other hand, remain fully exempt and can serve as both a philanthropic and tax-saving strategy.
Strategies for Minimizing Estate Taxes
The intricacy of estate tax planning increases as your estate grows and your family situation becomes more nuanced. Fortunately, there are multiple proven strategies to reduce both state and federal estate tax exposure.
From trusts and lifetime gifting to charitable vehicles and family partnerships, each tool has a specific use case and tax implication. The goal is to implement a comprehensive, customized plan that addresses your unique goals while preserving flexibility for future changes in law or circumstances.
The key to success lies in early and continuous planning. Many of the most effective techniques, such as irrevocable trusts or large-scale gifting, require time to implement and often can’t be used retroactively.
Regularly revisiting your estate plan keeps it aligned with your current assets, tax laws, and personal wishes. Equally important is the involvement of your beneficiaries and heirs in the planning process to avoid confusion, conflict, or litigation down the road.
Irrevocable Life Insurance Trusts (ILITs)
An ILIT is an advanced estate planning tool designed to own and manage a life insurance policy outside of the taxable estate. When structured correctly, the death benefit isn’t included in the estate of the insured, and thus isn’t subject to Maryland or federal estate tax.
In addition to the tax benefits, ILITs provide asset protection and control over how and when beneficiaries receive life insurance proceeds. For example, you can stipulate that funds are disbursed over time or upon reaching certain milestones, rather than as a lump sum.
Charitable Giving
Charitable giving allows individuals to align their estate plans with philanthropic goals while reducing tax exposure. By donating a portion of the estate to qualified charities, you can receive both income and estate tax deductions. Maryland fully exempts charitable bequests from estate and inheritance taxes, making this a powerful tool for tax-conscious donors.
Vehicles like charitable remainder trusts (CRTs) and donor-advised funds (DAFs) can further optimize giving. CRTs provide a lifetime income stream to the donor or other beneficiaries, with the remainder going to charity. DAFs allow donors to make a charitable contribution now while deciding later which charities will receive grants.
These structures enable you to support causes you care about while gaining valuable tax advantages for your estate and heirs.
Lifetime Gifting
Gifting during your lifetime is a straightforward yet powerful strategy to reduce the taxable value of your estate. The IRS allows each individual to gift up to $18,000 per year (as of 2025) to an unlimited number of recipients without incurring gift tax or reducing your lifetime exemption. Over time, this can transfer significant wealth to the next generation while avoiding estate taxes.
Beyond the annual exclusion, certain payments for tuition or medical expenses made directly to the provider aren’t considered taxable gifts. Families can also leverage larger lifetime gifts using the federal lifetime exemption, which allows up to $13.99 million per individual in 2025.
However, with the anticipated reduction of this exemption in 2026, many families are accelerating their gifting strategies now to lock in today’s higher limits. Strategic gifting should be documented carefully and integrated into the broader estate plan for the sake of tax efficiency and asset protection.
Spousal Lifetime Access Trusts (SLATs)
SLATs are irrevocable trusts established by one spouse for the benefit of the other. They remove assets from the taxable estate while preserving indirect access to the trust’s assets through the beneficiary spouse.
One of the main advantages of an SLAT is its flexibility. The beneficiary spouse can receive distributions as needed, helping to maintain the couple's lifestyle. However, SLATs require careful structuring to avoid issues such as the reciprocal trust doctrine, which could lead to the trusts being collapsed for tax purposes.
Additionally, SLATs are irrevocable, so changes can’t be made once assets are transferred. Proper drafting and coordination with your estate planning attorney are essential to maximizing their benefits.
Intentionally Defective Grantor Trusts (IDGTs)
An IDGT is a sophisticated estate planning tool that allows the grantor to “freeze” the value of certain appreciating assets for estate tax purposes. The trust is structured so that the grantor pays the income taxes on the trust's earnings, allowing the trust assets to grow tax-free for the beneficiaries. This results in a larger transfer of wealth over time and a reduced taxable estate.
IDGTs are particularly useful for transferring interests in closely held businesses, real estate, or investment portfolios. Since the grantor continues to pay the tax, the trust assets grow more rapidly, and the grantor's estate continues to shrink due to the tax payments.
Additionally, sales to an IDGT using a promissory note aren’t recognized for income tax purposes, allowing for tax-efficient transfers. However, like all advanced techniques, these trusts must be carefully drafted and maintained to remain legally compliant and avoid IRS scrutiny.
Contact an Experienced Estate Tax Planning Attorney
Estate planning isn’t just about taxes—it’s about making sure your values, your legacy, and your family are taken care of for generations to come. Serving clients throughout the Salisbury, Maryland, area, including Northwood, White Plains, West Wood, Princess Anne, Cambridge, and Ocean City, Marvel & Emche, P.A. is your dependable partner for all your estate planning needs. Contact us today to start planning for your future.