Cynthia was the only grandchild on her mother’s side of the family, so she wasn’t surprised that she had been included in her grandmother’s will. She was very surprised though, to learn the size of her inheritance – that she had inherited the house and property where she had spent summers during her childhood.
Cynthia had only graduated from college 18 months ago and had only ever lived with her parents, in the dorm and, for the last two years, in an apartment near campus and her job. She knew her parents paid homeowner association dues and property taxes on their home and were constantly spending money on maintenance and repairs. Which was one of the reasons she had decided to stay in her apartment for the time being, rather than purchasing a home. So when she learned of her grandmother’s bequest, the financial aspects of the inheritance were the first thoughts on her mind.
“Honestly,” Cynthia told us, “ I was still just accepting the fact that Gran was gone. In the two months since her passing, I hadn’t even been thought about what would happen to her house and belongings. I was just coming to terms with not being able to just call her up to talk about the latest adventures in my life. Then my uncle called and told me about my inheritance, and that I would be receiving an official letter with all of the details.”
Cynthia’s grandmother had named her uncle as her Personal Representative years ago when she had her attorney prepare her “Last Will and Testament”, which was then filed for safekeeping with the Register of Wills. Her uncle had been notified then that the will was filed with the Office of the Register of Wills, and that he should present the will for probate upon her death. When her uncle presented the will for probate, as instructed, he also notified all heirs and beneficiaries. That is when Cynthia received her letter.
Financial Responsibilities of Heirs
Cynthia had grounds to be concerned about the financial aspects of her inheritance. The person making the bequest, Cynthia’s grandmother, in this case, obviously did so out of a desire to share something of value with a loved one, something with both emotional and financial benefits. However, unless advanced estate planning has been done, the heir often faces overwhelming financial responsibilities that the benefactor may not have fully understood.
Currently, according to Mary Randolph, J.D.on NOLO.com, for deaths occurring in 2021, if you lived in Maryland at the time of your death and your estate is valued at more than $5 million, that estate may owe the Maryland estate tax. But that’s not all – there is also another tax in Maryland – an inheritance tax, and capital gains tax. Plus there is a federal estate tax, but this one only applies if your estate is valued at over $11.7 million.
After consulting with a tax attorney in our network, Cynthia received some welcome news. Although her grandmother’s estate was valued at well over $6 million, Maryland law contains quite a list of exemptions and different tax rates to the state inheritance tax. As it relates to Cynthia and her grandmother, Marylandtaxes.gov states:
Tax rates for decedents who died on or after July 1, 2020:
- Property passing to a child or other lineal descendant, spouse of a child or other lineal descendant, spouse, parent, grandparent, stepchild, or stepparent, siblings or, corporation having only certain of these persons as stockholders is exempt from taxation. (emphasis added)
- 10% on property passing to other individuals.
Maryland Estate Tax
So even though Cynthia’s inheritance qualified for exemption from Maryland Inheritance Tax, that was not the case for the Maryland Estate Tax. Cynthia however, was not personally responsible for paying this tax, as that is paid by the estate before assets are distributed to beneficiaries.
Marylandtaxes.gov explains the difference between the two taxes:
- Inheritance Tax is imposed on the clear value of property that passes from a decedent to some beneficiaries. This tax is paid by the beneficiary unless they meet the standard for exemption.
- The Maryland estate tax is a state tax imposed on the transfer of property in a decedent’s estate. Payment of the Maryland estate tax is due nine (9) months after the decedent’s date of death. (emphasis added) This tax is paid by the estate before the distribution of assets to beneficiaries.
Taxfoundation.org reports that” twelve states and the District of Columbia impose estate taxes and six impose inheritance taxes. Maryland is the only state to impose both.” On the upside, Maryland’s inheritance tax (at 10%) is the lowest of the six which impose an inheritance tax
Capital Gains Taxes
In addition to imposing both an inheritance tax and an estate tax, Maryland is also included among the 41 states and the District of Columbia that have their own capital gains taxes.
Bezinga compiled a list of the 10 states with the highest marginal tax rates on trading profits, according to the Tax Foundation. Maryland ranked number 7. Benzinga reported, “While Maryland’s 5.8% state capital gains tax may not look so bad on the surface, its unfavorable capital gains tax provisions result in an overall 30.3 % combined federal and state capital gains tax rate.”
When Cynthia’s grandmother originally purchased the property she later bequeathed to Cynthia, she paid $240,000. When she died, the property was valued at $425,000. That is an increase in value of $185,000. If Cynthia were to sell the property for the $425,000 it was valued at, she would owe $10,730 in capital gains taxes. Except –
Irs.gov explains “Stepped Up Basis” as it applies to inherited property. The IRS explains that the basis of the inherited property for tax purposes is determined by the Fair Market Value (FMV) of the property as of the date of the decedent’s death. So, for Cynthia, this meant that she would only pay capital gains tax f the property sold for more than the $450,000.
Cynthia originally came to us here at Akin Developers out of concern for financial responsibilities. After discussing her options, she elected to sell her inherited property to us. She knew the property required some repairs, including replacing the HVAC unit and ductwork and that we pay cash for houses in just about any condition. After factoring in the cost of repairs, we made a fair offer to purchase the property for $395,000. Cynthia accepted the offer, which also removed any capital gains tax obligation.
With complicated inheritance and tax laws in Maryland, consulting with a professional is always an excellent idea when dealing with inherited property. In Cynthia’s case, all parties benefitted: Cynthia avoided the requirement to pay capital gains taxes, as well as other financial responsibilities she did not feel prepared to face. Akin purchased a quality property that required a substantial repair but would be an asset to the community once repaired and sold to another buyer. If you have inherited property in Silver Springs, MD call us for a consultation so we can help you too.