Beginning in 2019, Maryland joined Hawaii in allowing portability of its estate tax exclusion. The amount subject to portability is the Maryland exclusion for the year of the deceased spouse’s death, less the amount of the deceased spouse’s taxable estate.
Unique to Maryland is that it allows portability retroactively for deceased spouses who died between 2011 and 2018. Tax benefits are typically not granted based on facts occurring in past years. This surprising development now places the onus on surviving spouses, professional fiduciaries and advisors to be vigilant in determining the application of these rules. In some cases, action may be needed now to secure these benefits, and in all cases, care will be needed to track and ensure that the potential benefits are used at the time of the surviving spouse’s death.
MD-DSUE Election
Portability isn’t automatic—it must be elected on an estate tax return. Because Maryland enacted the legislation allowing portability in 2018, it’s possible that the steps needed to enable Maryland portability for years 2011—2018 were missed. Therefore, advisors should identify all surviving spouses for whom portability may be applicable and, if necessary, steps should be taken to ensure the benefit is available, which most likely involves making the federal portability election.
The following is required to enable the Maryland deceased spouse’s unused exclusion (MD-DSUE) to be transferred to the surviving spouse:
(1) If the deceased spouse dies in 2019 or after and was a Maryland resident or had property with a Maryland estate tax situs:
(a) a timely filed Maryland estate tax return (MET-1) must be filed with the Comptroller of Maryland;
(b) the MD-DSUE must be calculated and reported on the MET-1; and
(c) an irrevocable Maryland portability election must be made on the MET-1.
(2) If the deceased spouse died prior to 2019 or if the deceased spouse wasn’t a Maryland resident and had no property with a Maryland estate tax situs, only the federal portability election under IRC Section 2010(c) must have been made.
Dependency on Federal Portability Election
For years prior to 2019, Maryland portability is entirely dependent on a proper federal portability election having been made. Likewise, if the deceased spouse wasn’t a Maryland resident and had no property with a Maryland estate tax situs, Maryland portability is entirely dependent on a proper federal portability election having been made. I always recommend making the federal portability election and now recommend making a Maryland portability election (if applicable)! But there are many instances in which that wasn’t done for a variety of reasons. Now, however, the retroactive nature of Maryland portability may shift the analysis and make the federal election desired on which the Maryland result is dependent.
Example 1. Harriet and Henry, a married couple, were Maryland residents with an aggregate total estate of $7 million, all jointly owned. Henry died in 2017, when the federal exclusion was $5.49 million. At the time of the federal estate tax return filing deadline, Harriet equivocated over the need to elect federal portability. At the end of 2017, Harriet knew that her federal estate tax exclusion alone would be $11 million for 2018 and more than her total estate of $7 million. Harriet ultimately decided not to elect federal portability because she sought to avoid the expenses involved with making the election for Henry’s estate. Now, however, Harriet could also have $3 million of MD-DSUE (in addition to the $5.49 million of federal DSUE). If the federal election could be secured, Harriet would have $16.89 million of federal exclusion and $8 million of Maryland exclusion, thereby making it likely that no estate taxes would be due upon her death for federal or Maryland purposes. Taking steps to make the federal portability election, albeit on a late filed basis, may save up to $480,000 in Maryland estate taxes.
Late Filing of Federal Portability Election
The federal portability election can be made with a timely filed estate tax return within nine months of the date of death, or within 15 months of death when an extension to file the return is submitted before the nine-month deadline. But what if those deadlines have passed? The result depends on whether the deceased spouse’s gross estate (plus adjusted taxable gifts) exceeds the federal basic exclusion amount in the year of death (for example, $11.4 million for 2019).
For estates below the filing threshold and within two years of the deceased spouse’s death, Revenue Procedure. 2019-34 provides a simplified and automatic process for obtaining relief to file the federal portability election on a late basis. After two years, a private letter ruling may be filed requesting permission from the government to allow a late filed federal portability election based on good cause and assuming the government’s interests aren’t prejudiced. So far, the government has been lenient in granting such letter ruling requests to allow late portability elections. Perhaps the retroactive availability of the MD- DSUE is good cause!
For estates above the filing threshold, the estate tax return must be filed by the statutory deadline—within nine months, plus the six-month extension period. This is a hard stop for the portability election beyond which no relief is available, so a great deal of caution is warranted. The only possible exception is limited to situations when the six-month extension period wasn’t properly requested within the first nine months and the problem is rectified during the normal six-month extension period (within 15 months of the deceased spouse’s death). In that limited situation, the Internal Revenue Service can grant the six-month extension period on a late basis, if good cause is shown. Securing the six-month extension period makes the filing of the portability election timely, but all must be completed during the six-month extension period.
MD Residency Not Required
The MD-DSUE isn’t dependent on actual residency in Maryland. Amazing!
Example 2. Harriet and Henry, a married couple, are Florida residents with an aggregate total estate of $10 million, all jointly owned. Henry dies in 2019, and at that time Harriet and Henry have no property in Maryland. Harriet makes the federal portability election on a timely filed federal estate tax return. In 2020, Harriet moves to Maryland to be close to her daughter who lives in Bethesda. Harriet dies in 2021. Harriet’s estate can claim a MD-DSUE (from Henry’s death) even though at the time of his death he wasn’t a Maryland resident. This provides Harriet’s estate $5 million of MD-DSUE (in addition to federal DSUE). Having made the federal portability election may save up to $800,000 in Maryland estate taxes.
Example 3. Harriet and Henry, a married couple, are Florida residents with an aggregate total estate of $20 million, all jointly owned and all in Florida, except for a $10 million beach house on the Maryland shore. Henry dies in 2019. Harriet makes the federal portability election on a timely filed federal estate tax return and the timely filed Maryland portability election on a Maryland estate tax return. Harriet dies in 2021. Harriet’s estate can claim a MD-DSUE (from Henry’s death) even though at the time of his death he wasn’t a Maryland resident and even though at the time of Harriet’s death she isn’t a Maryland resident. This provides Harriet’s estate $5 million of MD-DSUE (in addition to federal DSUE). Having made the federal and Maryland portability elections may save up to $480,000 in Maryland estate taxes.
Value of MD-DSUE
In terms of tax savings, the actual savings as a result of a MD-DSUE will be lower once the estate is of sufficient size to trigger a federal estate tax liability. This is because the payment of state estate taxes is deductible against the federal estate tax, so, as the MD-DSUE generates a larger savings of Maryland estate taxes, the lesser Maryland taxes generates a lesser federal deduction, which in turn results in an increased federal estate tax liability. Consider the following: When the MD-DSUE is $5 million (the deceased spouse dying in 2019 or later years), the maximum savings arising from using the MD-DSUE is $800,000, but in an estate where federal estate taxes are due, the MD-DSUEs $800,000 of Maryland estate tax savings reduced the deduction for federal purposes, which increases the federal estate tax liability; as a result, the $800,000 of Maryland savings is reduced to total Maryland and federal savings of $480,000 ($800,000 – ($800,000 x 40% federal estate tax rate)).
*The full version of this article, as it originally appeared, can be viewed here.