How to Avoid Maryland Inheritance Tax for Non-Lineal Heirs

Maryland's inheritance tax is a flat 10% on the clear market value of every asset a non-lineal heir receives — nieces, nephews, cousins, friends, unmarried partners, and anyone else who isn't a spouse, parent, child, grandchild, stepchild, or sibling. If your nephew inherits $100,000 from your estate, he owes $10,000 to the state before he sees a dollar. And unlike the estate tax (which only kicks in above $5 million), the inheritance tax has no minimum threshold. A $5,000 bequest to a friend triggers a $500 tax bill.

There is no way to make a non-lineal heir exempt — the categories are fixed by statute. But there are legitimate strategies to reduce the taxable amount, restructure how assets pass, and in some cases move value outside the inheritance tax's reach entirely.

Who Pays and Who Doesn't

Maryland law draws a clear line. These heirs are exempt from the inheritance tax:

• Surviving spouse
• Parents and grandparents
• Children, stepchildren, and their descendants (grandchildren, great-grandchildren)
• Siblings

Everyone else pays 10%. The most commonly affected:

• Nieces and nephews — frequently named in wills, especially for childless individuals
• Unmarried partners — treated as legal strangers regardless of relationship duration
• Close friends — even a lifelong friend inheriting a modest bequest pays the full 10%
• Charities — exempt, which creates planning opportunities (see below)

Strategies That Work

Life Insurance with a Named Beneficiary

Life insurance proceeds paid directly to a named beneficiary are not subject to Maryland inheritance tax. This makes term life insurance the single most cost-effective workaround for protecting non-lineal heirs.

If you want to leave $200,000 to a nephew, putting that amount in a bequest triggers a $20,000 tax bill. A $200,000 term life policy naming the nephew as beneficiary delivers the same value with zero inheritance tax — and the premiums over 20 years will cost a fraction of that $20,000 tax.

Lifetime Gifts

Maryland has no state gift tax. The federal annual gift tax exclusion is $19,000 per recipient in 2026. Giving $19,000 per year to a nephew for five years transfers $95,000 completely outside the inheritance tax — no filing required.

For larger amounts, the federal lifetime gift tax exemption ($15 million per individual under the One Big Beautiful Bill Act) means most Maryland residents can give away substantial sums during their lifetime without triggering federal gift tax. These transfers reduce the taxable estate and remove the assets from the inheritance tax calculation entirely.

Charitable Remainder Trusts

If you want to benefit a non-lineal heir while also supporting a cause, a charitable remainder trust (CRT) provides income to your named beneficiary during their lifetime, with the remainder going to charity. The income payments are taxed as ordinary income (not inheritance tax), and the charitable remainder qualifies for an estate tax deduction.

This structure works best for larger estates where the estate tax and inheritance tax intersect.

Restructuring Bequests Through Exempt Heirs

In some family situations, you can achieve the same result by leaving assets to an exempt heir (a child or sibling) with the understanding — formalized through a trust — that specific assets benefit the intended non-lineal recipient. This requires careful legal structuring and may not be appropriate for every family dynamic.

Payable-on-Death and Transfer-on-Death Accounts

POD and TOD designations on bank accounts and investment accounts transfer assets directly to named beneficiaries outside probate. While this avoids probate fees and delays, it does not avoid Maryland inheritance tax — the 10% still applies to non-lineal beneficiaries receiving assets via POD/TOD.

The benefit is speed and cost savings on the probate side, but don't confuse probate avoidance with tax avoidance. They're separate systems.

What Doesn't Work

Trusts don't eliminate the inheritance tax. A revocable living trust avoids probate but does not shield non-lineal beneficiaries from the 10% tax. The inheritance tax is based on the relationship between the decedent and the beneficiary, not the mechanism of transfer.

The $5 million estate tax exemption is irrelevant. The inheritance tax applies regardless of estate size. An estate worth $200,000 passing entirely to a nephew still triggers the 10% tax on every dollar.

Moving assets out of state doesn't help for tangible personal property. Maryland taxes tangible and intangible personal property wherever it's located, plus all real property located within Maryland.

The Dual-Tax Credit

Maryland is the only state with both an estate tax and an inheritance tax. For estates above $5 million, the inheritance tax paid on non-lineal bequests can be credited against the estate tax owed — preventing true double taxation. But for estates under $5 million (no estate tax owed), the inheritance tax stands alone with no offset.

The Maryland Basic Estate Planning Kit includes a Dual-Tax Reference Card that maps out exactly how these two taxes interact and which planning strategies reduce the combined burden for your specific situation.

Who This Is For

• Anyone leaving assets to nieces, nephews, cousins, or friends in Maryland
• Unmarried couples where the surviving partner will owe 10% on every inherited dollar
• Childless individuals whose primary beneficiaries are non-lineal heirs
• Families with estates that include both exempt and non-exempt beneficiaries

Who This Is NOT For

• Families whose beneficiaries are all exempt (spouse, children, parents, siblings)
• Estates where all assets pass to charity
• Non-Maryland residents inheriting Maryland property (different rules apply to real property transfers)

Frequently Asked Questions

Does the inheritance tax apply to jointly owned property?

It depends on how the title is held. Property held as Joint Tenants with Right of Survivorship passes to the surviving owner by operation of law. If the surviving joint tenant is a non-lineal heir, the inheritance tax applies to the decedent's proportional share of the property.

What's the deadline for paying Maryland inheritance tax?

The inheritance tax return must be filed and tax paid within the timeframe set by the Register of Wills — typically as part of the estate administration. Interest accrues on unpaid balances.

Can I leave money to my partner's children to avoid the tax?

If your partner's children are your stepchildren, they are exempt from the inheritance tax. Maryland exempts "children of the stepparent" from the 10% rate. However, this exemption requires that you are or were legally married to their parent — cohabitation alone doesn't create a stepparent relationship under Maryland law.

Is there a minimum amount that's exempt from the inheritance tax?

No. Maryland's inheritance tax has no de minimis threshold. A $100 bequest to a non-lineal heir technically triggers a $10 tax obligation, though the Register of Wills may waive filing requirements for very small estates.

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