How to Avoid Maryland Inheritance Tax: Gifts, Trusts, and Beneficiaries

Maryland’s inheritance tax is a flat 10% on property passing to certain beneficiaries at death, but the cleanest way to avoid Maryland inheritance tax is to make sure the property goes to someone the statute already exempts. Spouses, children, grandchildren, parents, and siblings pay nothing. For anyone outside that circle, the tax can still be reduced or eliminated through life insurance designations, charitable bequests, irrevocable trusts, and gifts completed well before death.

Who Already Pays Nothing

Under Maryland Tax-General Code § 7-203, several categories of beneficiaries take inherited property free of the tax entirely:

A surviving spouse who has not remarried.
Children and their descendants, including biological, adopted, and stepchildren, plus grandchildren and great-grandchildren.
Parents, grandparents, and stepparents.
Siblings, who have been exempt since July 1, 2000.
Sons-in-law and daughters-in-law, including the surviving spouse of a deceased child.
Corporations, partnerships, and LLCs where every owner falls into one of the exempt categories above.

Everyone else pays 10% on the full value received, minus debts and allowable deductions. That includes nieces, nephews, aunts, uncles, cousins, friends, and unmarried partners.¹ The rate has held at 10% since 1975 and applies whether property passes by will, trust, joint ownership, or any other mechanism.² If your intended beneficiary is on the exempt list, no planning is needed for this tax. If not, the rest of this article is for you.

Register a Domestic Partnership

Domestic partners are treated in one of two ways. A domestic partnership registered under Maryland’s Estates and Trusts Article § 2-214 receives the same full exemption as a marriage. An unregistered partnership qualifies only for a narrower break: a jointly held primary residence passes tax-free if the survivor supplies an affidavit or at least two proofs of the partnership, and everything else is taxed at 10%.³ For long-term partners who intend to leave each other substantial assets, formal registration is the single highest-return step available.

Give the Property Away More Than Two Years Before Death

Property you no longer own at death isn’t inherited from you, so gifting removes it from the inheritance tax base. Maryland has no state gift tax, so the state doesn’t care how much you give. It does care when.

Under Tax-General § 7-201, a transfer of a “material part” of your property made within two years of death is presumed to have been made in contemplation of death and is pulled back into the estate for inheritance tax purposes. The beneficiary bears the burden of proving otherwise.⁴ Gifts completed more than two years before death generally clear that hurdle. Practical planning follows from this: if you want to move assets to a non-exempt beneficiary, timing matters more than size.

Federal Gift Tax Still Applies

The IRS runs on a different framework. In 2026, you can give up to $19,000 per recipient per year without filing anything, and a married couple can combine exclusions to give $38,000 per recipient. Gifts above that amount require IRS Form 709, though no federal gift tax is owed until you exceed the $15 million lifetime exemption.⁵⁶

Watch the Capital Gains Trade-Off

Inherited property gets a step-up in basis: its cost basis resets to fair market value on the date of death. If your heir sells a house you bought for $150,000 that’s worth $450,000 at your death, the taxable gain is measured from $450,000.⁷ Lifetime gifts don’t get that reset. The recipient takes your original basis and owes capital gains on all appreciation from your purchase price. For property that has appreciated significantly, the capital gains cost of a lifetime gift can exceed the 10% inheritance tax the gift was meant to avoid. Run the numbers on both taxes before defaulting to a gifting plan.

Use Life Insurance Beneficiary Designations

Life insurance proceeds paid directly to a named beneficiary other than the estate are specifically exempt from Maryland inheritance tax, regardless of the beneficiary’s relationship to the deceased.² A niece, a friend, or an unmarried partner who would otherwise face 10% receives insurance proceeds tax-free.

The exemption disappears if the policy is payable to the estate, which happens when no beneficiary is named or all named beneficiaries have died with no contingent in place. A policy that lands in the estate loses the exemption and gets dragged into probate. Review your designations, and name at least one contingent beneficiary on every policy.

Don’t Assume Retirement Accounts Are Exempt

This is where planning frequently goes wrong. Maryland exempts retirement account payments only when they are “not taxable for federal estate tax purposes.”² Most IRAs, 401(k)s, and similar accounts with named beneficiaries are included in the federal gross estate, which means they are subject to Maryland inheritance tax when they pass to a non-exempt beneficiary.

Naming a beneficiary keeps the account out of probate. It does not create an inheritance tax exemption. What protects the account from the 10% is the recipient’s relationship. A 401(k) left to a spouse, child, or sibling escapes the tax because of who they are, not because of what the account is. Left to a nephew or a friend, the same account owes 10%.¹ The narrow statutory exemption applies mainly to certain employer pension plans with survivorship features structured to fall outside the federal gross estate. If you hold a pension with joint-and-survivor options, ask the plan whether it qualifies.

Fund an Irrevocable Trust — And Actually Let Go

An irrevocable trust takes assets out of your legal ownership. Once you transfer property into it, you can’t revoke the trust, change its terms, or take the property back. Because you no longer own it at death, it is generally outside your estate for inheritance tax purposes.

The catch is that you have to truly relinquish control. Maryland treats a transfer as incomplete, and the property as still yours, if you retained any dominion during your lifetime, including a beneficial interest, a power to revoke, or the ability to direct who ultimately receives the property.⁴ Continuing to live in the house, collect the rental income, or decide distributions will not survive scrutiny. Use an independent trustee who is not you and not someone you can effectively direct.

The two-year contemplation-of-death presumption applies here too. Funding a trust with a large share of your assets shortly before death draws the same suspicion as any late gift. Plan ahead.

Leave Property to a Qualifying Charity

Property passing to a qualifying charity is fully exempt. The organization must be tax-exempt under Section 501(c)(3), and Maryland adds a geographic requirement not found in the federal rule. The charity must satisfy at least one of these:²

Incorporation under Maryland law.
A substantial portion of its work conducted in Maryland or the District of Columbia.
A home state that either imposes no death tax on bequests to Maryland 501(c)(3) organizations or offers a reciprocal exemption.

Most large national charities pass on the third condition. A small foreign nonprofit, or one based in a state that taxes bequests to Maryland charities, may not. Confirm eligibility before finalizing the bequest.

What Doesn’t Work: Joint Ownership

Adding a non-exempt person to a deed or account as a joint owner with right of survivorship is sometimes pitched as a tax workaround. It skips probate. It does not avoid the inheritance tax. Maryland’s statute expressly includes property held by the deceased as a joint tenant.⁴ When the survivor takes the property, the 10% applies to the decedent’s interest. Doing this within two years of death with a significant share of assets can also trigger the contemplation-of-death presumption.¹ Joint ownership among spouses, children, or other exempt relatives is fine, because the relationship exemption already handles them.

If the Tax Is Owed, Know Who Pays and When

The tax is due when property is distributed, not on a fixed calendar deadline. In a probate estate, the personal representative pays it when filing the estate accounting. For property passing outside probate, it’s due when the Register of Wills sets the amount.⁸

The person distributing the property, usually the personal representative or trustee, is legally responsible for paying the tax before handing anything over. If the distributor fails to pay, the liability shifts to the beneficiary who received the property. Once the Register of Wills invoices the tax, you have 30 days before a 10% penalty and interest are added, and unpaid balances are eventually referred to Maryland’s Central Collection Unit, which can charge interest up to 18%.¹ If you’re a beneficiary and no one has confirmed the tax was paid, ask before you spend the money.

1
The Office of the REGISTER OF WILLS. Inheritance Tax
2
Maryland General Assembly. Maryland Code Tax-General 7-203 – Exemptions from Inheritance Tax
3
New York Codes, Rules and Regulations. Maryland Code Tax-General 7-203 – Property Exempt from Tax
4
Maryland General Assembly. Maryland Code Tax-General 7-201 – Definitions
5
Internal Revenue Service. Frequently Asked Questions on Gift Taxes
6
Internal Revenue Service. Estate Tax
7
Internal Revenue Service. Gifts and Inheritances
8
Comptroller of Maryland. Tax Guidance – Estate and Inheritance Tax