Last week I wrote about how to reduce or even eliminate your estate tax bill. One of the options that many people choose to minimize estate taxes is to give away some of their property before they die since the IRS and/or state taxing authorities can't tax what you no longer own at the time of your death, right? Wrong, at least when it comes to Maryland inheritance taxes. Recently the Maryland Court of Special Appeals upheld the Montgomery County Register of Wills and ordered the family of a wealthy Maryland resident, Dr. Edwin Cohn, to pay over $138,000 in Maryland inheritance taxes based on an estate that included $860,000 worth of property that Dr. Cohn gifted to his nephews over a year prior to his death and $385,000 worth of property gifted to his grandnieces and grandnephews 10 months prior to his death.
It turns out that Maryland law allows the state to bring gifts made as much as two years prior to death back into the decedent's estate for inheritance tax purposes because it is assumed that any such gifts were made "in contemplation of death." While the family argued that their uncle was "a vigorous man who had no thoughts of death when he made the gifts," the Court of Special Appeals disagreed, stating that Dr. Cohn was 87 years old and in ill health at the time he started making the gifts, and prior to that he had a "lifelong history of only modest gift-giving."
What can we learn from this? If your estate is of the size that warrants estate tax planning and part of that plan will include gifting to family members, friends, and/or charity, then (1) beware of gift tax issues, (2) start your gifting plan sooner rather than later, and (3) be consistent with your gifting plan.