If a Maryland will splits the residuary estate among heirs taxed at different inheritance tax rates, how is the tax calculated?

Plain-English summary

A Register of Wills asked how to calculate Maryland inheritance tax on a residuary estate when the will contains a tax clause directing that death taxes be paid from the residue, and the residuary legatees fall into different tax-rate classes, for example a spouse taxed at Maryland's 1% "lineal" rate alongside a sibling taxed at the 10% "collateral" rate. The question was whether to deduct the combined tax off-the-top before splitting the residue, or to split the residue first and then tax each legatee's own share at that legatee's own rate. A second, related question was whether the inheritance tax paid on a residuary bequest should itself be treated as an additional taxable gift, the way it is for specific bequests, an approach called "accelerated tax."

The opinion concluded that, absent clear evidence the testator wanted otherwise, tax should be computed on each legatee's own share at that legatee's own rate, not deducted off-the-top. It reasoned that an off-the-top calculation would effectively make a low-taxed lineal heir subsidize a higher-taxed collateral heir's tax bill, undermining the legislature's clear intent to tax different classes of heirs differently. On the second question, the opinion concluded that accelerated tax, appropriate for a specific bequest because paying its tax from the residue effectively increases what that beneficiary receives, does not apply to a residuary bequest itself, because the residuary estate and the tax on it come from the very same pool of money; taxing the tax again would just shrink an already-shrinking pot rather than reflect any real additional gift.

Currency note

This opinion was issued in 1991 and interpreted §7-202, §7-203, §7-204, and §7-308 of the Tax-General Article as they then existed, along with Maryland case law dating back to the 1930s and 1940s on inheritance tax classification and tax-clause construction. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis, including possible changes to Maryland's lineal and collateral inheritance tax rates. Treat this page as historical context, not current legal advice. Verify the current Maryland inheritance tax rates and residuary-estate tax computation rules before relying on any specific figure or rule described here.

Common questions

Should Maryland inheritance tax on a residuary estate be taken off the top before splitting it among heirs?
According to this 1991 opinion, generally no. The Attorney General concluded that, unless the testator's intent is clearly to the contrary, each residuary legatee's share should be taxed at that legatee's own rate rather than having a single combined tax deducted before the residue is divided.

Why does it matter whether the tax is calculated off-the-top or per legatee?
The opinion explained that an off-the-top calculation cross-subsidizes: it effectively shifts part of a higher-taxed collateral heir's burden onto a lower-taxed lineal heir's share, which conflicts with the legislature's choice to tax different classes of heirs at different rates (1% for close family, 10% for others).

Does the inheritance tax paid on a residuary bequest get taxed again itself, the way it does for a specific bequest?
No, according to the opinion. It concluded that the "accelerated tax" rule, which treats the tax paid on a specific bequest as an additional taxable gift, does not extend to residuary bequests, because a residuary bequest is decreased, not increased, by the tax paid on it, since both come from the same source.

Background and statutory framework

Maryland's inheritance tax under TG §7-202 is imposed on the "clear value" of property actually received by a beneficiary, computed after debts and administration expenses, as described in Bouse v. Hutzler. TG §7-204(b) and (c) set a 1% "lineal" rate for property passing to a grandparent, parent, spouse, or child, and a 10% "collateral" rate for other beneficiaries such as siblings, while TG §7-203, including the charitable exemption in TG §7-203(e), lists further exemptions. The opinion emphasized that this tax is distinct from the federal and Maryland estate taxes, which under TG §7-308 are payable from the corpus of the estate rather than from individual legacies.

On the off-the-top question, the opinion acknowledged the settled principle that a testator may specify which property bears the burden of death taxes, but found no Maryland case or prior AG opinion addressing what language would specifically signal an intent to compute inheritance tax itself (as opposed to estate tax) off-the-top before distribution; it noted that Johnson v. Hall and Johnson v. Pilkerton, construing the separate estate-tax apportionment statute at §11-109 of the Estates and Trust Article, do not govern inheritance tax computation at all. On accelerated tax, the opinion relied on Bouse v. Hutzler and Aged People's Home v. Hospital for the established rule that when a specific bequest's tax is paid from the residue, that payment counts as an additional bequest to the specific legatee, itself taxable, but reasoned this logic breaks down for a residuary bequest, since taxing the tax on a residuary gift would produce an inflated, arithmetically compounding result drawn from the same finite pool rather than reflect any real increase in what the residuary legatee receives.

Citations and references

Statutes:

• TG §7-202, imposing Maryland's inheritance tax on the privilege of receiving property with a Maryland taxable situs
• TG §7-204(b) and (c), setting the 1% lineal and 10% collateral inheritance tax rates
• TG §7-203, listing exemptions from the Maryland inheritance tax
• TG §7-203(e), exempting certain charitable organizations from the inheritance tax
• TG §7-308, making estate taxes payable from the corpus of the estate rather than from individual legacies
• §11-109 of the Estates and Trust Article, the separate mechanism for apportioning federal and Maryland estate taxes, which the opinion noted does not govern inheritance tax computation

Cases:

• Bouse v. Hutzler, 180 Md. 682, 26 A.2d 767 (1942), Maryland Court of Appeals decision on the "clear value" basis for inheritance tax and the rationale for accelerated tax on specific bequests
• Johnson v. Hall, 283 Md. 644, 392 A.2d 1103 (1978), Maryland Court of Appeals decision construing tax-clause apportionment of federal and Maryland estate taxes
• Johnson v. Pilkerton, 32 Md. App. 174, 359 A.2d 227 (1976), Maryland Court of Special Appeals decision construing tax-clause apportionment of federal and Maryland estate taxes
• Aged People's Home v. Hospital, 170 Md. 128, 183 A. 247 (1936), Maryland Court of Appeals decision on the accelerated tax rule for specific bequests

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1991/Volume76_1991.pdf (this opinion appears at printed pages 392-397 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

TESTAMENTARY LAW

Wills - Taxation - Computation of Inheritance Tax on
Residuary Estate - Computation of Accelerated Tax

February 1, 1991

The Honorable Winsie A. Cannon
Register of Wills for
Queen Anne's County

   You have requested our opinion concerning the correct procedure

for assessment of inheritance taxes on a residuary estate when the will
has a tax clause. Specifically, you have inquired whether the
computation of inheritance tax when the residuary estate is composed of
legatees of different classes should be made prior to distribution ("off-
the-top") or after distribution, so that each legatee's share is reduced by
the tax attributable to it. You have also inquired whether the inheritance
tax on a residuary bequest should be accelerated so that the tax paid on
the residuary bequest is subject to an additional inheritance tax on the
tax.

   For the reasons set forth below, we conclude as follows:

   1. As a general rule, inheritance tax should not be deducted off-

the-top prior to distribution of the residuary estate when the will has a
tax clause. Rather, each legatee's residuary bequest should be reduced
by the tax computed using that legatee's tax rate.1 Of course, as with
any other will provision, the intent of the testator is controlling.
However, only upon a showing that the testator specifically intended an
off-the-top deduction of inheritance taxes prior to distribution of the
residuary estate should a register deviate from the general rule.

  2. A bequest paid out of the residuary estate is not subject to

acceleration of the tax.

                               I

                 Maryland Inheritance Tax

   The Maryland inheritance tax is "imposed on the privilege of

receiving property that passes from a decedent and has a taxable situs in
the State." §7-202 of the Tax-General Article ("TG" Article). The
inheritance tax is imposed upon the "clear value" of the property, which
means net value after the payment of all debts and expenses of
administration. Bouse v. Hutzler, 180 Md. 682, 26 A.2d 767 (1942).
The Maryland inheritance tax thus is calculated upon the value of the
property actually received. 180 Md. at 686.

   The General Assembly, moreover, has given preferential

treatment to certain classes of legatees. The "lineal tax rate," applicable
to property that passes to a grandparent, parent, spouse, or child, is only
1%; the "collateral tax rate," by contrast, applicable, for example, to
property that passes to a sibling, is 10%. TG §7-204(b) and (c). In
addition, TG §7-203 sets out a series of exemptions from the tax,
including one for certain charitable organizations. TG §7-203(e).

   The Maryland inheritance tax is fundamentally different from

federal and Maryland estate taxes. The estate taxes are deemed to be a
tax on the transfer and, as such, are payable out of corpus of the estate
and not out of the legacies. TG §7-308. See Bouse, 180 Md. at 685;
52 Opinions of the Attorney General 374 (1967); 24 Opinions of the
Attorney General 892 (1939).

                               II

            Calculation of Inheritance Tax

   Many wills contain a tax clause, directing that death taxes,

including inheritance taxes, be paid out of the residuary estate.
However, the inclusion of such a tax clause in a will is not itself an
adequate basis for routinely calculating inheritance tax on the residuary
estate in a manner that is inconsistent with the legislative purpose in
providing preferential inheritance tax treatment to certain classes of
individuals. Routine use of the off-the-top procedure would have the
practical effect of making lineal or charitable legatees subsidize the tax
of a collateral legatee.

   The following example illustrates the difference in taxation under

the two procedures:

   Assume that the residuary estate is composed of $10,000, to be

distributed equally between two legatees, one of whom is taxed at the
1% lineal rate and the other at the 10% collateral rate. If the residuary
estate is divided equally prior to calculating the tax, each legatee inherits
$5,000. The collateral legatee pays a $500 tax and receives a net
distribution of $4,500. The lineal legatee pays a $50 inheritance tax and
receives a net distribution of $4,950.

   By contrast, in an "off-the-top" calculation of taxes under these

facts, $550 (the total tax due by both legatees) would be deducted
directly off-the-top of the $10,000 residuary estate, leaving $9,450 to be
equally divided. Both the lineal and collateral legatee would receive half
of $9,450 or $4,725. The practical effect of the off-the-top deduction
is that the net distribution to the lineal legatee has been reduced by $225
and the net distribution to the collateral legatee has been increased by
$225. This cross-subsidization is at odds with the legislative objective
in creating significantly different tax rates for the two classes.

   We are not casting doubt on the universally accepted principle

that "whatever the rule as to where the burden as to estate or inheritance
taxes lies by law, the testator may specify which property or class of
property shall bear the burden of the death taxes, and may free any and
all other gifts from diminution by such taxes, and in such case the
burden falls where the will declares that it should fall." Annotation,
Construction and Effect of Will Provisions Expressly Relating to the
Burden of Estate or Inheritance Taxes, 69 A.L.R.3d 122, 160 (1976).
See, e.g., 48 Opinions of the Attorney General 426, 427 (1963).

   However, we are aware of no Maryland case or Attorney General

opinion dealing with the question of the precise language necessary to
establish that a decedent intended an off-the-top calculation of
inheritance taxes on the residuary estate. Cases dealing with the
adequacy of the language of a tax clause address the apportionment of
federal and Maryland estate taxes, not the calculation of the inheritance
tax. See Johnson v. Hall, 283 Md. 644, 392 A.2d 1103 (1978);
Johnson v. Pilkerton, 32 Md. App. 174, 359 A.2d 227 (1976).2 In
particular, no Maryland case has held that the use of a phrase like
"payable out of the residuary estate" or "payable out of the principal of
the residuary estate" would routinely call for an off-the-top calculation.3

   In summary, we are of the view that to the extent practicable,

and subject to a showing of the testator's contrary intent, a tax clause
should be construed in a manner that assesses inheritance taxes in
keeping with the legislative intent of taxing various classes of legatees
at different rates.4

                               III

                        Accelerated Tax

   Maryland law is clear that when a specific bequest is made with

a provision that inheritance taxes be paid from the residuary estate, the
payment of the inheritance tax by the estate on a specific bequest is
deemed to be an additional bequest, and the additional bequest of the
amount of the tax is itself subject to inheritance tax, an accelerated tax.
Bouse, 180 Md. at 685; Aged People's Home v. Hospital, 170 Md. 128,
183 A. 247 (1936); 48 Opinions of the Attorney General 426 (1963); 42
Opinions of the Attorney General 399 (1957); 40 Opinions of the
Attorney General 505 (1959); 37 Opinions of the Attorney General 385
(1952); 26 Opinions of the Attorney General 457 (1941); 19 Opinions
of the Attorney General 488 (1934); 9 Opinions of the Attorney General
244 (1924).

   The rationale behind the accelerated tax rule is that the legatee's

gift has been "increased" by providing for payment of an obligation that
the legatee would have been obligated to pay if the testator had not
directed otherwise. Bouse, 180 Md. at 685. In other words, payment
of the inheritance tax from the residuary estate constitutes a pecuniary
bequest to the legatee, equal to the amount of the tax assessable against
that legatee in addition to the specific bequest on which the tax is
computed.

   The requirement for an accelerated tax on a specific bequest has

never been extended by any Maryland court or Attorney General opinion
to the calculation of inheritance taxes on a general bequest in the
residuary estate. The accelerated tax rule on a specific bequest is simply
not applicable to a general residuary bequest, because the residuary
bequest is not increased by the payment of the tax; it is decreased. The
bequest and the tax payment are derived from the same source, the
residuary estate. The situation is quite unlike that involving a special
bequest, where the bequest and the tax on it are derived from distinct
portions of the estate.

   The illogical result of accelerating the tax on a residuary bequest

is best illustrated as follows: if a total residuary estate of $10,000,
available for distribution to a collateral legatee, is taxed under the
accelerated tax rule for a specific bequest, the tax would be $1,111.11
($1,000 tax on the $10,000 bequest and $111.11 tax on the tax itself,
treated as an additional bequest).5 This computation presupposes that the
legatee is receiving a $10,000 bequest and a $1,000 tax payment; that
totals $11,000, or $1,000 in excess of the actual residuary estate.

   Not only is the result of accelerating the tax on a residuary

bequest illogical, it might also be viewed as a disfavored form of
double taxation. The $1,000 inheritance tax on the $10,000 residuary
estate left to a collateral legatee is payable out of the $10,000 on which
the tax was computed. If an inheritance tax is then computed on the
$1,000, it will constitute a second tax on the same $1,000. By contrast,
when a specific bequest of $10,000 is made to a collateral legatee, the
$1,000 tax on it is paid out of the residuary estate; that $1,000 is not
part of the $10,000 bequest on which the tax was computed. The net
residuary estate available for distribution to the residuary legatees and
subject to inheritance tax will not include the $1,000 used to pay the tax
on the specific bequest, nor will it include the $111.11 used to pay the
tax on the $1,000 tax payment made on behalf of the specific legatee.
No double taxation results when the tax payment on a specific bequest
is itself subjected to tax.

   Therefore, it is our view that because a residuary bequest is

actually decreased, rather than increased, by the inheritance tax payable
on the residuary legatee's inheritance, an additional or accelerated tax
should not be assessed on a residuary bequest.

                               IV

                          Conclusion

   In summary, it is our opinion that, unless the testator's intent is

clearly to the contrary, inheritance taxes should not routinely be assessed
on the residuary estate by the off-the-top procedure, but should be
assessed against each distributee's residuary share. It is also our opinion
that a residuary bequest is not subject to the accelerated tax applicable
to a specific bequest.

                                       J. Joseph Curran, Jr.
                                       Attorney General

                                       Susan P. Whiteford
                                       Assistant Attorney General

Jack Schwartz
Chief Counsel
Opinions and Advice

1
The problem only arises when the legatees are in different tax classes.
Therefore, if all residuary legatees are of the same class, there is no difference
in the net distribution under either method.

2
These cases construe §11-109 of the Estates and Trust Article, which
provides a mechanism for the apportionment of federal and Maryland estate
taxes; it makes no provision for the payment of Maryland inheritance taxes.

3
Out-of-state cases are collected in 69 A.L.R.3d at 385-90.

4
The tax clause in the estate that prompted your inquiry provides, in
pertinent part, that "[a]ll estate, inheritance, succession and transfer taxes, . . .
payable with respect to all property includable in my gross estate for Federal
Estate Tax purposes . . . shall be paid out of the principal of my residuary estate."
This tax clause can be harmonized with the conclusion of this opinion. After
deduction of federal and Maryland estate taxes, if any, from the estate, the
balance may be distributed equally to the legatees, one of whom is a collateral
legatee. For example, if $10,000 remained for distribution after payment of
estate taxes, that would be equally divided and subject to Maryland inheritance
tax. The principal of the residuary estate, i.e., the $10,000 available for
distribution, would be the source of payment of the tax. As such, the decedent's
intent that taxes be paid from the principal of the residue and the legislative
scheme of giving preferential inheritance tax treatment to certain classes of
legatees can be harmonized. Also, each legatee will have inherited "equally"; the
difference in the net distribution after taxes is not a result of an unequal
inheritance, but the result of different tax classifications.

5
This computation of the accelerated tax can be explained as follows:
because the residuary estate is paying for all of the collateral inheritance tax on
the $10,000 specific bequest, the $1,000 tax payable by the estate is deemed an
additional bequest subject to a 10% tax of $100. In turn, the $100 is deemed an
additional bequest subject to a 10% tax of $10.00, etc. The sum of the
inheritance taxes imposed on the $10,000 gift is $1,111.11 ($1,000 + $10 + 1

• $.10 + $.01). Stated as a formula, the $1,111.11 tax is computed as follows:
  $10,000 bequest x 1000/900 = $11,111.11 x 10% = $1,111.11. See 37
  Opinions of the Attorney General 385, 386 (1952). See also Sykes, Probate Law
  and Practice §790 (1956).