By David Jonathan Taylor, Certified Elder Law and Estate Planning Attorney
When we were discussing the benefits of a Maryland Medicaid Trust in the course What Every Estate Planning Attorney Needs to Know About Medicaid Planning, a participating attorney asked me a question that gave me pause:
If a Medicaid Asset Protection Trust (MAPT) protects a client’s assets from Maryland’s estate recovery, does it also protect against Maryland inheritance tax?
My immediate reaction was “no” because Maryland makes escaping the inheritance tax difficult, but I was not sure why that would apply to a Maryland Medicaid Trust. That uncertainty caused me to take a closer look at Maryland’s inheritance tax statute to see how it applies when a home or other property is placed in a Maryland Medicaid Trust.
To understand the answer, it helps to recall the contours of Maryland’s inheritance tax.
Maryland, one of the few states with an inheritance tax, imposes a tax on gifts made to certain beneficiaries at death. Transfers to spouses, domestic partners, children, parents, grandparents, and siblings are exempt. But for gifts passing to non-exempt beneficiaries such as nieces, nephews, cousins, or friends, the rate is generally 10 percent.
For example, if you leave $50,000 to a friend, nephew, or niece, your estate must pay a $5,000 inheritance tax for them to receive that gift. It’s a straightforward rule, but one that can make a significant difference in how much a beneficiary ultimately receives.
Understanding who is exempt, and how property is treated as “passing from the decedent,” is essential when coordinating Medicaid planning with Maryland inheritance-tax rules.
A Medicaid Trust is created to protect your home and savings from being used to pay nursing-home costs and from being collected later through Medicaid estate recovery program.
Maryland’s inheritance tax, however, works under a completely different set of rules.
Medicaid estate recovery looks at whether the state can collect from your estate to recover benefits paid on your behalf.
Maryland’s inheritance tax looks at whether the people who receive your property must pay a tax based on their relationship to you.
That means a Medicaid Trust can successfully protect your home from estate recovery and still trigger Maryland’s inheritance tax if the property passes at death to someone other than an exempt person such as a spouse, child, or sibling.
Under Maryland law, property is treated as “passing from the decedent” for inheritance-tax purposes if any of the following are true:
If property is transferred to someone at your death—whether through a will, without a will, or through a trust—it is treated as passing from you.
This includes property held in a trust if the transfer does not fully take effect until you die.
Property you owned jointly with someone else is treated as passing from you to the extent your interest ends at death, even if ownership automatically continues in the surviving joint owner.
Even if you transferred property while you were alive, Maryland still treats it as passing from you at death if:
Property you transferred during life—including to an irrevocable trust—is still treated as passing from you if you retained dominion over the property during your lifetime.
Dominion includes, by way of example:
Consider parents who own a home in Maryland and are concerned about future nursing-home costs.
They have adult children and want the home to benefit those children, rather than be lost to long-term-care expenses or Medicaid estate recovery.
To address that concern, the parents create a Medicaid Trust during their lifetime.
In a typical arrangement:
From a practical standpoint, very little changes during the parents’ lives. They continue to live in the home, maintain it, and treat it as their residence. The children’s interest is real, but postponed until the parents’ deaths.
This structure is intentional. It allows the parents to protect the home from nursing-home costs and from Maryland’s efforts, after death, to recover the cost of care—while ensuring the children ultimately receive the property.
It is this combination—beneficial ownership in the children, continued lifetime occupancy by the parents, and delayed enjoyment until death—that sets up the inheritance-tax analysis that follows.
Maryland inheritance tax does not focus on who holds title. It asks whether the property is treated as “passing from the decedent” under Maryland law.
When the above facts are applied to the statute, several provisions are implicated.
Although legal title is transferred during life, the children cannot possess, use, or enjoy the home until the parents die. Because possession and enjoyment are postponed until death, Maryland treats the transfer as one that takes effect at or after death.
A defining feature of the Medicaid Trust is that the parents continue living in the home after the transfer. Their right to occupy the property does not end until death. When that lifetime use ends, the property is treated as passing from the decedent.
Maryland’s inheritance-tax statute uses the term “dominion,” which focuses on practical control and benefit, not formal ownership.
In this common fact pattern, the parents retain dominion because they live in the home, control how it is used during life, and nothing materially changes until death.
Even though the children are the beneficial owners, the parents’ retained dominion causes the property to be treated as passing from them at death.
The fact that the trust is irrevocable and a separate legal entity does not prevent inheritance-tax treatment. Maryland’s statute looks past formal ownership and focuses on whether death is what ends possession, enjoyment, or dominion.
This outcome does not mean the Medicaid Trust failed. It worked exactly as intended for Medicaid planning.
But the same features that make the trust workable—lifetime occupancy, delayed enjoyment, and retained dominion—are what cause Maryland to treat the property as passing from the decedent for inheritance-tax purposes.
When the beneficiaries are children, the inheritance-tax analysis is often academic. Maryland exempts transfers to children, so no inheritance tax is due even though the property is treated as passing from the decedent.
The analysis becomes critical when the trust is designed to benefit nieces, nephews, more remote relatives, or friends. In that situation, the same retained-dominion structure results in a taxable transfer.
The trust protects the home from nursing-home costs and Medicaid estate recovery, but it does not prevent Maryland from imposing inheritance tax on non-exempt beneficiaries.
For a homeowner planning to leave a home to children, a Medicaid Trust usually raises no inheritance-tax issue.
For a homeowner planning to leave a home to nieces, nephews, or friends, the same trust structure can result in a significant inheritance-tax obligation. That distinction is why Medicaid planning and inheritance-tax planning must be considered together, not separately.
A Medicaid Trust is a powerful planning tool, but its effectiveness depends on how it is drafted and on who is intended to benefit from the trust. The same structure that protects a home from nursing-home costs and Medicaid estate recovery can have different inheritance-tax consequences depending on beneficiary design and retained lifetime rights.
If you are considering a Medicaid Trust, it is important to evaluate Medicaid eligibility, estate recovery exposure, and inheritance-tax implications together.
To discuss whether a Maryland Medicaid Trust can be drafted to meet your specific goals, you are welcome to contact David Jonathan Taylor, Certified Elder Law and Estate Planning Attorney, to schedule a consultation.