2026 Estate Tax Exemption Changes What Maryland Business Owners
Key Takeaways
- Maryland’s estate tax exposure can start far below the federal level, so business owners must plan around the state threshold first.
- Closely held business value is often illiquid, which can pressure heirs into selling assets quickly to cover taxes.
- Accurate valuations and well-supported discount strategies can materially reduce taxable value when transferring business interests.
- Life insurance and buy-sell agreements only work as intended when structured correctly and reviewed regularly.
- Updating estate documents and business agreements before 2026 helps prevent conflicts, delays, and preventable tax costs.
Maryland business owners can’t rely on federal estate tax headlines to protect their companies. Even with a larger federal exemption, Maryland’s lower threshold and separate inheritance tax can create a cash problem when an owner dies. This article explains what the estate tax exemption is, how Maryland rules differ from federal law, and why illiquid business value can trigger a forced sale. You’ll learn how to estimate exposure, use defensible valuations and discounts, and build liquidity through life insurance and properly structured buy-sell agreements. Most importantly, you’ll see what to update now so your succession plan still works in 2026.
What Is an “Estate Tax Exemption,” and Why Should Maryland Business Owners Care About It?
The estate tax exemption determines how much wealth passes tax-free at death. For business owners, this number isn’t abstract—it directly impacts whether heirs keep the company or sell it to pay taxes. Understanding the estate tax changes Maryland implemented alongside federal shifts is the first step in business owner estate planning.
The Estate Tax Exemption Controls How Much You Can Transfer Tax-Free
The exemption sets a threshold. Estates below it owe nothing. Estates above it get taxed on the excess.
The One Big Beautiful Bill Act (OBBBA) was passed in July 2025 and changed the federal landscape. It repealed the TCJA sunset provision that would have slashed exemptions in half. The federal estate and gift tax exemption for 2026 now sits at $15 million per individual—$30 million for married couples. This exemption is permanent and indexed for inflation going forward.
What the exemption doesn’t cover: state-level taxes. Maryland maintains its own estate tax with a much lower threshold. Federal planning alone won’t protect you.
Business Owners Face Greater Exposure Than W-2 Employees
Salaried employees rarely accumulate enough wealth to trigger estate taxes. Business owners are different.
Business interests, commercial real estate, and equipment create concentrated, illiquid wealth. These assets push owners above exemption thresholds even when cash flow is tight. The math works against you: a profitable company valued at $8 million means you’re already $3 million over Maryland’s limit.
The stakes are high. 78% of family firms fail by the third generation. Poor succession and estate planning for business owners drives much of that failure. Without a plan to reduce the estate tax burden, heirs may face a forced sale just to cover the tax bill.
Estate Tax, Inheritance Tax, and Income Tax on Inherited Assets Are Three Different Things
These terms get confused constantly. They shouldn’t be.
Estate tax is levied on the total value of a decedent’s estate exceeding the exclusion amount. The estate pays before assets are distributed. Inheritance tax is paid by the person receiving assets—the rate depends on their relationship to the deceased. Income tax on inherited assets applies when heirs sell appreciated property or take distributions from retirement accounts.
Maryland is one of the few states imposing both estate tax and inheritance tax. This double layer makes the Maryland estate tax exemption 2026 threshold especially important. You’re not dodging one tax—you’re navigating two. Effective estate planning requires addressing both simultaneously.
How Do Maryland Estate Tax Rules Work Compared to Federal Estate Tax Rules?
Maryland operates under a separate estate tax system that catches many business owners off guard. While federal exemptions climbed to $15 million, Maryland’s threshold stayed put. Understanding the estate tax changes that Maryland maintains independently is critical for any business owner’s estate planning strategy.
Maryland Is a “Two-Tax” State—You Pay Estate Tax and Inheritance Tax
Most states impose one death tax or the other. Maryland imposes both.
The Maryland estate tax is governed by the Tax-General Article of the Maryland Code. Key statutes include Md. Code Ann., Tax-Gen. § 7-302 (imposition), § 7-304 (amount), and § 7-309 (exclusion and portability rules). The estate tax hits the total estate value. The inheritance tax hits individual beneficiaries based on what they receive and their relationship to the deceased. Planning must account for both layers to effectively reduce the estate tax burden.
Maryland’s Exemption Is $10 Million Lower Than the Federal
The gap between federal and state exemptions creates a real planning challenge.
The Maryland estate tax exemption for 2026 remains at $5 million per individual. It’s not indexed for inflation—that number won’t budge unless the legislature acts. Married couples using portability can shield up to $10 million from the Maryland estate tax. Compare that to the federal exemption of $15 million per individual. This creates a $10 million gap per person where you owe nothing federally but face a state tax bill.
For estate planning for business owners, this means federal-only strategies fall short. A $12 million estate pays zero federal tax but owes Maryland estate tax on $7 million. The state exemption is your real planning target.
Inheritance Tax Adds Another Layer for Non-Family Beneficiaries
The inheritance tax applies separately from the estate tax, and rates depend on who inherits.
Transfers to spouses and lineal descendants (children, grandchildren) receive favorable treatment. Transfers to non-lineal beneficiaries—siblings, business partners, friends—face inheritance tax at higher rates. If your succession plan includes transferring ownership to a non-family member or key employee, inheritance tax becomes part of the equation. Structure matters. The right planning can minimize or eliminate this additional hit.
What Estate Tax Changes Should Maryland Business Owners Prepare for in 2026?
The federal landscape shifted dramatically in 2025. But estate tax changes Maryland business owners face aren’t just about federal rules. State thresholds remain unchanged, creating a planning gap that requires immediate attention.
Federal Changes Rewrote Succession and Gifting Strategies
The expected cliff didn’t happen. Planning assumptions from 2024 are now obsolete.
Previous expectation: the federal exemption would drop to approximately $7 million on January 1, 2026. The OBBBA averted that sunset and actually increased the exemption to $15 million. This changes the calculus for large gifts and trust funding strategies that were designed to beat the deadline.
The annual gift tax exclusion remains at $19,000 per recipient for 2026—$38,000 per married couple giving jointly. These annual gifts still remove assets from your estate without touching the lifetime exemption. For business owner estate planning, combining annual exclusion gifts with strategic business interest transfers remains effective.
Maryland’s Rules Don’t Move When Federal Rules Change
Federal and state systems operate independently. Don’t assume Maryland follows federal changes.
The Maryland estate tax exemption for 2026 stays at $5 million until the General Assembly changes it. No legislation is pending. That threshold hasn’t moved in years and won’t automatically adjust for inflation or federal shifts.
One advantage: Maryland does not have a gift tax. Lifetime transfers that reduce your taxable estate face no state-level gift tax. This creates opportunities to reduce estate tax burden through strategic gifting that federal law now makes even more attractive.
A Higher Federal Exemption Doesn’t Solve the Maryland Problem
Clearing the federal threshold means nothing if you’re still exposed at the state level.
Business owners may avoid federal estate tax entirely but still owe Maryland estate tax. An estate worth $12 million owes zero federally but faces state tax on $7 million above Maryland’s exemption. Estate planning for business owners must address both levels—federal planning alone leaves money on the table.
Anyone with a net worth exceeding $5 million must focus planning on mitigating state estate tax. That’s your real exposure point in Maryland.
Verify Your Planning Assumptions—Don’t Rely on Permanence
“Permanent” in tax law rarely means forever. Plan accordingly.
The permanence of the federal exemption does not eliminate planning needs. Future administrations could amend or repeal the OBBBA. Political shifts happen. What’s locked in today could change after the next election cycle.
Smart business owner estate planning builds flexibility into the structure. Use current high exemptions while available. Design plans that adapt if thresholds drop later. Review assumptions annually rather than setting and forgetting. The Maryland estate tax exemption for 2026 is certain—federal certainty is always provisional.
Who Is Most at Risk from Maryland Estate Taxes in 2026 and Beyond?
Not every business owner faces the same exposure. Some ownership structures and industries create perfect storms where assets are high, cash is low, and the tax bill comes due immediately. Understanding your risk profile shapes effective business owner estate planning.
Asset-Rich, Cash-Poor Owners Face Forced Sales
Estate taxes are due in cash. Illiquid estates create crisis situations.
Estates with illiquid business interests may lack cash to pay Maryland estate tax without selling assets. The business might be worth $8 million on paper, but if the estate can’t write a check for the tax bill, heirs face a forced sale—often at a discount, often to competitors, often destroying what took decades to build.
The 2024 Supreme Court decision in Connelly v. United States made this worse. Life insurance proceeds received by a corporation to redeem a deceased shareholder’s stock must now be included in estate value for federal estate tax purposes. A policy meant to provide liquidity actually increases the taxable estate. This estate tax change that Maryland business owners must factor into any redemption-funded buy-sell agreement.
Certain Industries Face Outsized Valuation and Liquidity Gaps
The gap between what a business is worth and what cash it generates determines risk.
Closely held businesses, family farms, and real estate holdings are particularly vulnerable. A farm worth $7 million generates a modest annual income. A commercial property portfolio has high appraised value, but cash flow is tied up in maintenance and mortgages. Manufacturing companies carry expensive equipment that doesn’t convert to cash quickly.
Industries with high asset values but low cash flow face the greatest exposure to the Maryland estate tax exemption 2026 threshold. Estate planning for business owners in these sectors must prioritize liquidity strategies—not just valuation reduction—to reduce estate tax burden when the time comes.
Multi-State and Multi-Entity Ownership Compounds Complexity
Owning property across state lines doesn’t simplify anything. It multiplies filing requirements.
Multi-state property ownership complicates estate tax calculations and may trigger filing in multiple jurisdictions. Own a rental property in Delaware and a business in Maryland? Both states may assert taxing authority over portions of the estate. Each state has different exemptions, rates, and rules.
Multi-entity structures—holding companies, operating companies, real estate LLCs—add layers to business owner estate planning. Each entity needs proper documentation. Valuations must account for ownership percentages and control issues. The planning that works for a single-entity owner won’t transfer directly to complex structures. Get professional guidance before assuming your situation is straightforward.
How Do You Estimate Your Taxable Estate When You Own a Closely Held Business?
Business owners rarely know their true estate tax exposure. The company’s value isn’t what you paid for it or what’s on the balance sheet—it’s what the IRS says it’s worth. Accurate estimation is foundational to business owner estate planning.
Your Estate Includes More Than You Think
Everything you own or control gets counted. The list is broader than most expect.
The IRS requires assets to be valued at Fair Market Value—what a willing buyer would pay a willing seller. Your taxable estate includes business interests, real estate, investment accounts, personal property, and retirement accounts. Life insurance death benefits are included in the estate if the policy is owned by the decedent. That $2 million policy you bought for liquidity? It adds $2 million to your taxable estate unless structured properly.
For estate planning for business owners, the business interest often dominates the calculation. A 100% ownership stake in a company worth $6 million already exceeds the Maryland estate tax exemption 2026 threshold before counting anything else.
Appraisals and Timing Directly Impact the Tax Bill
The valuation date and method determine the number that gets taxed. Get this wrong, and you overpay.
Critical action: obtain a formal, qualified valuation of the business before making gifts of business interests. A professional appraisal establishes defensible value at a specific point in time. Gifting without proper valuation invites IRS challenges and potential penalties.
Valuation dates matter because business values fluctuate. Estate tax changes in Maryland apply the use date-of-death values—or an alternate valuation date six months later if values declined. Strategic timing of gifts during lower-value periods can reduce estate tax burden significantly.
Valuation Discounts Can Substantially Reduce Taxable Value
Not all ownership interests are created equal. Minority stakes and illiquid holdings deserve discounts.
Discount for Lack of Marketability (DLOM) applies because closely held interests aren’t easily bought and sold like public stock. There’s no ready market. Discount for Lack of Control (DLOC) applies to minority interests that can’t unilaterally direct operations. A 30% stake doesn’t control the company—it’s worth less than 30% of the total value.
Discounts can range from 10% to 40% or more, depending on facts and circumstances. A $10 million business interest might be valued at $6.5 million after appropriate discounts. That’s the difference between a significant tax bill and minimal exposure under the Maryland estate tax exemption of 2026.
Proper Documentation Makes Discounts Defensible
The IRS challenges unsupported discounts. Documentation is your defense.
Gifts of business interests must be supported by a formal, qualified appraisal to withstand IRS scrutiny. The appraiser should be credentialed, independent, and experienced with closely held businesses. Principles established in federal tax court cases guide what’s acceptable—and Maryland courts often consider these precedents.
Business owner estate planning requires contemporaneous documentation. Get the appraisal before the gift, not after. Document the restrictions on transfer, the lack of control, and the absence of a ready market. The discount you claim is only as strong as the paper backing it up.
A Simple Test Identifies Whether You Have Exposure
You don’t need a full appraisal to know if planning is urgent. A rough estimate points the direction.
If total net worth—including business valuation—exceeds $5 million, Maryland estate tax exposure exists. That’s the threshold. Add up your business interest (even a rough estimate), real estate equity, retirement accounts, life insurance face values, and other assets. Over $5 million? You need a plan to reduce estate tax burden.
This back-of-the-envelope calculation isn’t precise enough for filing. But it’s precise enough to know whether estate planning for business owners should be on your calendar this quarter—not next year.
How Should You Plan for Liquidity so Taxes Don’t Force a Fire Sale of the Company?
Estate taxes come due in cash—typically within nine months of death. If the estate lacks liquidity, heirs sell assets under pressure at discounted prices. Liquidity planning is where business owner estate planning succeeds or fails.
Life Insurance Provides Immediate Cash When Structured Correctly
Life insurance solves the liquidity problem—but only if kept outside the taxable estate.
Irrevocable Life Insurance Trusts (ILITs) keep death benefits out of the taxable estate. The trust owns the policy, pays the premiums, and receives the proceeds. Those funds then provide liquidity to the estate or purchase business interests from heirs without inflating the estate value. Without an ILIT, the death benefit adds to your taxable estate—creating more tax, not solving it.
Life insurance is the dominant funding mechanism, backing 70% of buy-sell agreements. For estate planning for business owners, it’s often the cleanest solution: guaranteed funds, available immediately, no debt created. The key is proper ownership structure from day one.
Buy-Sell Agreements Can Solve or Create Liquidity Problems
A buy-sell agreement on paper means nothing without funding behind it. Too many agreements are promises without cash.
An unfunded buy-sell agreement lacks the liquidity to execute the transfer. The agreement says remaining owners will buy the deceased’s shares—but with what money? Heirs wait. The business struggles. Everyone loses. Equally dangerous: 40% of small business owners fail to perform required annual reviews of their buy-sell agreements. Stale valuations and outdated terms create disputes when families can least afford them.
The Connelly ruling made this worse. 30% of existing redemption agreements require immediate review because corporate-owned life insurance now inflates estate values. Estate tax changes Maryland business owners must address include restructuring these agreements before they trigger unexpected tax bills.
Redemption and Cross-Purchase Plans Create Different Tax Outcomes
How the buyout is structured determines who benefits—and who pays more tax.
Cross-purchase agreements mean remaining owners buy the deceased’s shares directly. They receive a stepped-up basis in acquired shares, which is advantageous for future sale. If they later sell the company, they pay less capital gains tax.
Redemption agreements mean the company buys back the shares. No stepped-up basis for remaining owners. Worse, after Connelly, life insurance proceeds are included in corporate value for estate tax purposes. The policy meant to fund the buyout increases the taxable estate. This directly undermines efforts to reduce the estate tax burden.
Hybrid or “wait-and-see” agreements offer flexibility to choose the most tax-advantageous option at the time of sale. Given the current uncertainty around estate tax changes, Maryland and federal rules may bring, hybrids provide a valuable optionality.
Evaluate Cash-Flow and Credit Options Before Crisis Hits
Life insurance isn’t the only funding mechanism. Other options work—with tradeoffs.
Funding mechanisms include sinking funds, promissory notes, and installment payments. Sinking funds mean the business sets aside cash over time—but those funds sit on the balance sheet and may be exposed to creditors. Promissory notes spread payments over years, easing immediate cash strain but creating long-term debt. Interest paid is taxable income to the seller’s family.
For business owner estate planning, the right mix depends on business cash flow, owner age, insurability, and risk tolerance. The Maryland estate tax exemption 2026 threshold of $5 million means even moderately successful businesses need a liquidity plan. Evaluate options now—not when the estate is in probate and decisions are forced.
Your 2026 Advantage: Plan Before the Tax Bill Arrives
Maryland’s estate tax threshold can hit long before federal tax ever applies, especially when most of your wealth is tied up in a closely held business. The smartest move is acting early: confirm valuations, stress-test liquidity, update entity documents, and align your succession plan with your estate plan so heirs aren’t forced into a rushed sale. If you’re unsure where you stand, don’t guess. We help Maryland business owners build tax-aware succession plans that protect family and company continuity. Reach out to ZM Law Group today to schedule a planning consult.
