ANNAPOLIS – The Maryland Court of Special Appeals ruled Friday that families who transfer real property for estate planning purposes are not exempt from paying recordation and transfer taxes.
In late 1993, Bruce H. and L. Suzanne Schmidt and Edward D. Scott were told by the Frederick County clerk’s office that land they wanted to deed to their children for estate planning purposes was subject to recordation and transfer taxes.
The clerk collected $1,935.50 in recordation taxes and $1,381.01 in transfer taxes from Scott. This was based on the grain and cattle farm, valued at $276,202, he wanted to deed to his two minor children.
The Schmidts paid $1,218 in recordation taxes and $868.25 in transfer taxes based on the $173,650 tree farm they wanted to deed to their two adult children.
After paying the required taxes, the Schmidts and Scott filed a refund claim, which was denied by the clerk’s office.
Both parties thought a 22-year-old attorney general’s opinion protected them from any taxation. According to that opinion, “…deeds to family partnerships motivated solely by the purpose of estate planning should…be excluded from the assessment of taxes.”
But the clerk’s office said that the Schmidts’ and Scott’s “transaction came within no statutory exemption…and that therefore…were subject to taxes.”
On Nov. 16, 1994, a petition of appeal was filed to the Maryland Tax Court on behalf of the Schmidts and Scott. That court ruled in their favor.
The clerk then appealed the ruling to the Circuit Court of Frederick County, where the decision was reversed. The circuit court found that “the only way to avoid the tax is through a statutory exemption. Simply put, there is no exemption in the law….”
Maryland’s second-highest court agreed with the circuit court.
The attorney general “has no power to create exemptions, only to interpret the current exemptions set out in the statute,” wrote the panel members, Judges Dale R. Cathell and Charles E. Moylan Jr. and John J. Bishop, retired judge.
Creation of exemptions “is the province of the General Assembly,” the three wrote.
The Legislature has tried to deal with this issue in last two sessions. But no legislation has been enacted that exempts recordation and transfer taxation, the court observed.
Julia M. Freit, assistant attorney general, said the 1974 attorney general’s opinion has caused confusion across the state.
“I’m happy that this decision was reached because it will finally clear up confusion among county clerks and people interested in this form of estate planning,” said Freit, who argued the case.
“This 1974 opinion was simply an opinion, not a statute or a law. But apparently some county clerks have used it over the years to justify tax exemptions for estate planning.”
“In the case of the Schmidts and Scott, their attorney had used this opinion for years and apparently some county clerks were exempting their prior clients from taxes,” Freit said. “So that’s why they thought the opinion would stand.”
Freit said there are other ways to do estate planning.
“Most people want the best of both worlds,” Freit said. “They want to establish a corporation that will allow them to reduce their current estate value. But they don’t want to pay taxes for that transfer nor do they want to relinquish any control over the property.”
“Establishing a trust while you are living is one of the ways to avoid taxation,” she said.
Neither the Schmidts nor Scott could be reached for comment. -30-