Gen. 253] 253
TAXAT ION
I NHERITANCE T AX

) D EDUCTION OF E XP EN SES F ROM N ON P ROBATE T RUST E STATES

February 21, 1996

The Honorable W. Patri cia Dauenhauer Reg ister of W ills for M ontg om ery C oun ty
You have request ed our opini on whe ther certain expe nses are dedu ctible from non-probat e estat es in det ermining t he value of

the estate for inherit ance tax purpose s. More specifi call y, you asked about the cont inuing val idit y of a pri or Attor

ney General’ s opini on, 44 Opinions of

the Attorney General

337 (195 9), in wh ich this Office opined tha t expenses ordinari ly de ductib le from prob ate estates a re ded uctible from non-probate trust estates when the trust instr um ent e xpr essly so p rov ides

. Our opinion i s that

the conclusi on in the 1959 opinion remains valid. At t

he sa me t ime , w e acknowledge that t his conclusion l eads to incon sistent trea tme nt of p roba te and non -prob ate esta tes in certain respect s. Furth er, thi s conclusion results in a potentialloss of St ate re venue. Whether t hese probl ems suggest t he need for legis lative change is a polic y issue meri ting carefulstudy.

I Background
A. General Scope of Inheritance Tax
The Maryland inher itanc e tax i s imposed on the privil ege of recei ving propert

y that pa sses f

rom a decedent andh as a tax able sit us in thi s Stat e. Section 7- 202 of the Tax-General(“TG”) Artic le, Maryland Co de. T he tax applie s to pro bate a nd n on-p roba te prop erty alike and is i mposed on the “cle ar value ” of the prop e rty passing. TG §7-204. “Clear value” is def ined in TG §7-204(a ) as “the fair market value minus expenses. ” The term “expenses ” is not defined.254 [81 O p. Att’y

1 Prior to 1941, a long line of Attorney General opinions concluded, ininstances involving joint bank accounts, that funeralexpense s and debts of the decedent could be deducted from the ac count balance passing to the surviving owner i f the existence of a parole trust on the account for payment of such expenses was established as a mat ter o f fact. See21 Opinions of the Attorney General 765 (1936); 22 Opinions of the Attorney General 719 (1937); 23 Opinions of the Attorney General

589 (1938); 24 Opinion s of the Attorney General 837 (1939). However, these opinions wereeffective lyoverruled with the passage of Chapter 790 of the Laws of Marylan d 1941; this

enactment, n ow codified at TG §7-201(d)(2), providedthatthe written form of title of the account is controlling, notwithsta

n ding a parole agreement to the contrary. See26 Opinions of the Attorney General

475 (1941). B. The 1959 Opinion
In 44 Opinions of

the Attorney General

337, Attor

ney General S yber t was aske d w hethe r certain expe nses o rdinar ily ded uctible from a d ecedent’ s probat e estat e could be deduct ed from a nonprob ate trust

. The tru st i nstrument a ddressed in the 1959 opini on expr essly providedfor the trus tee t o pay the foll owing: debts of the decedentthat

the tr ustee conc luded to be valid; the expense s of the decede nt’s last

illnes s an d burial ; allinheri tance and s uccessi on taxe s; reasonable compensation to the trustee; and allcost s , expenses, and att orneys’ f ees. The dece dent’s probate e stat e was insuff icie nt to pay al l of t

he tradi tionaldebts and expe nses of administrati on. The 1959 opinion conc luded that su ch exp enses w ere dedu ctible from a non-p robat e trus t in ca lculating inherit ance tax. This conc lusion refle cts an une laborat ed appli cati on of the r easoning of prior opinions that de alt wit h applic ation of a paro le tr ust for payment of funer al expe nses a nd d ebts from joint tenancy pr operty. 1 These earli er opini ons reli ed on the equi table argument that since t he expenses would be deductible if there were a p robat e estate, there appearedto be no good rea son to appl y a diff erent r ule if the expens es we re to be p aid o ut o f no n-p rob ate a ssets

. See , e.g., 22 Opinions of

the Attorney General

719 , 720 (19 37)

. Th ese opinions are thinly reasone d at best. If the issue w ere new ly pre sen ted, w e might have reach ed a d ifferent re sult. Y et, “[w]e do n ot ov errule a prior opinion s imply because we might have resol ved a close que sti on the other w ay, were we first prese nted w ith it.” 72 Opinions of

the Attorney General

200, 202 (19 87)

. In thisGen. 253] 255
inst ance, as we explai n in Part II bel ow, the conclusion i n the 1959 opi nio n is b olste red by s ubs equ ent le gisla tive a cqu iesc enc e.

II Legislat ive Acquiescence
At the ti m e of

the 1 959 opi nio n, t h e inheri tance t ax was codifi ed in vari ous section s of for me r Artic le 81. For example, the tax on collatera ls wa s 7.5 p ercen t “of the clear v alue o f any and a ll prop erty

... passing at the de ath of any . .. de cedent .

... ” Former Articl e 81, §150.
Between 195 9 and a m ajor rec odifica tio n i n 1988, the inheri tance tax was the subject of peri odic le gisl ative atte ntion. For example, the GeneralAssembly amended former Arti cle 81, §150 a half- dozen times. Yet the GeneralAs sembly lef t undis turbed t

he Att orn ey G ene ral’s 195 9 in terp retat ion

. In Chap ter 2 of the La ws of M aryland 1988, the General Ass em bly recodif

ied the inheri tance t ax as TG Title 7, Subtit le 2. As before, the rec odifi ed stat ute imposed t

he tax on the “clear

value” of propert y. TG §7-204(b) and ( c). The t erm “clear value” was defined as “fair m ark et va lue m inu s ex pen ses.” TG §7- 204 (a). The Reviso r’s Note fol lowi ng TG §7-2 04 in dicate s that su bsec tion (a) is new language added t o clari fy the t erm of art “clear value” and refers to Bouse v. Hutzl er , 1 80 Md . 6 82, 686 , 2 6 A. 2d 767 (1942) “[f] or a dis cussion of

‘clear value. ’”
W hile the te rm “cl ear val ue” is def ined in t he stat ute and discuss ed in the c ited c ase, the G enera l Ass em bly did n ot sep arately define the te rm “expenses” as used in T G §7 -204(a). In other words, the General Assembly di d not take the occasi on to change t he inter pretation of “expe nses” i n the 1959 opini on. Nor h as the C ourt o f Ap peals d one s o in the exerc ise of it s rule-m akin g authori ty. The r eferenc e to “expens es,” wit hout defini tion or

discuss ion, ha s been carried over into the Appli cati on to Fix Inher itanc e Tax on Non-probate Asset setforth in Rule 6-405, ado pted by t he C our t of A ppe als b y or der date d Ju ne 2 8, 19 90. Although opinions of the Att orney General are non-bi nding in t erpret ations of the l aw, the GeneralAssembly is deemed to be256 [81 O p. Att’y

2 Costs and expenses o f administ ration inc lude such

items as appraisers’ fees under ET §7-202(d). aware of the opinions when enacting su bseq uent revi sions or recodificati ons. The General Assembly, obser ved the Court in State v. Crescent Cities Jayc ees , 330 Md. 460, 470, 624 A.2d 955 (1993), “is presumed to ha ve know n of the A ttorney G eneral’s statutory interpre ta tion and to have acqui esced in t hat const ructi on absent change in the s tatutory language

... .” This rule of constr uction applie s to the t erm “expenses, ” as used in the st atutor y defini tion of “clear value .” In ligh t of the le gislativ e acquiesce nce, the term “expenses” is best c onstru ed as including the e xpenses that 44 Opinions of the A tto rney G eneral 337 opined are deducti ble fr om non-probate assets.

III

Deductible Expenses
The Estate s and Trust s (“ET”) Arti cle cont ains se veral provisi ons governing debt s and expenses that are deduct ible f rom prob ate asset s. Under ET §8-105, which establ ishes a prior ity of payment if t

he estate assets are i nsufficient to cover all obli gations, the allowable expenses are itemized as foll ows:

(1) Fees du e to the register; (2) Costs and expens es of admini stration; [ 2 ] (3) Funeral expe nses as pro vid ed i n [ET] §8- 106 ...; (4) Compensation of per sonal r epresent ative as pro vid ed in [ET ] §7 -60 1 ..., for legal s ervice s as provi ded in [ET] §7- 602 ... , and comm issions of l icensed real estat e brokers; (5) Fami lyal lo wa nce as p rov ide d in[ET] §3-2 01 ...; (6) Tax es du e by d eced ent;Gen. 253] 257 (7) Reasonabl e m edic al, ho spita l, and nursin g expe nses o f the last illn ess of d eced ent; (8) Rent pa yable by decede nt fo r not mo re than three months in arrears; (9) W ages, salaries, or com missions fo r servi ces perf

orm ed fo r the de cede nt w ithin three m onth s prior to death of the d eced ent; (10) Old age a ssistanc e claim s und er A rticle 88A, §77 of the Code; and (11) All other claims.
Under ET §7-304, allthese expe nses are chargeabl e against the prin cipa l of th e es tate. These provis ions i n the Estates and Trus t Arti cle appl y to the adm in istrati on of probat e estat es, not to non-pr obate est ates; the provisi ons of the Tax- General Arti cle appl icabl e to the impositi on of inheri tance t ax on non- prob ate ass ets do not ex pressly refer to these deduc tion s. H owe ver, as stated in Part II abo ve, the term “expenses” as us edinTG § 7-204(a ) and Ru le 6-40 5 is de em ed to inclu de th ese obl igati ons
.

IV

Inconsistencies and Potential Revenu e Loss Applicat ion of the deduc tions to n on -probat e asset s, f or purposes of deter

mining cl ea r value f

or imposition of i nherit ance tax, caus es certa in inco nsisten cie s in tr eatment and a pot entia l reducti on in the amount of tax imp osed. In identifyi ng the problems, how ever, we do not wish to be under stood as commenting on whethe r the res ult i s wise as a matt er of publ ic poli cy. That i ssue must be left

to the Gener al Assembly, wh ich ha s auth ority to set the pub lic policy wit

h regard t o the imposi tion of taxes and t

h e applicable deductions.
One inconsi stency r elat es to the r easonable ness of the amount of the expense s de duc ted. With respect to the e xpenses deduct ed from probate e stat es, t he court ha s author ity t o determine t he258 [81 O p. Att’y

3 While TG §7-225(a) requires property ( probate or

non-probate) to (continued...) reasonableness of the a mo unt o f certain costs and fees. For example, the cour t has au thority to determine reasonableness of appraisal fees, ET §7-202(d); funeralexpenses, ET §8-106(b); c ompensation of the per sona l r epr ese ntati ve, ET §7-601(b); and att orney’s f ees, ET §7- 602. Mo reover, the cou rt has authority in the cont ext of the p roba te estate to dete rmine the r ea son ablen ess of th e agg regate compensationpaid to t

he personalrepres entat ive and attor ney
. ET §7- 602 (c).
The cour t does n ot have concomit ant authorit y to dete rmine the reasonableness of the amount of the expense s deducted f rom the value of non-probate est ates f or purposes of imposing inherit ance tax. Thus, funer al expense s, at torney’ s fees, and the like, in am oun ts not checked for

rea son ablen ess, m ay be dedu cted fro m th e fair market value of non- probate a ssets to dete rmine clear value f or impositi on of inheritanc e tax. This res ults in dis parate treat ment between probate and non-probat e estates and potent ially reduces t he amoun t of tax imposed on the non-probate assets.
Additional ly, w h ile c osts incurred af ter t he death of

the decedentto maintain the probat e asset s during a dministr ation of the estate are deduct ible e xpe ns es of admini stration, thereby r educing the “clear

value” of

the asset s for

purposes of

imposing inhe rit ance tax, that reduction in clea r value m ay be o ffs et by a revis ion in t he apprais ed value of

the assets i f there is a

signi ficant

increa se in t

he fair ma rket va lue of th e asse ts durin g adm inistr ation . The law expr essly allows pr obate ass ets t o be reval ued, i f appropr iate , at any ti me bef ore the e state is clo sed . ET §7- 204

. See D ow ns v. S afe Depo si t & Trust

Co ., 164 M d. 293 , 300, 1 64 A . 874 ( 193 3); Bouse v. Hu ll , 1 68 M d. 1, 8, 176 A. 645 (1935); 51 Opinions of the AttorneyGeneral198, 199-200 (1966). This is so beca use p roba te assets pass to t

he personalrepres entat ive upon the decedent ’s deat h, pursuant to ET §1-301; t

he y do n ot pass to the le gatee or devisee until distr ibu tion by t he p erso nal r epr ese ntati ve. For that reason, the law requir es the i nherit ance tax t o be deter mined and paid when the per sona l r epr ese ntati ve ac coun ts for and d is tr ibute s the as set s. TG §7- 217 (a). By contras t, t

here is no provisi on for re valuat ion of nonprob ate assets. 3 This is so be caus e non -prob ate ass ets ves t inGen. 253] 259

3 (...continued) be “appraised in the manner provided inTitle 7, Subtitle 2 of the Estates and Trusts Ar

ticle ,” this language does not make the revision of value provisioninTG §7-204

of that su btitle app licable t

o non-pro bateassets. The language itself refers only to “app raisal” and does

not refe r to “revision of value” or reappraisal. Moreove r, the Revisor’ s Note accompanying TG §7-225(a)states that subsection (a) “is new language derived without substantive change from the first sentence of former Article81, §169(b).” The former law simply provided that the nonprobate property reported

in the inventory was to be appraised for the purpose of determining the amount of tax then due an d payable; the former law did not provide for reevaluation.

4 “Vest in possession” is a term of art refer ring tothe vesting of the rightto receive, not actual receipt of the property. See Polhaus v. Register of Wills , 248 Md. 625, 630-31 , 238 A. 2d 91 (196 8); Shaughnessy v. Perlman, 198 Md. 619, 85 A.2d 38 (1951) ; Lilly v. Sta te , 156 Md. 94, 143 A.2d 661 (1928); 40 Opinions of the Attorney General

501, 504 (1955); 25 Opinions of the Attorney General 625, 628 (1940); 21 Opinions of the Attorney General

720, 721 (1936). possessi on in the benefi ciary at the time of the dec edent’s death. 4 The “clear

value” f or inheri tance t ax purposes and th e resp onsib ility forpayment of the t ax are fi xed when the apprais al is made and the regis ter determines the am oun t of tax d ue. T G § 7-21 7(b); Merca ntile Safe De posit & Trus t Co. v . State ex rel. Shaughnessy , 264 Md. 455, 287 A.2d 502 (197 2). Th erefor e, there is no p ossibility of offs etting the reducti on in cle ar value that resu lts in the deduct ion of expens es of ad ministr ation, even when those expendi tures may result in an increase in the fair market value of the assets.
Another inconsi stencyaris es with r espect to the compensation to the r egist er of wil ls for the work of r eviewing documentation submitte d to support

the expense s deducted. Under ET §2-206, the regis ter is ent itl ed to fee s for t

he work performed in connect ion with the adm inistration of pro bate e sta tes. There is no provisi on for compensation t o the regis ter f or the work per formed underTG §7- 214 in dete rmining the amount of inheritanc e tax due i n connecti on with non -prob ate ass ets. W ere the determ ination limit ed to reviewing the inve nt ory and appr aisal, t he amount of uncompensated work would not be great. However, when determinat ion of t he tax requir es revi ew of

documentati on supporting a myriad of expens es that are bei ng deducted f

rom the apprais ed value t o ascert ain cl ear value, th e a mount o f unc ompe ns at edwork be co mes subs tant ia l. An260 [81 O p. Att’y
increase in use of inter vivos trust s has neces sit atedthe h iri ng of additi onal pers onnel in t he regis ter’ s offi ce.

V
Conclusion
In summary, it i s our opini on that expe nses o rdinar ily dedu ctible from probate asset s to det ermine clearvalue for imposi tion o f inheritanc e tax ar e like wise deductible fr om nonprob ate assets when the inst ru me nt crea ting the non -prob ate esta te expr essly provides for the payment of such expenses. W e adh ere to the conc lusion to that e ffect in 44 Opinions of the Attorney General 337. Any inconsist encies or e ffect on tax reve nue resul ting f rom applic ationof the deducti ons to non-probate prope rty ar e issue s for the General Assem bly to address. J. Joseph C urran, Jr. AttorneyGeneral
Susan P . Wh iteford Assist ant Attorney General
Julia M . Freit Assist ant Attorney General
Jack Sch wa rtz Chief Counsel Opinions and Advic e