D.C.'s New Estate Tax Exemption Amount
The District of Columbia's Office of Tax and Revenue recently announced that the D.C. estate tax exemption amount - - that is the portion of an estate NOT subject to tax - - will DOUBLE, from $1 million to $2 million, applicable to residents who pass away after December 31, 2016. This is big, welcome news! Those with their eyes on the ball had been disappointed the past couple of years, as this move had been announced in mid-2014, but was made dependent on the District's budget meeting certain revenue goals, which had not been achieved until recently.
Maryland's New Estate Tax Exemption Amount
As planned, Maryland's estate tax exemption amount increased to $3 million for individuals who pass away in 2017 -- an increase of a cool million dollars over the 2016 exemption amount. Assuming no bumps in the road, the Maryland exemption amount will be $4 million for individuals who pass away in 2018, and in 2019 and beyond, the Maryland's estate tax exemption is scheduled to match the federal estate tax exemption then in effect for individuals who then pass away. Look how far we've come -- in December 2014, the heirs of Maryland domiciled decedents had to bear a tax of approximately 16% on the taxable gross estates for the amount over and above a mere $1 million.
The New Federal Exemption Amount
The federal exemption amount is also a moving target, indexed to inflation and rising each January 1 in recent years. For 2017, the unified estate and gift tax exemption is $5.49 million per individual, up from $5.45 million in 2016. The annual gift tax exclusion remains at $14,000 per donor per donee per annum for 2017.
What Is An Estate Tax Exemption?
An estate tax exemption is the amount of money or assets that are exempt from estate taxes. When someone passes away, his or her estate is subject to estate taxes. However, this tax applies only to estates that exceed the tax exemption. For example, in 2017, since the Maryland estate tax exemption is $3 million. If a person domiciled in Maryland dies in 2017 with a taxable gross estate of $3.1 million, that estate will only be taxed by Maryland on the $100,000 that exceeds this exemption. Note, also, that the tax exemption amount in a jurisdiction also has the potential of affecting residents of other states, such as decedents who owned valuable real estate or kept tangible assets in the state assessing estate tax.
Do I Need To Update My Estate Plan?
If you are a District of Columbia or Maryland resident with a large estate - in excess of $2 million for DC, or $3 million for Maryland - this new law affects you, and you should consider speaking to an estate planning attorney to see if there are ways you can minimize the estate tax that may be payable by your estate - - decreasing the amount available to your heirs and beneficiaries. Alternatively, if your current estate falls below these new exemption amounts, your current estate plan may be in serious need of an update, as it may employ various tax-savings techniques that are no longer necessary, and which add complications and unnecessary burdens to your heirs "post-mortem" (after death).
Further Changes on the Horizon
Another upcoming change to Maryland law has to do with what's known as "portability" of the "deceased spouse's unused exemption amount," Under federal law, married couples have the ability to use each other's unused exemption. For example, if your spouse passes away in 2017 and only uses $1 million of his or her federal estate tax exemption, your heirs can use the remaining $3.490,000 exemption in calculating federal estate taxes on your passing if you, as the surviving spouse, file a specific federal election within 9 months of your spouse's death. While the portability portion of the law won't come into effect for Maryland estate taxes until 2019, it is important to think ahead when developing your estate plan and use estate planning tools that take advantage of portability, and in the interim, take advantage to estate planning tools that allow married couples to take advantage of the Maryland estate tax exemption available to each of them.
The D.C. estate tax exemption may also match the federal's in 2018 and beyond, if certain revenue conditions are met and are deemed "recurring" in order to "fund" the tax cuts. We await further announcements for that in the future.
Additionally, in this ever-changing landscape, the fate of the federal estate tax itself is uncertain. Certain proposals emanating from the Donald Trump camp seek to repeal it entirely, while imposing a new carryover basis regime for estates over $10 million. This involves a trade-off, eliminating both the dreaded estate tax and the favored "step-up in basis" to date-of-death values that heirs enjoy for assets passed on to them. Stay tuned for further updates, as and when announced.
The bottom line is this: increases in the estate tax exemption are good for Maryland and D.C. residents, while other potential changes may or may not be in your favor, depending on your particular circumstances. Should further changes get passed by our legislative bodies, careful planning may avoid unintended financial consequences. Speak to an estate planning attorney to make sure your estate plan is well protected, and takes advantage of changes in the law.