Estate and Gift Tax After the 2017 Tax Reform Act

January 2, 2018

Although the 2017 Tax Cuts and Jobs Act, or “Tax Act,” constituted the most sweeping change to the Internal Revenue Code in 30 years, very little changed regarding estate and gift taxes—except the estate and gift tax exemption.

Whereas, prior to the Tax Act the post-2017 exemption was scheduled to be $5.6 million, the Tax Act has doubled the exemption to $11.2 million. The doubling of the exemption will cause many estates to no longer be subject to federal estate tax.

At one point there was discussion about doing away with the estate tax altogether and imposing an income tax on assets’ unrealized gains in high net worth estates. These proposals died. The estate tax remains, and seems unlikely to be repealed. The step-up rules—whereby estate assets receive a new tax basis equal to fair market value—have been retained.

There is good news as well regarding the estate tax exemptions for Maryland and D.C. (Virginia has no estate tax). The Maryland estate tax exemption is scheduled to be $4 million for 2018 and $11.2 million, the same as the federal exemption for 2019. The D.C. exemption, which was $2 million for 2017, will be $11.2 million for 2018, the same as the federal exemption. At these exemption levels the effective Maryland and D.C. estate tax rates will each be a flat 16%.

Caution: Maryland and D.C. may have anticipated tying their exemptions to a lower federal exemption. They may seek to lower their respective exemptions in the coming year.

Likewise, a future Administration could conceivably seek to reduce the federal exemption, even before the scheduled December 31, 2025 exemption “sunset” date.

In appropriate situations, taxpayers might consider making gifts sooner rather than later, to take advantage of the new federal exemption. Making gifts might also serve to reduce any remaining Maryland and D.C. estate tax exposure, by removing the gifted assets from the taxable estates.

Please contact Richard Lee at 301.231.6268 or with any questions.