When the Tax Cuts and Jobs Act (TCJA) was signed into law late last year, it ushered in the largest federal estate tax exemption since the federal estate tax was first imposed by the Revenue Act of 1862. The new law excluded many taxable estates from federal estate tax liability, nearly doubling the projected 2018 federal individual estate tax exemption amount from $5.6 million to $11.18 million.
The TCJA also directly affected some state estate tax laws by increasing certain states’ estate tax exemption without state legislative input. This occurred as a result of some states “coupling” their estate tax exemption amount to the federal amount, allowing their residents the same estate tax exemption for state purposes as for federal purposes. Coupling simplified state estate taxes, but after TCJA abruptly doubled their exemption amounts, some state legislatures subsequently considered “decoupling” from federal law and establishing a separate estate tax exemption. Washington D.C. and Maryland are among these states.
Below is a brief summary of the estate tax exemption status for D.C., Maryland, and Virginia both pre- and post-TCJA:
The District of Columbia previously decoupled from the federal exemption amount and allowed its residents a $2 million exemption in 2017. As the result of legislation passed in 2015, D.C.’s exemption amount was scheduled to recouple with federal law effective January 1, 2018. When TCJA was passed, D.C. found its exemption amount leaping from $2 million in 2017 to $11.18 million in 2018 a few days before the effective date.
In response, ten of the 13 D.C. Council members proposed a bill in February 2018 to reduce DC’s estate exemption back to the expected $5.6 million. After receiving some pushback from the Council’s finance committee, the bill is expected to be attached to the annual budget and voted on mid-June 2018.
Maryland’s estate exemption amount has been decoupled from the federal estate exemption amount since 2004. In 2014, Maryland passed legislation to gradually increase its estate tax exemption until 2019, when it would recouple with the federal exemption. However, similar to its neighbor D.C., Maryland was not willing to allow TCJA to indirectly raise the state’s exemption to $11.18 million, up from $3 million in 2017 and $4 million in 2018.
During the 2018 legislative session, which ended on April 9, 2018, the Maryland legislature passed a bill to prospectively decouple from the federal estate exemption before its scheduled recoupling on January 1, 2019. The Maryland estate exemption amount now is $5 million, not indexed for inflation.
Virginia repealed its estate tax effective July 1, 2007, and thus was not affected by the estate provisions of TCJA. However, a bill introduced recently in the Senate proposes reinstating Virginia’s estate tax. While this bill ultimately may not be passed, it and similar previous bills may indicate an interest by the Commonwealth’s legislators to impose an estate tax in the near future.
In light of these changes, residents of D.C. with estates of $5 million or more should work with their estate planning advisors as the D.C. proposed estate exemption bill progresses. If the bill is passed, many residents should review and revise their current estate plans to account for the changes in the law.
Maryland residents with estates of $5 million or more should revisit their estate plans. The disparity between the Maryland exemption amount and the new federal amount requires residents and their estate planning advisors to review and potentially adjust existing estate plans in order to effectuate the residents’ original intent regarding the transfer and use of estate assets. Maryland residents should ensure their documents are drafted to take advantage of the new portability rules effective January 1, 2019.
Virginia residents should stay alert for any changes in the Commonwealth’s estate tax law. Residents of D.C., Maryland, and Virginia can all utilize strategic gifting to lower the value of their estates, as gift tax is not imposed in any of these states.
Please contact our estate, gift & trust tax director, John Ure, at 301.231.6200 with any questions you may have.