In October 2017, the IRS announced (Revenue Procedure 2017-58) that the exemption from federal estate taxes would increase to $5.6 million per person in 2018. The Tax Cuts & Jobs Act passed in December 2017 apparently doubled the federal estate tax exemption to $11.2 million per person or $22.4 million per married couple in 2018.
Now the IRS has announced (Revenue Procedure 2018-18) that the Tax Cuts & Jobs Act mandated that the annual inflation increase should be calculated using “chained-CPI” rather than the straight increase in CPI. The result is that the exemption from federal estate has been restated as $11.18 million per person for 2018. It continues to be subject to inflation adjustments and will increase each year in the future.
Portability continues at the federal level. That is the ability to claim the unused portion of the exemption from estate taxes of the first spouse to die (if death was in 2011 or more recent) for the estate of the second spouse when he/she dies. This means that a married couple won’t pay federal estate tax until their joint estate exceeds $22.36 million.
This announcement from the IRS has local repercussions as well.
In 2016, Washington, D.C., announced that it would increase its estate exemption beginning in 2018 to match the federal exemption. It was anticipated that the D.C. exemption would be approximately $5.6 million in 2018. Instead, it got increased and because of the wording of the D.C. law, the D. C. exemption will match the federal as is now correctly stated as $11.18 million per person (or $22.36 million per married couple). The DC City Council is considering legislation to reduce its exemption.
Maryland, in its legislation passed in 2014 provided that it would gradually increase the individual exemption each year from 2015 to 2018 when the exemption would be $4 million per person. The legislation further provided that in 2019 the Maryland exemption would be the same as the federal exemption, even to allowing the utilization of a deceased spouse’s unused exemption like the federal law allows (portability).
The Maryland General Assembly had assumed, in passing such legislation, that the exemption in 2019 would be approximately $5.7 million per person. That the exemption will be about twice as much has the General Assembly concerned about the loss of revenue that would have been collected in those state estate taxes.
As a result, the Maryland General Assembly passed legislation in the 2018 session setting the Maryland exemption from estate taxes for 2019 at only $5.0 million. The new legislation also allows portability beginning in 2019 – thus allowing the use of a deceased spouse’s unused exemption (from 2015 or more recent) if certain requirements are met. The Governor has allowed this law to go into effect without his signature.
Virginia (in 2007) and West Virginia (in 2005) abolished their respective state estate taxes. Thus, the recalibration of the federal estate tax exemption has no impact in either of those jurisdictions.
Although the overall change in the federal estate tax exemption (from $11.2 million to $11.18 million) is not great, the doubling of the exemption to more than $11 million per estate creates additional opportunities to share family wealth both now and in the future through creative estate planning.