When the Tax Cuts and Jobs Act of 2017 doubled the federal exemption (the amount that passes tax free before there is any estate tax) to $11.18 million in 2018, the law also provided that the exemption amount would be adjusted annually for inflation. As a result of the inflation adjustment, the federal exemption for 2019 is $11.4 million per estate.
The Tax Cuts and Jobs Act of 2017 also continued the concept of “portability”. This is the right of the estate of the second spouse to use their own exemption and any unused federal estate tax exemption of the first spouse if: (1) the first spouse died in 2011 or later, and (2) a federal estate tax return was filed to preserve the unused exemption. This means that a married couple will not pay federal estate taxes until their combined estates exceed $22.9 million.
Several years ago, Maryland passed legislation that would cause the exemption from Maryland estate tax to be the same as the exemption from federal estate tax beginning in 2019. However, when the Tax Cuts and Jobs Act of 2017 doubled the federal exemption, the Maryland General Assembly changed the Maryland law for 2019.
As a result, Maryland law now provides that the exemption for Maryland estate tax for 2019 is $5 million. The new law also provides that “portability” will be allowed.
The Maryland portability allows the estate of the second spouse to use their own estate exemption and the unused portion of the exemption of the first spouse who has died. The conditions are: (1) that the first spouse died in 2015 or later and (2) that a Maryland estate tax return was filed.
The District of Columbia passed legislation several years ago increasing its exemption from D.C. estate taxes and providing that in 2018, the D.C. exemption would be the same as the federal exemption. However, when the Tax Cuts and Jobs Act of 2017 doubled the federal exemption to $11.18 million for 2018, the D.C. City Council passed legislation setting the D.C. exemption for 2018 at $5.6 million.
That D.C. legislation also made the exemption amount subject to inflation increases. While D.C. has not yet announced the exemption level for 2019, it is expected that the exemption will be $5.7 million for 2019.
Virginia abolished its state estate tax in 2007. Accordingly, the estates of Virginia residents are subject only to the federal estate tax, with its exemption of $11.4 million per person or $22.8 million for a married couple in 2019.
In all jurisdictions, amounts from an estate left to a charity or to a surviving U.S. citizen spouse are exempt from the federal estate tax and any state (or D.C.) estate tax. Even if the estate is large enough that it might be subject to state (or D.C.) or federal estate tax, there are estate planning opportunities to decrease or eliminate the estate tax bite.
The bottom line is that the significant increases in exemptions mean that far fewer estates will pay any estate taxes. However, it also means that estates that had substantial tax planning incorporated in their Wills or Trusts may have provisions that are now contraindicated and should be updated.