2018 Estate Tax Changes

Legislative Update As of January 1, 2018, the D.C. estate tax exemption increased to match the federal estate tax exemption. As a result of the 2017 Tax Act (signed into law on December 22, 2017), each D.C. resident has a D.C. estate tax exemption of $11,180,000 for 2018.

The federal estate tax applies to estates valued above the exemption amount, which registered in 2017 at $5.49 million.

In the days before Christmas, Congress made the estate tax the sole concern of an even narrower socioeconomic band by doubling the exemption. The Tax Cut and Jobs Act, which eliminated many other individual tax breaks to partially pay for tax cuts to the individual (temporary) and corporate (permanent) rates, will exclude the first $11.2 million of individual estates from taxation in 2018. For married couples, each spouse gets an exclusion and any unused portion at the death of one transfers to the other.

Those numbers will rise along an inflationary index. Legislatively, they have now increased 15-fold since the beginning of the century.

For the few in and around the District who must deal with estate planning in that strata, the picture changed for local estate taxes as well. Virginia marks the exception since the Commonwealth repealed its estate tax entirely in 2007. However, both Maryland and D.C. made changes to their estate tax administration schemes with some changes to kick in in 2019.

In the District, the estate tax exemption rose from $2 million to $11.2 million. D.C. law refers to its effective exemption as a “zero tax rate,” and it’s not portable between spouses like the federal exemption. D.C. previously applied a progressive rate structure for amounts above $2 million, but the new exemption effectively swallowed them all up. Thus, everything over $11.2 million is taxed at 16 percent.

Maryland took steps to increase its estate tax exemption in 2014, but the recent change to federal law will trigger an escalation. The estate tax exemption increased from $1 million in 2017 to $4 million in 2018 with no portability between spouses for unused exemption amounts. In 2019, Maryland law will sync up with federal law and the exemption will become the inflation-indexed federal standard for that year. At the same time, the higher state exemption will become portable. Maryland also taxes whatever the exemption fails to cover at a rate of 16 percent.

Maryland will not change the 10 percent inheritance tax imposed on the estate beneficiaries. It remains the only state to tax on both sides of the transfer, though the number of estates subject to the estate tax will soon become much smaller.

For anyone who finds themselves likely to pass on an estate valued above, but near, the new exemption limits, the remedies for getting under the bar remain largely the same. One option is to start gifting loved ones cash or property up to the new gift tax exclusion of $15,000 per year. Any amount over that will chip away at the federal estate tax exemption, but that’s not the case with the Maryland and D.C. exemptions. Another option involves making qualified charitable contributions out of an IRA. Finally, there’s the infamous grantor-retained annuity trust, or GRAT, a controversial vehicle complex enough to warrant its own article.