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Estate Tax Changes Under the 2017 Tax Cuts and Jobs Act

Effective January 1, 2018, the federal estate tax underwent a massive overhaul with the Tax Cuts and Jobs Act (the “Act”), permitting each individual to pass up to $11.2 million at death completely free from federal estate tax.  With proper planning, married couples will now be able to pass $22.4 million to their heirs at the death of the surviving spouse.  To that end, “portability” remains intact such that the surviving spouse can stack the deceased spouse’s unused exemption to his or her own federal estate tax exemption.   

The final version of the Act did not completely repeal the federal estate tax as was first envisioned by the House-sponsored bill; instead, the new tax law will sunset at the end of 2025.  Unless Congress acts in the interim, the estate tax exemption will revert to current levels (approximately $5.5 million per person adjusted annually for inflation).

Maryland, like a minority of states, still imposes a state estate tax, which attaches at a much lower amount than the federal exemption.  For example, in 2018 the Maryland estate tax exemption for an individual is $4,000,000, but in 2019 the Maryland exemption is set to match whatever the federal exemption amount is.  When the Maryland tax code was revised in 2014, legislators envisioned a scaled increase of the Maryland exemption and an eventual re-coupling in 2019 to the to the federal exemption (at the time, expected to be around $6,000,000). However, state lawmakers failed to consider the possibility of a complete repeal of the federal estate tax or such a large increase in the federal estate tax exemption that the Act ultimately provided. 

Interestingly, the Maryland statute as presently written states that in 2019 the federal credit used to determine the Maryland estate tax will be “the applicable exclusion amount corresponding to the applicable unified credit” – no specific dollar amount is mentioned.  Thus, if all things remain equal in Maryland, the state exemption will catapult from $4,000,000 in 2018 to $11.2 million in 2019 – probably not what the sponsors of the 2014 bill had in mind.   A recently sponsored bill to address this unintended consequence, which caps Maryland’s estate tax exemption at $5,000,000 for individuals dying on or after January 1, 2019, passed both houses of the General Assembly and will become law at the conclusion of the current legislative session.  Importantly for taxpayers, under this bill, effective January 1, 2019, “portability” of a deceased spouse’s unused state estate tax exemption would now be permitted in Maryland. 

Strictly from an estate tax perspective, the repeal of the federal estate tax is welcome news for individual taxpayers, but it will affect only a very small portion of the population.  Prior to the passage of the Act, a primary focus for most individuals with moderate to significant wealth was maximizing the estate tax credit through the use of credit shelter trusts.  Given the apparent divergence of the Maryland estate tax exemption from the federal estate tax exemption, the use of credit shelter trusts in estate planning remains an important strategy to limit estate taxes.  However, because of the significant increase in the federal exemption, even with substantial lifetime gifting, most estates will still not trigger any federal tax.  For that reason, the primary focus for many is shifting from estate tax planning to limiting the impact of capital gains tax.  In fact, some taxpayers have begun considering options to reincorporate low-basis assets into their estates so that a step-up in basis can be obtained at death. 

The revisions to the state and federal tax laws are substantial, but are certainly navigable.  Contact the trust and estate planners at Niles, Barton & Wilmer to determine how these significant changes may impact your estate planning goals.

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