It used to be extremely important to engage in what is called estate "tax planning" in order to avoid unnecessary estate taxes at the time of death. But times have changed. First of all, as of 2019 the federal estate and lifetime gift tax exemption is now $11,400,000 per person (or $22,800,000 per married couple). This means that most people don’t need to be concerned about a federal estate tax when they die.
But there are still “state estate taxes” in parts of this geographic area. The District of Columbia estate tax exemption for 2019 now $5,681,760 or double that for a married couple, to include domestic partners. But Maryland’s estate tax exemption has jumped to $5 million per person (or $10 million per couple) for 2019. Virginia has no state estate tax these days so Virginians don’t need to worry about this issue. The State of Maryland also imposes “inheritance” taxes on distributions to certain beneficiaries who are remotely related or are unrelated to the decedent.
Tax exemptions will continue to change over time.
The new concept of “portability” means that if the first spouse to die does not “use up” his or her full federal or state estate tax exemption, the remainder of that exemption is “portable” to the surviving spouse and can be used by him or her to avoid estate taxes later, provided an estate tax return is filed when the first spouse dies and provided further that the surviving spouse does not remarry before his or her death.
The value of the estate is determined not by just the assets held in a trust or part of a decedent’s probate estate. Indeed, all assets over which the decedent had control at the time of death, including life insurance and retirement accounts, are included in the calculation. This is a fact that many people don’t understand until I meet with them.
The federal government also taxes gifts made in your lifetime, if those gifts in total were in excess of $11.4 million. The federal estate tax exemption and the federal gift tax exemption are “linked,” in other words. You can use it up during life or at death. Thus, when you make a large gift during life (above the $15,000 gift tax exemption), you are “using up” part of your federal estate tax exemption. There is no gift tax in Washington, D.C., Maryland or Virginia. I help my clients understand how this unique feature of state law can work to their advantage.
With the new federal exemption amount and with newly increased income taxes, it’s important for everyone to consider whether their existing estate plan maximizes both estate tax savings and income tax savings. Contact me to discuss this topic further. Based in Bethesda, Maryland, I work with clients in Maryland, Virginia and Washington, D.C.