Estate Tax Alert: Maryland and D.C. To Raise Estate Tax Exemption

Some Things Change.

On May 15, 2014, Governor Martin O’Malley signed H.B. 739, which provides for the gradual increase of Maryland’s state estate tax exemption. The House passed the bill on March 7 with the Senate passing the measure on March 20.

According the measure’s provisions, the Maryland state estate tax exemption would increase from $1 million in 2014, to $1.5 million in 2015, $2 million in 2016, $3 million in 2017, and $4 million in 2018. In 2019, the state estate tax exemption would finally re-couple with the federal exemption, which is projected to be $5.9 million (indexed for inflation).

Note. The maximum estate tax rate will remain at 16%.

Additionally, beginning in 2019, the federal portability provisions will also apply for Maryland estate tax purposes.  In general, this means that if any Maryland estate tax exemption is unused at the death of the first spouse to die, the executor of his/her estate can elect to “port” the unused exemption amount to the surviving spouse for him/her to use in addition to his/her own state estate tax exemption. For example, if the first spouse dies in 2019 and uses none of his/her state estate tax exemption, the second spouse’s estate tax exemption amount could equal up to $11,800,000 (the 2019 Maryland estate tax exemption is predicted to be $5,900,000).

Portability, while seemingly simple, does have some complex rules. You should discuss with your estate planning advisor the impact Maryland’s new portability provisions might have on your estate plan.

Some Things Stay The Same.

Although the raising of the estate tax exemption might be a cause of celebration to many, there is an enduring tax that might dampen their joy: the Maryland inheritance tax. Even if no estate tax is due upon death, Maryland law still provides for a state inheritance tax assessment, depending on to whom you leave your assets. Any property that passes to a spouse, grandparent, parent, child or lineal descendant (and their spouses and children), or siblings is exempt from the inheritance tax. However, transfers made to other family members (ex. cousins, aunts and uncles) or friends, would be assessed an inheritance tax at a rate of 10%.

Note. Maryland and New Jersey are the only two states that assess both an estate tax and an inheritance tax.

Wait There’s More: Other State Estate Tax Developments.

For those who live in the DMV area, many may be wondering what the District’s response is to Maryland raising its estate tax exemption (Virginia repealed its estate tax in 2006). While no changes have been officially enacted, the D.C. Council recently approved its 2014 tax bill, which provides for the increase of the D.C. estate tax exemption from $1 million to $2 million in 2016. The bill further provides that in 2016 or later years, the D.C. estate tax exemption is to gradually increase to match the federal exemption amount, but only after enough additional revenue becomes available to pay for higher priority tax cuts. If the bill is ultimately enacted, subject to the Mayor’s and Congress’ approval, the D.C. estate tax exemption could potentially be higher than Maryland’s until 2019.

As of 2014, only 19 states (and D.C.) impose state death taxes. In recent years, Indiana, Kansas, North Carolina, Ohio and Oklahoma repealed their state death taxes. Tennessee’s death tax will be phased out by Jan 1, 2016.

Two other states have also increased their state death tax exemptions. New York’s estate tax exemption recently increased to $2,062,500 for 2014 and will gradually rise until it matches the federal exemption in 2019. Minnesota’s estate tax exemption is to increase by $200,000 per year until it reaches $2 million, which is scheduled to occur in 2018.

Planning Ahead.

If you are currently domiciled in Maryland, it might be prudent to meet with an estate planning advisor to either review and/or revise your estate plan. Certain strategies that might have been put into place to help deal with Maryland’s estate tax may no longer be as effective or even necessary. In any case, whenever there are new developments in federal or state tax laws, it is always a good time to make sure your estate plan is up to date as well.

 

Written by Allaya Lloyd.

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