The Tax Cuts and Jobs Act of 2017 created sweeping amendments in federal tax legislation, including important modifications to the federal estate and gift tax laws. The impact of the federal estate tax changes on the D.C. and Maryland estate tax systems created a frenzy of local legislation during 2018. As the dust settles on 2018, there is more clarity for estate tax exemptions in 2019.
Federal Estate and Gift Taxes
The federal government imposes an estate tax on all assets in which a person has a requisite interest at the time of such person’s death. The federal government also imposes a gift tax on certain transfers that a person makes during such person’s lifetime.
Most of the population does not actually pay federal estate or gift tax because there are several exclusions and deductions available to reduce or eliminate the tax.
- Annual Gift Exclusion. In 2019, each person can generally give up to $15,000 to any recipient without reporting the gift to the Internal Revenue Service or paying any gift tax.
- Marital Deduction. There is also a martial deduction available for gift and estate tax purposes that allows a person to give an unlimited amount to such person’s U.S. citizen spouse without incurring any tax. Assets left to a person’s non-U.S. citizen spouse may qualify for a modified marital deduction for estate tax purposes if held in a qualifying trust. In 2019, a person can generally give up to $155,000 to such person’s non-U.S. citizen spouse without reporting the gift to the Internal Revenue Service or paying any gift tax.
- Charitable Deduction. Many transfers to charitable organizations qualify for the unlimited charitable deduction for gift and estate tax purposes.
- Basic Exclusion Amount. Each person also has a basic exclusion amount that can be used to avoid tax on transfers that do not qualify for one of the above exclusions or deductions. Such transfers may need to be reported to the Internal Revenue Service but will not trigger a tax liability until the basic exclusion amount has been exhausted. For 2019, the basic exclusion amount is $11,400,000.
- Deceased Spousal Unused Exclusion. An individual whose spouse died in 2011 or later may also have a deceased spousal unused exclusion that can be used to avoid tax on transfers in excess of the basic exclusion amount. The deceased spousal unused exclusion arises from the “portability” rules of the federal estate tax system. An individual will only have an available deceased spousal unused exclusion amount if appropriate returns were filed and elections were made upon the death of the predeceased spouse.
District of Columbia Estate Tax
The District of Columbia imposes a local estate tax on D.C. residents and non-D.C. residents who own D.C. situs assets (e.g., real estate). For 2019, the District of Columbia exempts the first $5,600,000 (as adjusted for inflation) of assets (referred to as the “zero bracket amount”) from D.C. estate tax. The District of Columbia Office of Tax and Revenue has not yet released the inflation-adjusted figure that will apply for 2019. The portion of the D.C. taxable estate in excess of the zero bracket amount will be taxed at graduated marginal rates ranging from 12% to 15.2%.
The District of Columbia estate tax system does not allow the “portability” of any unused exemption to a surviving spouse. The District of Columbia also does not impose a local gift tax or consider lifetime gifts in the calculation or administration of the D.C. estate tax.
Maryland Estate and Inheritance Taxes
Maryland is the only state that has both an estate tax and an inheritance tax that may apply upon a person’s death.
Maryland imposes a state estate tax on Maryland residents and non-Maryland residents who own Maryland situs assets (e.g., real estate). For 2019, Maryland exempts the first $5,000,000 of assets from Maryland estate tax. In addition, the concept of “portability” of a predeceased spouse’s unused exemption amount applies as of January 1, 2019.
Maryland residents with assets below $5,000,000 may be subject to Maryland inheritance tax if assets are left to non-exempt beneficiaries. Non-exempt beneficiaries are generally individuals other than the decedent’s spouse, descendants, ancestors, and siblings.
Maryland does not impose a local gift tax; however, gifts made during lifetime (as calculated for federal gift tax purposes) are considered in determining whether a Maryland estate tax return must be filed, in the calculation of the Maryland estate tax, and in the imposition of Maryland inheritance tax.
 The rules discussed in this section are such rules as applicable to U.S. persons (generally, U.S. citizens and residents). Different rules apply to non-U.S. persons who own U.S. situs assets (e.g., real estate).
 I.R.C. § 2503(b); Rev. Proc. 2018-57 ¶ .43(1).
 I.R.C. §§ 2503(b), 2523(i)(2); Rev. Proc. 2018-57 ¶ .43(2).
 Because the basic exclusion amount is a combined exclusion against the gift tax (for lifetime transfers) and the estate tax (for transfers at death), lifetime transfers that use a portion of the person’s basic exclusion amount generally need to be reported to the Internal Revenue Service on a gift tax return (Form 709) even if no tax is due at the time of such gift.
 I.R.C. §§ 2010(c)(3), 2505(a); Rev. Proc. 2018-57 ¶ .41.
 D.C. Code § 47-3701(14)(C).
 D.C. Code § 47-3702(a-1)(1).
 Md. Tax-General Code Ann. § 7-309(b)(3).
ABOUT MICHELLE EVANS
Michelle L. Evans focuses her practice on estate planning and trust and estate administration in the District of Columbia, Maryland, and Virginia.
Ms. Evans assists clients with creating estate plans to meet their financial and personal objectives. Such planning often includes the preparation of Wills, Revocable and Irrevocable Trusts, Durable General Powers of Attorney, and Advance Medical Directives.
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