Jonathan Ackerman Law

Fundamentals - Changes to Federal, Maryland and District of Columbia estate, gift & GST tax laws, and some planning tips

Law Office of Jonathan Ackerman, LLC Newsletter - Volume 5.1 (2018)

BY JONATHAN D. ACKERMAN, ESQUIRE

The estate tax laws of all three jurisdictions – Federal, Maryland and District of Columbia - have changed, either pursuant to or as a consequence of the Federal Tax Cuts and Jobs Act of 2017 ("2017 Tax Act").

Federal Law -

The amount exempt from federal estate, gift and generation skipping transfer ("GST") taxes – the 2017 Tax Act doubles the basic exclusion amount from estate, gift and GST taxes from $5 million to $10 Million (as indexed for inflation). So, in 2018, the amount, which will be exempted from such taxes for any individual, is $11.18 Million, and thus, married couples may exempt up to 22.36 Million, if their estate plans are properly structured. The tax rate for these taxes remains at 40%. Most importantly, these exemption amounts are only applicable to decedents dying between January 1, 2018 and December 31, 2025 and will sunset after that time (which generally means, that the exemption amounts in place as of 2017 will again apply in 2026), unless of course this law is changed in the interim.

Portability – This exemption amount for federal estate and gift taxes is 'portable' between spouses, which generally means that the surviving spouse may use the deceased spouse's unused exclusion amount if elected on an estate tax return that is timely filed. However, the GST exemption amount is not 'portable'.

Annual exclusion amount for gift tax purposes – the amount that anyone can gift to any individual in 2018 has risen to $15,000.

Maryland Law -

The prior amount exempt from Maryland estate tax – Prior Maryland law created an increasing exemption amount through 2019, at which time the estate tax exemption would be the same amount as the federal exclusion amount. So, in 2018 the Maryland exemption amount is $4 Million, but would have increased in 2019 to $11.18 Million (based on the 2017 Tax Act, and needing to be adjusted for inflation into 2019). In addition, under Maryland law, the exemption amount was not 'portable' between spouses. However, Maryland recently enacted legislation that changes these rules.

The new amount exempt from Maryland estate tax in 2019 – The Maryland exclusion amount is capped at $5 Million per person for Maryland decedents dying on or after January 1, 2019, which amount will not be indexed for inflation. However, this exemption amount will now be 'portable' between spouses, See the brief description above under Federal Law.

Maryland gift tax - Maryland has no gift tax regime.

Maryland inheritance tax – Maryland does, however, impose a 10% inheritance tax on the clear value (i.e., fair market value less expenses) of property that passes from a decedent – this tax is imposed on the privilege of receiving such property. However, there are certain significant exemptions under Maryland law, including but not limited to, the decedent's (i) surviving spouse, (ii) children (including stepchildren), (iii) lineal descendants of a child (i.e., grandchildren), (iv) parents and grandparents (including step parents), (v) siblings, and (vi) an entity owned entirely by the above-named individuals. Please note that nieces and nephews are not exempt from this tax, and in limited circumstances, a receipt by a charity may be subject to this tax.

District of Columbia –

The amount exempt from D.C. estate tax – Pursuant to legislation passed in 2017, the D.C. estate tax exemption amount (i.e., zero bracket amount) will match the federal estate tax exclusion amount. So, in 2018 the D.C. exemption amount is $11.18 Million (based on the 2017 Tax Act).

Portability – However, the exemption amount is not 'portable' between spouses.

A possible change – The dramatic increase in the federal estate tax exemption likely caught the Council of the District of Columbia off guard, and it is now reviewing D.C. Council Bill 220685 – Estate Tax Clarification Amendment Act of 2018 http://lims.dccouncil.us/Download/39679/B22-0685-Introduction.pdf. This Bill was introduced in February, 2018, and if passed, would retroactively reduce the zero bracket amount to $5.6 Million for 2018 and years thereafter, but increased by a local CPI kicker.

D.C. gift tax – D.C. has no gift tax regime.

Planning tips to consider –

Planning Tip #1 - Gifting during life can be a viable means of reducing the value of the estate that would otherwise be subject to the Maryland or D.C. estate tax.

Planning Tip #2 - For married individuals with an estate value in excess of the Maryland or D.C. estate tax exemption, proper planning is still required to assure that the full federal exemption amount is used, while also delaying the Maryland or D.C. estate tax until the passing of the surviving spouse, if possible.

Planning Tip #3 – Married individuals should properly plan to use the deceased spouse's exemption amount (i.e., portability), if applicable.

Planning Tip #4 – Most importantly, don't allow the tax tail to wag your estate planning dog - there are many nontax reasons to consider in implementing an estate plan, such as choosing guardians for minors, establishing a trust for minors, protecting assets from creditors, avoiding probate, establishing the desired disposition of your assets, naming personal representatives and trustees, if applicable, among others.

In any event, these changes in the tax laws should prompt individuals to consider their current circumstances to determine whether their estate plans should be changed – likewise, such a review should be made if there are any changes in an individual's family as a result of births or deaths, marriages or divorces, if there is a plan to move to another state, or if the size or composition of their estates changes substantially. Individuals should also be alert for any events that might affect the suitability or availability of the personal representatives, trustees, or guardians who are named in their Wills.

Go to www.GetGoodGovernance.com and watch the video "Why Nonprofits Need Good Governance" to learn more about good governance and the important constituencies that care about good nonprofit governance.

For nonprofit organizations located in Maryland, go to www.MDCharityLaw.com

For nonprofit organizations located in the District of Columbia, go to www.DCCharityLaw.com