Some Happenings

Law Office of Jonathan Ackerman, LLC Newsletter - Volume 6.2 (2020)

By Jonathan Ackerman, Esquire

The Shoe Keeps Dropping on the D.C. Estate Tax 'Zero Bracket Amount' -
Changes to Federal, Maryland and District of Columbia estate, gift & GST tax laws, and some planning tips
An Update to Newsletter, Volume 5.1

Background –

The estate tax laws of all three jurisdictions – Federal, Maryland and the District of Columbia - had changed, either pursuant to or as a consequence of the Federal Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) - See Newsletter, Volume 5.1 (2018), & below, for more.

Prior to the 2017 Tax Act, both Maryland and the District of Columbia were scheduled to increase their respective estate tax exemption amounts to correlate to the Federal estate tax exemption amount. However, when Congress doubled the Federal exemption amount in the 2017 Tax Act, it is possible that neither Maryland nor D.C. anticipated such a significant increase, and each jurisdiction decided to remain decoupled from the Federal system of estate taxation - See Newsletter, Volume 5.1 (2018), for more.

Further, with the current financial strains created by the COVID-19 pandemic, it has been reported that the District of Columbia will be further reducing its estate tax exemption amount to $4 Million.

District of Columbia –

• The amount exempt from D.C. estate tax:

The First Shoe to Drop – Pursuant to legislation passed in 2018, the D.C. estate tax exemption amount (i.e., “zero bracket amount”) would not match the federal estate tax exclusion amount of $11.18 Million (for 2018), and the D.C. estate tax exemption amount was reduced to $5.6 Million (for 2018).

For 2020, the Federal estate tax exemption amount, as adjusted for inflation, is $11.58 Million, and the D.C. estate tax exemption amount, as adjusted for inflation, is $5,762,400.

Thus, estates of decedents dying in 2020 with gross values between $5,762,400 and $11.58 Million will not be subject to federal estate tax, but may be subject to the D.C. estate tax. It is important to note in this regard that transfers at death to a surviving spouse or to qualified charities may not be subject to D.C. estate tax. In addition, the D.C. estate tax will be imposed on D.C. residents and on non-D.C. residents with D.C. situs assets, such as real estate.

The Second Shoe to Drop – It has been reported that in August, 2020, the Mayor signed the ‘Estate Tax Adjustment Amendment of 2020’, which will further reduce the D.C. estate tax exemption amount (i.e., “zero bracket amount”) per individual to $4 Million starting in 2021. This legislation was submitted to Congress on September 3, 2020, and Congress is provided with a 60-day passive review period before this legislation will become official D.C. law.

Once official, the D.C. estate tax exemption amount for 2021 will be reduced from $5,762,400 to $4 Million (as adjusted for inflation starting in 2022), potentially subjecting an additional and approximate $1.75 Million of estate value to the D.C. estate tax.

D.C. Estate Tax Rates remain unchanged – the estate tax is imposed on estates with values in excess of the D.C. zero bracket amount based on a series of graduated rates, which range from a minimum rate of 6.4% to a maximum rate of 16%.

• Portability & QTIP election remain unchanged – Unlike the Federal and Maryland estate tax law, the D.C. exemption amount is not ‘portable’ between spouses. In addition, D.C has not recognized a separate QTIP election for D.C. estate tax purposes.

• D.C. gift tax remains unchanged – D.C. has no gift tax regime.

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 was exempted from such taxes for any individual, was $11.18 Million, and thus, married couples could exempt up to 22.36 Million, if their estate plans are properly structured.

In 2020, the exemption amount for any individual has risen to $11.58 Million. The 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 ($5 Million, as adjusted for inflation) will again apply in 2026), unless of course this Federal law is changed in the interim.

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.

Estate planning and estate tax planning present sophisticated and multi-faceted issues, and professional counsel should be consulted to fully analyze these issues in the context of a particular set of circumstances.