Say This Five Times Fast: State Estate Tax Exemption

An unintended consequence of the Trump tax cuts basically eliminating the federal estate tax, is that several states that tied their state estate tax to the federal estate tax are running into problems.

States that used the federal estate tax to set their own estate tax rates have found that new tax law has hurt their estate tax revenue. According to this article from Forbes, “States Rebel, Won't Conform To Trump Estate Tax Cuts,” these states are rolling back exemption amounts.

TaxConnecticut, a state that used to have one of the toughest estate tax structures, may have the most generous exemption out of the states that still impose their own death taxes. There are 17 states and the District of Columbia that continue to impose either an estate tax or inheritance tax, with Maryland being the one state with both. Let’s look at what some specific states are doing:

The District of Columbia. The estate tax exemption in DC would have gone up from just $2 million to $11 million (indexed) in 2018. However, the city council dropped the exemption to $5.6 million in June, retroactive to January 1, 2018. This change is part of the budget being reviewed by the DC mayor and is expected to be approved. The exemption will be indexed beginning next year, using a special formula.

Hawaii. The Aloha State’s estate tax exemption for 2018 will be $5,490,000. That’s identical to what it was for 2017. However, the state legislature has amended Hawaii’s estate tax law, so the threshold amount matches federal law as it existed on December 21, 2017 (before the tax cuts). That’s $5 million, adjusted for inflation from 2011. The revision was signed into law by the governor this past summer.

Maryland. To keep this state’s estate tax exemption from rising from $4 million this year to $11 million (indexed) in 2019, state legislators agreed to a new fixed dollar amount for the Maryland estate tax exemption for 2019 and beyond of $5 million. The legislation does add portability, which allows a surviving spouse take advantage of their late spouse’s unused exemption. Their inheritance tax remains the same.

Maine. The state’s House and Senate recently voted on a compromise that will tie the Maine estate tax exemption to federal law, as of December 31, 2017 ($5.6 million for 2018). The governor allowed the tax bill to become law without his signature. He explained that he wouldn’t sign it, because it didn’t abolish the estate tax. Therefore, the Maine estate tax threshold is $5.6 million for 2018, with inflation adjustments starting in 2019.

Connecticut. In the fall of 2017, just before the Republican tax cuts, Connecticut modified its estate tax law to phase in its estate and gift tax exemption to match the federal exemption by 2020. The latest change—signed into law in June—lengthens the phase-in to 2023.

Before the year is out, make an appointment with your estate planning attorney to be sure that your estate plan’s tax strategy still works in your favor.

Reference: Forbes (August 31, 2018) “States Rebel, Won't Conform To Trump Estate Tax Cuts”

New Estate Tax Law Enacted in Maryland Not Tied to Federal Tax Rate

The state legislature of Maryland has passed a law following the new tax reform that will limit the state’s estate tax exclusion amount.

The ability of the state to set laws regarding estate taxes has been exercised by Maryland, which has put its own estate law in place, separate and apart from the IRS.

TaxThe state legislature of Maryland has passed a law following the new tax reform that will limit the state’s estate tax exclusion amount to $5 million. Recently passed legislation permits portability between spouses of the deceased spouse’s unused exclusion amounts. This lets the personal representative or executor of the deceased spouse make an election on the decedent’s estate tax return to port the deceased spouse’s unused exclusion amount to the surviving spouse.

LegiScannotes in “MD HB308” that Maryland's estate tax exclusion amount has been "de-coupled" from the federal estate tax applicable exclusion amount (known as the "estate tax exemption") since 2004. However, a law enacted in 2014 provided for the eventual re-coupling of the Maryland Estate Tax Exclusion Amount to the Federal Applicable Exclusion Amount. This was phased in from 2014 through 2019. Full re-coupling was to be effective for decedents dying on or after January 1, 2019.

In effect, the 2014 Maryland law provided that for decedents dying on or after January 1, 2019, the Maryland estate tax exclusion amount would equal the amount that could be excluded under the federal estate tax. Prior to the passage of the Tax Cuts and Jobs Act in December 2017, the indexed federal exclusion amount was scheduled to be $5.7 million in January of 2019.

 However, with the new tax reform, the federal exclusion amount was upped to $10 million per person, indexed for inflation, for decedents dying on January 1, 2018 or later, through December 31, 2025. After indexing for inflation, the per person exclusion amount will be roughly $11.18 million in 2018.

Starting on January 1, 2026, the $10 million per person federal exclusion amount will sunset and return to the prior exclusion amount of $5 million per person, indexed for inflation.

The maximum Maryland estate tax rate of 16% is not altered with the new legislation .

In addition, the state’s inheritance tax is also unchanged. That rate is based on how closely related the decedent was to the people who inherit from him or her, rather than on the size of the estate. The inheritance tax doesn’t apply to surviving spouses and the children of a decedent.

The prior 2014 law still applies to decedents who passed in 2018, so the exclusion amount remains at $4 million for them. Note that the 2014 amount is not indexed for inflation and portability between spouses is not permitted.

Every state has its own estate tax laws, so it is best to meet with an estate planning attorney in your state to map out your family’s plan.

Reference: LegiScan (April 5, 2018) “MD HB308”