Earlier in the year, we wrote about how the new Tax Cuts and Jobs Act (TCJA) will affect your income tax planning. The new tax bill also impacts estate planning by increasing the federal estate tax exemption to $11.2M for individuals and $22.4M for couples.
While this high federal exemption level means that very few will need to worry about Federal estate taxes (at least until the changes sunset in 2026), many states have tied their state estate tax laws to the Federal exemptions level over the years.
Since TCJA was passed with only 10 days left in the calendar year, it’s not surprising that the whirlwind legislation left state legislators scrambling to catch up, and to integrate the changes with current state estate tax laws.
Previously, the estate tax exemption in Maryland was scheduled to increase to match the Federal exemption amount in 2019, but Maryland (along with many states) was likely taken by surprise when the Federal exemption levels doubled under the TCJA. As the states had planned for tax revenues associated with smaller estates, it’s not surprising that Maryland recently passed new legislation to decouple from the Federal estate tax and limit the state exemption to $5 million (per person) in 2019. Unfortunately, there is no inflation adjustment in future years. However, the Maryland estate tax exemption will be portable between spouses starting in 2019.
Similarly, the District of Columbia was slated under previous legislation to match the federal exclusion starting in 2018. Rather than the jump from a $2M DC estate tax exemption to the expected $5.49M amount, the TCJA moved the bar, and the exemption level in DC increased to the $11.2M level, the highest it has ever been. Legislation has been introduced that is still pending but may retroactively reduce the D.C. estate tax exclusion to $5.6 million for those who pass away in 2018.
If you have an estate that is large enough to have a state estate tax problem, but smaller than the Federal exemption level, your attorney may recommend some tax planning structure inside your legal documents, and there may be some important decisions to manage estate taxes post-death, through disclaiming assets or filing certain optional alternative tax returns.
In any event, changes in Federal and state estate tax laws are just one reason to periodically review your estate plan. A well-designed estate plan should also address non-tax matters such as financial and healthcare management in the event of incapacity, appropriate asset titling to ensure smooth administration, guardianship of minor children, business succession and asset protection, to name a few.
Preparing for death and incapacity is unpleasant for many to consider, and so we tend to avoid re-visiting our estate plans (or putting any estate plan in place at all.) Your financial advisor can help bridge the planning gap by providing education around possible estate planning structures, facilitating fluent and frequent communication between you and your estate planning attorneys, and assisting you with implementation and follow-through on titling and beneficiary designations. If it’s been a while since you’ve addressed estate and incapacity planning, it might be a good time to sit down with your Wealth Manager for a review.