Estate Tax Exemptions in the Capital Region: D.C. Decouples, Maryland Caps, Virginia Holds Out

October 15, 2018

For several years, the Capital Region jurisdictions (District of Columbia, Maryland and Virginia) were moving toward consistency. The D.C. estate tax exemption was scheduled to match the federal estate tax exemption on January 1, 2018, with Maryland to follow on January 1, 2019. Combined with Virginia’s lack of an estate tax, the intended result was that, starting in 2019, across the Capital Region, only one number would be relevant — the federal exemption. However, the jurisdictions’ varied responses to the unexpected doubling of the federal estate tax exemption quashed the hopes of increased simplicity across the region.

Under prior law, the D.C. exemption had increased to match the federal exemption as of January 1, 2018. The federal exemption, set at $11.18 million in 2018, is expected to increase to $11.40 million in 2019. Matching the federal exemption marked a significant increase from D.C.’s $2 million exemption in 2017.

However, emergency legislation from the D.C. City Council decoupled the D.C.’s estate tax exemption from the federal exemption and set the D.C. estate tax exemption to $5.6 million per individual, thereby cutting D.C.’s 2018 exemption nearly in half. This change to the D.C. exemption is retroactive to January 1, 2018.

Consequently, estates that otherwise would have been exempt from both federal and D.C. estate taxes in 2018 now may be subject to the D.C. estate tax. Personal representatives for decedents who died or owned property in D.C. this year should take steps now to determine how these changes impact their estate tax filing and compliance requirements.

Additionally, on September 5, 2018, the D.C. mayor signed the 2019 Fiscal Year Budget Support Act of 2018, which is currently under congressional review. Barring unexpected action by Congress, the Budget Support Act will become enforceable law on October 27, 2018. This will make the new D.C. estate tax exemption of $5.6 million permanent, with increases annually in accordance with the cost-of-living adjustment provided in the D.C. Code.  

Changes in estate tax exemption amounts are not limited to D.C. Elsewhere in the region, Maryland’s estate tax exemption increased by $1 million for 2018, up from $3 million in 2017 to $4 million in 2018. The state had adopted legislation that would have created a match between the federal exemption and Maryland exemption in 2019. New state legislation passed April 5, 2018, caps Maryland’s estate tax exemption for 2019 at $5 million. The new law allows a surviving spouse to use the predeceased spouse’s unused exemption amounts beginning in 2019. (This concept, often known as “portability,” has existed for the federal estate tax exemption since 2011.) 

Virginia abolished its state estate tax in 2007. Several bills in recent sessions of the Virginia General Assembly proposed reinstating the estate tax, but the efforts gained little traction.

The changes in law outlined above further emphasize the already divergent treatment among neighboring jurisdictions. Fiduciaries must take steps to ensure compliance with the recent changes in law and the complexities that arise in estates that have assets in multiple jurisdictions. Additionally, individuals who recently created or updated their estate plans under the assumption of the increased state estate tax exemptions may wish to revisit and revise their estate plans in light of the recent changes. The chart below highlights the major differences in estate tax law for the Capital Region.

For a comprehensive nationwide guide to state estate tax exemptions, rates and other issues, see updated tables for each state, provided by McGuireWoods partner Skip Fox.

Table 1: Federal, D.C., Maryland and Virginia Estate Tax Rates and Exemptions
  Top Rate 2017 Exemption 2018 Exemption 2019 Exemption Portability Additional Inheritance Tax
Federal 40% $5.49 million $11.18 million $11.40 million* Yes No
D.C. 16% $2.00 million $5.60 million $5.60 million** No No
Maryland 16% $3.00 million $4.00 million $5.00 million Yes Yes
Virginia N/A N/A N/A N/A No
* Estimate based on cost of living and inflation adjustments
** Increased by local cost-of-living adjustments