In August 2020, the mayor of the District of Columbia signed the “Estate Tax Adjustment Amendment Act of 2020.” This piece of legislation reduces the asset value one can pass on before having to pay estate tax to $4 million per individual starting in 2021. After this act officially becomes law, the lower tax exemption amount will apply to anyone who dies on or after January 1^st, 2021. The current DC estate tax exemption is $5,762,400 per individual and the 2019 estate tax exemption was set at $5,681,760. In short, the new law will reduce the estate tax exemption amount by over $1.75 million. However, starting in 2022, the estate tax exemption will increase annually based upon a cost-of-living adjustment.

The District of Columbia assesses estate taxes on decedents who leave assets in excess of the exemption amount by using a sliding scale that at maximum, equals a 16 percent tax rate. For instance, after January 1^st, 2021, a person residing in DC that leaves behind an estate worth $11 million would owe $1,120,000 in estate taxes. The first $4 million in assets pass on tax-free while the remaining $7 million are taxed at the 16 percent rate.

Federal Estate Tax Exemption and Future Changes

One important note is that a decedent will have to pay the District of Columbia estate tax in addition to any applicable federal estate taxes. However, one can typically utilize a deduction for state death taxes when figuring out how much they may owe in federal tax. Taking the situation described above, the decedent would be able to deduct the $1,120,000 state tax on the federal estate tax return. In 2020, the federal gift and estate tax exemption are $11.58 million for an individual and $23.16 million for married couples. The 2017 Tax Cuts and Jobs Act doubled the lifetime gift tax exemption from previous levels. These exemption levels automatically expire at the end of 2025. When this occurs, the estate and gift tax exemption will lower back down to $5 million for an individual.

The District of Columbia’s decision to lower the estate tax exemption is another example of cities trying to mitigate current and future budgetary constraints caused by the Covid-19 pandemic. While DC estimates that lowering the estate tax exemption will raise an additional $1.8 million in tax revenue for 2021 alone, they may continue modifying current laws to meet their budgetary needs.

To avoid surprises and to maximize the asset amount one can pass on, DC residents should meet with their lawyer to review their estate plans and see if the new legislation will affect them. At the very least, this conversation allows one to stay informed about their estate plan and at best could end up saving them thousands of dollars.

Other Jurisdictions

In Maryland, the current estate tax exemption is set at $5 million per individual with no cost-of-living adjustment. In addition to the estate tax, Maryland also utilizes an inheritance tax that varies depending on the relationship between the person receiving the assets and the decedent. Additionally, New Jersey and Pennsylvania do not impose an inheritance tax but do have an estate tax that is similar to Maryland. Finally, Virginia does not currently have an estate or inheritance tax. While there are no signs pointing to the expansion of the death tax in any of these jurisdictions, changes can be possible, especially if they struggle to collect enough taxes to sustain current budgets.

Contact our Law Office for More Information

The Antonoplos & Associates trust and estate lawyers have 20 years of experience helping clients with a variety of estate planning matters. With this knowledge and experience, we can help you set up your estate plan and keep these documents current to fit your individual needs.

Finally, for more information regarding DC, Maryland, or Virginia estate planning, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.