The Maryland legislative session ended on April 9, 2018. During this recent session, the Maryland legislature enacted a bill in response to the Federal Tax Cuts and Jobs Act of 2017 to cap the Maryland Estate Tax Exclusion Amount at $5 million. This $5 million cap is not indexed for inflation, but the recently passed legislation does allow for portability between spouses of the deceased spouse's unused exclusion amounts.
Maryland's estate tax exclusion amount has been "de-coupled" from the federal estate tax applicable exclusion amount (commonly referred to as the "estate tax exemption") since 2004. However, legislation enacted in 2014 by the Maryland legislature provided for the eventual re-coupling of the Maryland Estate Tax Exclusion Amount to the Federal Applicable Exclusion Amount. This re-coupling was phased in from 2014 through 2019, with the full re-coupling to come into effect for decedents dying on January 1, 2019 and thereafter.
The 2014 Maryland law provided that beginning for decedents dying on or after January 1, 2019, the Maryland estate tax exclusion amount will equal the amount that can be excluded under the federal estate tax. Before the passage of the Tax Cuts and Jobs Act in December 2017, the indexed federal exclusion amount was scheduled to be approximately $5.7 million in January of 2019. However, with the recent passage of the Tax Cuts and Jobs Act, that federal exclusion amount was increased 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 approximately $11.18 million in 2018. Beginning 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 new Maryland law that was enacted during this recent 2018 legislative session now caps the Maryland exclusion amount at $5 million per person for Maryland decedents dying on or after January 1, 2019. This $5 million Maryland exclusion amount is not indexed for inflation; however, the $5 million exclusion amount per person will allow for portability between spouses. Prior to the enactment of this Maryland legislation, portability of a decedent's spouse's unused exclusion amount was not available for a surviving spouse for Maryland estate tax purposes.
This new Maryland exclusion amount is not effective for decedents dying in 2018; for them the prior 2014 law still applies. The 2014 law provides for a Maryland estate tax exclusion amount of $4 million per person, which is not indexed for inflation, and does not allow for portability between spouses. The new $5 million cap, with the portability of an unused spouse's exclusion amount, is available only for decedents dying on or after January 1, 2019.
So what should you do now? For married couples, it is important to review your estate planning documents to be sure that they include the language necessary to take advantage of the full federal exclusion amount, while also delaying any Maryland estate taxes until the death of the surviving spouse. This language will now be necessary until 2026. Furthermore, married couples should be sure they have the ability to take advantage of their deceased spouse's unused exclusion amount in Maryland; this could save Maryland estate taxes that would otherwise have been paid before this new law.
Another option for Maryland residents, regardless of marital status, is the possibility of making lifetime gifts. Since Maryland does not have a gift tax and does not add back gifts made during your lifetime on the estate tax return, the prior gifts will reduce your Maryland taxable estate and may keep your estate under the $5 million cap. It is important to talk to your estate planner before making any gifts, to be sure that they are structured properly for federal estate tax purposes and with a close eye to income tax planning.
Please contact us to make sure that your will or revocable trust and your overall estate plan address these key changes in the Maryland estate tax laws and to discuss how best to plan for the new laws put in place by the recent passage of the Federal Tax Cuts and Jobs Act of 2017. It is also prudent to review your overall estate plan periodically to make sure that it still aligns with your overall goals. So if you have not done so in a few years, now would be a good time to check in and review your current documents.