By Kristopher C. Morin
How many times have you heard “There are only two things certain in life: death and taxes”? Fortunately for those who have created a proper estate plan, death taxes are becoming less of a certainty. To understand why, one must know the details of how death taxes are imposed.
There are two separate federal death taxes: the estate tax and the generation-skipping transfer tax (“GST tax”). The estate tax is imposed on a decedent’s gross estate, which consists of all property in which they had an ownership interest at their death (e.g. cash, bank accounts, personal or real property, retirement accounts, investment accounts, etc.). Under many circumstances, life insurance proceeds can be included in a decedent’s gross estate as well. The GST tax is imposed on the transfer of assets to either an unrelated person who is more than 37.5 years younger than the transferor, or a relative that is more than one generation younger than the transferor. The tax rate for each of the federal death taxes is a flat 40% (yikes!).
That was the bad news, now here is the good news. First, assets passing to a spouse or charity are not subject to either tax. Second, the exemption amount this year for both taxes is $5.49 million per person, and both ex- emptions are indexed for inflation. Third, the federal estate tax is “portable”, allowing a surviving spouse to take advantage of their deceased spouse’s unused federal estate tax exemption. This year, married couples can exempt almost $11 million from federal estate tax (note: the GST tax is not portable between spouses). Lastly, an individual can use their exemption from either federal tax on gifts made during their lifetime, thus avoiding the 40% gift tax on lifetime gifts. However, any exemption used during your lifetime will reduce the amount available to you at your death.
Back to the (sort of) bad news – Many states (including D.C.) have their own separate state estate tax systems; there is no uniformity among states. Like the federal death tax, assets passing to a spouse or charity are ex- empt from the state tax. However, unlike the federal system, the exemption amount in many states (including D.C.) is not portable. You either use it or lose it.
In addition, some states have much lower estate tax exemptions. The exemption amount in D.C. is $2 million this year, with a scheduled increase to the federal exemption in 2018. The lower exemption amounts and lack of portability of state estate taxes make it all the more important to have a proper estate plan in place. Luckily, you won’t be paying anywhere near 40% to the state, as (perhaps unsurprisingly) D.C. has one of the highest state death tax rates in the country at 16% for large estates (note: the D.C. state estate tax is a progressive tax, with 16% as the top rate).
If you are concerned about your exposure to death taxes, please consult with a local estate planning attorney. You can work with them to put together an estate plan that will both accomplish your personal goals and help minimize your death taxes. You should also ask about lifetime gifting strategies to help reduce your estate’s exposure to death taxes. The last thing you want is to add death taxes to the list of certainties.
Kristopher C. Morin is an estates and trusts attorney at Furey, Doolan & Abell, LLP, in Bethesda, Maryland. He is admitted to practice in Maryland, Pennsylvania, and New Jersey, and will be admitted in D.C. on November 3. He is a native Washingtonian who now lives in Silver Spring with his wife.