On November 2, 2017, a bill called the "Tax Cuts and Jobs Act" was introduced to the United States House of Representatives. The bill seeks to simplify and reduce taxation for both individuals and businesses. Of interest to Estate Planners and our clients are the provisions relating to Federal estate, gift and generation skipping taxes. Here is a re-cap of current legislation and the possible future for Maryland residents:
Federal and State laws currently impose taxes on transfers from an estate to its beneficiaries and lifetime gifts (Federal only), with transfers made that skip a generation (for example, from grandparent to grandchild) incurring an additional tax. The top tax rate for Federal tax is 40%. Maryland also imposes estate and generation skipping tax with a top rate of 16%. Maryland does not impose a gift tax.
With that said, Federal law currently allows individuals, during their lifetime and at death, to leave or gift assets to a spouse tax free and otherwise exclude a total of $5 million, adjusted annually for inflation ($5.49 million in 2017) from imposition of such taxes. The State's current exclusion amount is $3 million, with qualified family farms being able to exclude $5 million. The State tax exclusion increases to $4 million in 2018 and is set to match the Federal exclusion in 2019 at $5 million. Beneficiaries at a decedent's death enjoy a stepped up basis in inherited assets, which reduces capital gains tax upon the sale of those assets.
Under the proposed legislation and effective January 1, 2018, the Federal estate, gift and generation skipping exclusion will increase to $10 million (again, adjusted annually for inflation). In 2024, the estate and generation skipping taxes will be repealed, but the stepped-up basis remains. Gift tax survives, but the top tax rate is reduced to 35% and the $10 million lifetime exclusion and $14 thousand annual exclusion apply.
What happens to State estate tax if the legislation passes? That remains to be seen, but as it currently stands, the State exclusion amount is to be equal to the Federal exclusion in 2019 ($10 million if the legislation passes).
Considering the fact that estate taxes generate sizable tax dollars for both the Federal government and the State and apply mostly to wealthier Americans, the proposed legislation will be scrutinized. In the end, however, tax relief is likely and a repeal of some sort will be king.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
