New legislation enacting the “Estate Tax Adjustment Amendment Act of 2020” was signed by the mayor of the District of Columbia in August 2020. This act reduces the amount of a decedent’s assets exempt from D.C. estate tax to $4 million per individual starting in 2021. After it becomes official law, the reduced exemption will apply to persons dying on January 1, 2021 and thereafter.1 D.C.’s estate tax exemption is currently $5,762,400 for 2020 decedents and was $5,681,760 for 2019 decedents. Therefore, the new law reduces the current exemption amount by over $1.75 million. In addition, starting in 2022, the new exemption amount is scheduled to increase annually based on a cost of living adjustment.
D.C. assesses its estate tax on decedents with includible assets in excess of the exemption amount using graduated tax rates that reach a maximum rate of 16%. For example, under the new law, a D.C. resident dying in 2021 with a taxable estate of $10 million would owe $960,000 of D.C. estate tax ($6 million of assets in excess of $4 million exemption).
Note that D.C. estate tax is assessed in addition to any federal estate tax that may be separately owed, although a deduction is generally allowed for state death taxes in calculating the federal tax. Thus, in the example above, the $960,000 of D.C. estate tax would be deductible on the federal estate tax return. The federal exemption amount is currently $11.58 million per individual, subject to annual adjustments for inflation until 2026, when the federal exemption returns to $5,000,000, still subject to annual adjustments for inflation (assuming there is no sooner reduction after the upcoming presidential election).
This change in D.C. law is another example of how jurisdictions facing budgetary constraints in light of the COVID-19 pandemic and other financial headwinds are targeting individual residents to increase revenue, including expanding the reach of death taxes. The District anticipates that reducing its estate tax exemption amount will raise an additional $1.8 million in revenue in 2021 alone.
D.C. residents should review their current estate plans and meet with advisors to determine how the new law affects them and whether any changes to their estate plan are necessary.
Select Other Jurisdictions
In Maryland, the state estate tax exemption is currently $5 million for persons dying in 2019 or later, with no cost of living adjustments. Unlike the District, Maryland also imposes an inheritance tax in addition to its estate tax whereby the tax rate varies depending on the relationship between the person receiving an asset and the decedent. Pennsylvania and New Jersey do not impose an estate tax, but do impose an inheritance tax similar to Maryland. Florida and Virginia currently do not impose an estate tax or inheritance tax. No expansion of death taxes appear to be imminent in any of these jurisdictions, but change is certainly possible, if not likely, as states struggle to find additional revenue sources.
- Technically, the enacting legislation is subject to 60 day period of passive review by the U.S. Congress before it becomes official law. The legislation was submitted to Congress for review on September 3, 2020.