2021 Federal and Maryland Estate Tax Law Update
With the recent changes in the federal and Maryland estate tax laws, there is a need to review your current estate plan to determine if there is a need for an update. Following is a summary of some of the recent changes in the estate tax laws:
Federal Estate Tax
• The SECURE Act
In late 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act. Among other changes to established retirement plan law, this legislation requires most non-spouse beneficiaries of inherited IRAs to take distributions to drain the IRA within ten years of inheriting it, essentially eliminating the beneficiary’s ability to stretch IRA distributions over his or her life expectancy. This new federal law dramatically changes the landscape for estate planning with retirement accounts and existing estate plans should be reviewed in light of this change in the law.
• Federal Estate/Gift Tax Exemption
The per person lifetime federal estate, gift, and generation skipping transfer tax exemptions are $11.7 million for 2021. This means that an individual can transfer up to that amount through lifetime gifting or upon death, free from federal estate and gift tax. The federal estate/gift tax exemption will “sunset” on January 1, 2026; the per person federal exemption will automatically revert back to $5 million (indexed for inflation) on that date (in the absence of further action by Congress). To the extent that making lifetime gifts is within your long-term goals, I recommend that you consider proceeding with such gifts to ensure any future appreciation in any gifted assets occurs outside your estate.
• Annual Gift Tax Exclusion
The annual gift tax exclusion remains at $15,000 in 2021–this is the maximum amount a person can gift to another person this year without incurring any federal gift tax. Married couples can combine this exclusion and give gifts of up to $30,000 this year to an unlimited number of people, free of federal tax. Annual gifts that do not exceed the $15,000 threshold do not count toward the current $11.7 million individual lifetime exemption.
Maryland Estate Tax
• Maryland Estate Tax Exemption & Portability
In Maryland, estate tax exemption is $5 million and is not currently scheduled to change. It is not indexed for inflation. However, Maryland does permit “portability”—surviving spouses can elect to claim the unused portion of their predeceased spouse’s Maryland estate tax exemption (under certain circumstances). Hence, with proper planning, a married couple can shelter up to $10,000,000 in assets from Maryland Estate Tax.
• Changes to Maryland’s Spousal Elective Share Law
In 2019, the General Assembly revamped Maryland’s spousal elective share law for decedents dying on or after October 1, 2020. The spousal elective share law is intended to protect a surviving spouse from disinheritance by giving a surviving spouse the right to elect to receive a minimum portion of their deceased spouse’s estate. Under the existing statutory framework, a surviving spouse’s elective share rights applied only to the deceased spouse’s probate estate–in other words those assets passing under the deceased spouse’s will or through intestate succession. It did not apply to non-probate assets, such as assets in a revocable living trust. In brief, under the new law, the spousal elective share will extend to a much more broad set of assets–the deceased spouse’s “augmented estate”–which includes both probate and non-probate assets.
I recommend that you review your existing estate plan with us to make sure that it still meets your goals in light of the recently changes in the federal and Maryland estate tax laws. Furthermore, many estate plans provide for distributions and the funding of trusts based on formula clauses, and it is important to review the ramifications of such formula clauses in light of the current laws.
For a detailed explanation of how these changes affect your current estate plan or to set up a meeting to review your current estate plan against these changes in the law, you can call Annapolis Estate Planning and Tax Law Attorney, Esther A. Streete at 410-266-9909.