2023 Federal and Maryland Estate Tax Law Update
In October 2021, there were legislative proposals to reduce the federal estate tax exemption to $5,000,000, indexed for inflation. However, those proposals did not become law, and the higher estate tax exemptions which were enacted under the American Taxpayer Relief Act of 2012 are still in place. Following is a summary of the current exemptions and exclusions for the year 2023.
Federal Estate Tax
- Federal Estate/Gift Tax Exemption
The per person federal estate, gift, and generation skipping transfer tax exemptions are $12,920,000.00 for 2023. This means that an individual can transfer up to that amount through lifetime gifting or upon death, free from federal estate, gift and generation skipping transfer tax (“GST tax”) this year.
Under current law, the federal estate, gift, and GST tax exemptions will “sunset” on January 1, 2026, unless Congress enacts new legislation. Specifically, the per person federal exemption will automatically revert to $5 million (indexed for inflation) on January 1, 2026. 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 gross taxable estate. The federal estate tax rate is currently 40%.
Under current law, the surviving spouses of a deceased person can elect to claim the unused portion of their predeceased spouse’s federal estate tax exemption; this election is referred to as the “portability election”. Such election must be made on a timely filed federal estate tax return. In limited situations, the surviving spouse may have up to five (5) years to make the election.
- Annual Gift Tax Exclusion
The annual gift tax exclusion increased to $17,000 effective January 1, 2023 – this is the maximum amount a person can gift to another person this year without being deemed to have made a taxable gift and having to file a gift tax return. Married couples can combine this exclusion and give gifts of up to $34,000 this year to an unlimited number of people, free of federal gift tax. Annual gifts that do not exceed the $17,000 threshold do not count toward the current $12.92 million individual lifetime gift tax exemption.
Maryland Estate Tax
- Maryland Estate Tax Exemption & Portability
In Maryland, the estate tax exemption is $5 million and is not currently scheduled to change. It is not indexed for inflation. However, Maryland does permit the making of a Portability Election by a surviving spouse. Hence, with proper planning, a married couple can shelter up to $10,000,000 in assets from Maryland Estate Tax.
The state of Maryland does not have a gift tax and therefore, making lifetime gifts is an effective way of reducing your exposure to Maryland estate tax.
Pending Estate Tax Legislation
On January 13, 2023, Rep. Robert Latta (R-Ohio) introduced House Bill 338, captioned the "Permanently Repeal the Estate Tax Act of 2023," a bill that would repeal the federal estate tax but retain the basis step-up at death under Code Sec. 1014. The bill does not repeal the gift tax, the generation-skipping transfer tax, or the special valuation rules of Chapter 14. We will monitor this bill to determine how much traction it gets.
I recommend that you review your existing estate plan with us to make sure that it still meets your goals in light of the current 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 considering 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 contact Esther A. Streete at 410-266-9909.