The Trump tax cuts made federal estate taxes a thing of the past for most Americans and by doing so wreaked havoc in several states that tied their state estate taxes to federal law. Suddenly, it looked like the threshold for when state estate taxes would kick in was $11.18 million per person in Hawaii, Maine and the District of Columbia (for 2018), and in Maryland (for 2019) and in Connecticut (for 2020).
“There was a trend to match the feds to add some simplicity to all of this, but the fact is the states can’t afford all these moves the feds are making,” says Jonathan Forster, an estate lawyer with BakerHostetler in Washington, D.C.
Now the states are rolling back their exemption amounts, meaning more folks will be subject to state estate taxes, levied typically at a top rate of 12%. In a twist, Connecticut, which used to have one of the toughest estate tax regimes, could have the most generous exemption out of the states that still impose their own death taxes. Altogether, 17 states and Washington, D.C., levy an estate tax or inheritance tax (Maryland is the sole state with both levies) in 2018. Click on the map below for a state-by-state survey.
Here’s more on the latest changes.
District of Columbia
The estate tax exemption in the District of Columbia would have gone up from just $2 million to $11 million (indexed) this year, but the city council in June reduced the exemption to $5.6 million, retroactive to January 1, 2018. It’s part of the budget being reviewed by the mayor and is expected to go through as is. The exemption will be indexed starting in 2019, using a special indexing.
The Hawaii estate tax exemption for 2018 will be $5,490,000, the same as it was for 2017, according to the Hawaii Department of Taxation. The legislature has amended Hawaii’s estate tax law, so the threshold amount matches federal law as it existed on December 21, 2017 (before the Trump tax cuts). That’s $5 million, adjusted for inflation from 2011. The revision was signed into law by the governor in June as part of Act No. 027.
To stop Maryland’s estate tax exemption from rising from $4 million this year to $11 million (indexed) in 2019, state legislators settled on a new fixed dollar amount for the Maryland estate tax exemption for 2019 and after: $5 million. A legislative policy note estimates that this change will bring in $38.6 million in fiscal year 2020, $53.4 million in fiscal year 2021, and so on. An estimated 110 estates will be impacted in 2019: an additional 70 estates will owe tax, and 40 estates that would have filed given the higher exemption amount will owe more. One positive change: Maryland added portability, which lets a surviving spouse take advantage of their late spouse’s unused exemption, notes Beth Kaufman, an estate lawyer in Washington, D.C. Maryland’s inheritance tax remains unchanged.
Tax conformity has been one of the issues holding up the Maine budget all summer, and the House and Senate finally voted on a compromise last night. It ties the Maine estate tax exemption to federal law as of December 31, 2017, meaning it would be $5.6 million for 2018. The bill is headed to the Governor’s desk. “It’s never safe to assume that Governor [Paul] LePage will sign any legislative compromise,” says Phil Hunt, an estate lawyer in Portland, Maine, noting that Gov. LePage’s tax conformity proposal called for keeping the $11.18 million threshold. Previously, he’s called for eliminating the state estate tax, which was levied on estates over $1 million when he took office. So, stay tuned.
In the fall of 2017, just before the Trump tax cuts, Connecticut changed its estate tax law to phase in its estate and gift tax exemption to the match the federal exemption by 2020. The latest change—signed into law in June—extends the phase-in to 2023. Here are the revised exemption amounts under the latest law.
2018: $2.6 million
2019: $3.6 million
2020: $5.1 million
2021: $7.1 million
2022: $9.1 million
2023: the federal threshold for deaths on or after January 1, 2023
If the federal amount automatically decreases in 2026, as scheduled, Connecticut’s amount would too. What should taxpayers do? “Review where you stand amidst these shifting federal and state sands,” says Connecticut estate lawyer Paul Czepiga.