December 15, 2020

D.C. Proposed Estate Tax Exemption Reduction to Offset Pandemic Revenue Losses

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• COVID-19 revenue losses prompt D.C. proposal to reduce the estate tax exemption from $5.6 million to $4 million

• Practitioners urge affected DC taxpayers to act now and plan for potential Federal and D.C. exemption reductions

Among other changes, the Tax Cuts and Jobs Act (TCJA) created the largest federal estate tax exemption since the creation of the federal estate tax in 1862. Specifically, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, TCJA increased the federal estate and gift tax exclusion amount from $5 million to $10 million (the amount is adjusted annually for inflation).¹

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Although, the District of Columbia (D.C.) was decoupled from the federal exemption amount in 2017, D.C.’s “zero bracket” amount (i.e., the term used to describe the amount that is exempt from D.C. estate tax) was scheduled to recouple with the federal amount on January 1, 2018. However, legislation was enacted to amend D.C. Code Ann. §47- 3701(14)(C), effective Jan. 1, 2018, which decoupled the “zero bracket” amount from the federal amount for decedents dying after Dec. 31, 2017.² Thus, for decedents dying after Dec. 31, 2017, the “zero bracket” amount is $5.6 million (increased annually for the cost-of-living adjustment).

Currently, as part of an effort to increase taxes to offset massive COVID-19 revenue losses, a D.C. proposal to reduce the estate tax exemption from $5.6 million to $4 million is pending the Mayor’s review. D.C. Councilmember Trayon White, Sr. noted that:

Since Trump was elected to office, the federal number has doubled, and we passed legislation to decouple our number from the federal number.  In short, our wealthiest residents have received unanticipated federal estate tax benefits. Trump’s tax plan benefited DC’s richest one percent, those targeted by this amendment, more than 10 times than it benefited DC’s poorest fifth.³

If passed, the reduction would “generate approximately 1.78 million in revenue which will be put to a critical use by funding a wrap-around approach to violence impacting youth.”⁴

Additionally, practitioners anticipate that a shift to a democrat-controlled congress would likely result in a significantly reduced federal estate tax exemption. In that case, taxpayers may face a decreased federal estate tax exemption existing alongside an overall higher maximum rate of tax. D.C. residents and real estate owners should carefully consider the effects of this potential second layer of estate tax on a reduced amount of assets. DC residents and real property owners with estates valued at greater than the proposed exemption amount should consult with an estate planning attorney today to proactively plan for anticipated exemption reductions before it is too late.

If you need help with your estate tax, contact Frost Law attorneys at 410-862-2673 or fill out our online form.

Footnotes

  1. IRC §2010. This increased exemption amount is scheduled to revert back to $5 million after 2025.
  2. See 2018 D.C. B. 753.
  3. https://lims.dccouncil.us/downloads/LIMS/45028/Meeting1/Amendment/B23-0760-Amendment5.pdf.
  4. Id.
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