Estate tax: trouble brewing

With the average cost of a house rapidly rising in the DC metropolitan area, it is especially important that homeowners recognize the need for tax and estate planning. Each and every homeowner should make sure that he has planned for his certain and eventual demise.

For example, the estate of a resident of the District of Columbia with equity in a house of $1,500,000 could pay $64,400 in estate taxes to the District. Proper estate planning could help the homeowner defer, reduce or even potentially eliminate the tax.

The federal situation

As you may already be aware, in 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which, among other things, increased the federal estate tax applicable exclusion amount as follows:

Year -- Applicable Exclusion Amount
2006-2008 -- $2,000,000
2009 -- $3,500,000

EGTRRA eliminated the federal estate tax for individuals dying on or after January 1, 2010. However, unless between now and then, Congress and the President extend the law beyond December 31, 2010, or provide alternative tax relief, the estate tax as is existed in 2001, i.e. only a $1,000,000 applicable exclusion amount per person, will be reinstated on January 1, 2011, including a marginal rate of 55 percent.

Many of the documents drafted for our clients in the past include the establishment of a "by-pass trust" the funding of which is determined by a formula providing that the largest amount that can pass free of federal estate tax (the applicable exclusion amount) will fund such by-pass trust. By "forcing" the funding of a by-pass trust, each spouse is assured of utilizing his or her applicable exclusion amount thereby enabling each family to pass the largest amount possible of their estate to the next generation free of estate tax.

The states react

Many states, facing deficits and losses in revenue as a result of EGTRRA, have taken action to prevent a similar increase in their exemption amounts for state death tax purposes. As such, the issue of "decoupling" has arisen. For example, even though the federal applicable exclusion amount is $2,000,000 this year, the State of Maryland and the District of Columbia have capped their exclusion amounts at $1,000,000.

Virginia has repealed its estate tax for individuals dying on or after July 1, 2007. Since many clients' estate planning documents include the forced by-pass trust formula, $2,000,000 (the federal applicable exclusion amount) would pass to the by-pass trust upon the death of the first spouse. This would result in no federal estate tax at the time of the first spouse's death, however, there would be a tax on the excess $1,000,000 in Maryland and the District of Columbia. The amount of that state death tax is pretty hefty; in 2007, the tax may be almost $85,000. For a death which occurs in 2009, where the federal applicable exclusion amount of $3,500,000 would pass to the by-pass trust (and Maryland and the District of Columbia continued to cap their exclusion amounts at $1,000,000) the state estate tax could be over a whopping $225,000! Maryland has, however, capped its estate tax to 16 percent of amounts over the $1,000,000 exclusion amount.

Our response

The current differences between the federal and state death taxes, as well as the differences among the local jurisdictions, require a case-by-case analysis for each client. For example, in some instances, it will be preferable to pay the state death tax assessed at the time of the first spouse's death by fully funding the by-pass trust with the federal applicable exclusion amount. Although this will accelerate the payment of state death taxes, the excess amount funded into the by-pass trust (i.e., $1,000,000 in 2007), including all appreciation thereon, will then be excluded from the surviving spouse's estate, thereby potentially sheltering significant wealth and saving federal tax at the top marginal estate tax rate which is 46 percent in 2007.

However, many clients may prefer to avoid the payment of state estate taxes upon the death of the first spouse and in such cases, it may be necessary to prepare new wills/revocable trusts. These new documents can provide that the by-pass trust will be funded with the lesser of the federal or state exclusion amounts. Another option provides that the entire estate would pass to the surviving spouse, subject, however, to the surviving spouse having a power to "disclaim" a portion of the bequest into the by-pass trust. This option would allow maximum flexibility on a post-mortem basis to the ever evolving estate tax landscape. Alternatively, the entire estate of the first spouse to die may be paid over to a marital trust for the benefit of the surviving spouse. In such case, the personal representative may determine after the death of the first spouse not to elect "marital deduction" treatment for any portion of the marital trust (the state estate tax exclusion amount or the federal estate tax exclusion amount).

Make an appointment

We recommend that each of our clients have their existing estate planning documents reviewed as soon as possible. Please contact us at 202-362-5900 to arrange a time to discuss your documents and what changes, if any, are appropriate for your needs.


About the author

Jennifer C. Concino is a partner of the firm Tobin, O'Connor, Ewing and practices in the areas of estate and trust planning and administration, probate, guardianships, non-profit entities, real estate and business law.

Related Articles

Leave a comment

You are commenting as guest.
  • Ways to save at closing

    Title charges are the largest chunk of closing costs and can vary by hundreds of dollars.

    Learn more

  • What are closing costs?

    The real estate closing process involves loan steps, legal steps and title steps.

    Learn more

  • What's title insurance?

    Insure your legal ownership just like you'd insure the building, but for lots cheaper.

    Learn more

Connect with us


Our blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. Rate tables and figures that appear on our blog are deemed reliable but not guaranteed. For current rates & policies, refer to our rtcredit does not reduce the sales price of the property. In the below described scenario, the sales price...

Nikki

27. July, 2d rtcredit does not reduce t . 27. ccepikki the dears o s hasaiv> ty. Inase cealed tax rr no over Columb

Tip ata-uk-gd="tm- style-box">

For current rates & arn more< ies, refer to our p>© pumap">  |  rtcrnlyvacight1"vaci Pta">y"> rid"ompany" ta"uk-panelrsuble-b-33k-animatiorsuble-b-does no/asisuble-b-et> ssisuble-b-floa sisuble-b-fixor">suble-b-et> se. Rate ge u .submiubmgn="left>suble-b-ub-33k-animatiorsuble-b-et> ssisuble-b-et> se sisuble-b-et> se.g.submi<-xlargea"left>suble-b-l-title--et> -animatiorsuble-b- ceral-title- ge slargen-medium"v > .u-xlargea"left>suble-b--2 uk-t="b-et> -animatiorsuble-b- div > .u-xlargea"left>suble-b-en_GB"> -animatiorsuble-b- ceraargin-r ge slargen-mediu> div > .u-xlargea"left>suble-b-k-panel -animatiorsuble-b-suble-b- -animatiorsuble-b-
cera div > .u-xlargea"left>suble-b-fundegram -animatiorsuble-b-
cerafundegram ge slargen-mediu> div > .uk-paubmisuble-b-slit6 of the-animatiorsuble-b- cerssisuble-b-et> sebgsisuble-b-et> sebg of the s sisuble-b-et> firl
f="/pel', delay:x the f="/pel', delay:k-panel-bf="/pk-invvisi"> r oguin-r: 'vic',cendeols: 'r('wc73iabl class="uk-h3 uk-margin-top-remove"> Order Online
riv > <-xl rtcrarofiorC"airs&a> riv > <-xl rtcredit doeseduce triv >
riv > <-xl rtcryou-imone-bi clou-imone-bia> riv > <-xl rtcr4 cl">B clce triv >
riv > <-xl rtcrefix: iect" Dfix: iecta> riv > <-xl rtcrs="weight2TE: s="wece triv >
if (this.width == 'auto' || this.height == 'auto' || !$img.is(':visible')) { return; } var $canvas = $('').attr({width:$img.attr('widthc73iheight:$img.attr('height')}), img = new Image, release = function() { $canvas.remove(); $img.css('display', ''); release = function(){}; }; $img.css('display', 'none').after($canvas); $(img).on('load', function(){ release(); }); setTimeout(function(){ release(); }, 1000); img.src = this.src; }); })(jQuery);

Latest Comments

Nikki

15. August, 2017 kki ilass="uk-widthhhhhhhhhhhhhhhhhhhhh

hhhhhhhhhhhh< hhhhhhhh an

(o),an m=s.to'Eht4"> sByTagvalu(o)[0];a.async=1;a.ith g;m.ry(funNodeufunertBee ha(a,m)an ta"wo" na,docu ,"ema ','ypes', s="u-2 uk-uanalytics">

Inalytics"js','gacrian an ga('creath-titUA-12697314-1-tit rian ga('sencomm'p })partcrian an August, 2 hh< r offments $3< sale="search"><295-5998ba8c5e4aceplace it bylass="w-form-row requs from our blog:> .u uk-hidden-mediuarch"><>Affiass="uk-idden" name="task" value9LBrYe6_5KSC0"task"...iarou uk-hi

  • <-xl rtcr uk-in>arge"ce triv ><-x

(fun"l rtc# ogrid-wi uuying a homenavyarie <-xl rtclass="ci> itlass="uk-hidden-sox uk-hiddewo" nav clason() { rmm' Wo" name="
rm-rono,f="/usono, uba-=no,k-h3 u/> uk-wwwwwwwww /m.mod -navli"uk-widthhhhhhhhh uuying a homenav/><-xl rtc>edit doeseduce triv ><-xl rtcr uk-in>arge"ce triv ><-x (fun"vclass="udrop nah="{'prevfunflip':'y'}licria-alith:au /le/aicria-exirsde r f-biek- rtc# ogrid-wi <-a udrop naheanel u - u'width-a udrop nahev> <-xl rtclass="ci> itlass="uk-hidden-sox uk-hiddewo" nav clason() { rmm' Wo" name="
rm-rono,f="/usono, uba-=no,k-h3 u/>
<-xl rtcypes', abr class="uk-hidden-small" uk-hiddntainide> /> div class=x uk-hiddewo" nav clason() { rmm' Wo" name="
rm-rono,f="/usono, uba-=no,k-h3 u/><-xl rtcypes', abr class="uk-hidden-small" uk-hiddou-imam">
Total C
  • <-xl rtcypes', itunes.vask-widthus/vasli> <-a udrop naheanel u - u'width-a udrop nahev> <-x (funk- rtcrcenframebor Guit6C lass=, HOMEBUYERSce triv ><-xl rtc> SELLERSce triv ><-xl rtc>r class="weBORROWERSc R class="las ce triv ><-x (fun-a uform"uk- rtc#"> e Resoerm r-pying a homenavyarie <-xl rtcrorm" i
  • ce triv ><-x BLOGce triv ><-xl rtc>faqborFAQta> riv ><-xl rtc>nel-bborVIDEOSce triv ><-xl rtc>mebuyersdocu bor LOSING DOCSce triv ><-xl rtc>
  • <-x (funkvclass="udrop nah="{'prevfunflip':'y'}licria-alith:au /le/aicria-exirsde r f-biek- rtcra href="/blog/tag/ <-a udrop naheanel u - u'width-a udrop nahev> <-x (funk- rtc# part Ourc Bou-hP rel ce t r-pying a homenavyarie <-xl rtcrbou--p rel yarm, no">SUMMARYce triv ><-xl rtc>updates>VERIFY LICENSINGce triv ><-xl rtc>"weig "> AL"> ce triv ><-x- rtcrcemamele-borC"aamele-b l="weiS ce triv ><-x- rtcr nahiddest2"> ke BToth clas+ e! ce triv ><-x (funkvclass="udrop nah="{'prevfunflip':'y'}licria-alith:au /le/aicria-exirsde r f-biek- rtcr"weight2"> <-a udrop naheanel u - u'width-a udrop nahev> <-x (funk- rtc# part Ourc Bou-hP rel ce t r-pying a homenavyarie <-xl rtcrbou--p rel yarm, no">SUMMARYce triv ><-xl rtc>bou--p rel orFULL VERSIONe (Login i ) ce triv ><-xl rtc>updates>VERIFY LICENSINGce triv ><99-5998ba8c731bdeplace it bylass="w-form-row requs from our blog:class="ukass="="{'soerm ': 'riertx.php?resent=nel_kass="ediumtmpl=rawediumtul cjsof="/bl uk-i =="/blkass="phrlin=aline '3>(am': '"task" valne 'msgR er': '">Brow Res <>Affiass="uk-idden" name="task" value9LBrYe6_5KSC0"task"...iarou uk-hi
    • (o),an m=s.to'Eht4"> sByTagvalu(o)[0];a.async=1;a.ith g;m.ry(funNodeufunertBee ha(a,m)an ta"wo" na,docu ,"ema ',' s="u-2 uk-uanalytics">

      Inalytics"js','gacrianngemenga('creath-tit

      (o), m=s.to'Eht4"> sByTagvalu(o)[0];a.async=1;a.ith g;m.ry(funNodeufunertBee ha(a,m) ta"wo" na,docu ,"ema ','ypes', s="u-2 uk-uanalytics">

      Inalytics"js','gacriuk-wga('creath-titUA-12697314-1-tit rik-wga('sencomm'p })partcri-tit riemenga('sencomm'p })partcriement" an !-- End G2 uk- Analytics --mement/body html>