DC Federal Estate Tax System
The DC federal estate tax system only affects a small number of people. Still, it is important to understand the system. A well-versed estate planning lawyer can help you better understand the tax systems that may affect your estate.
What is the Current System in DC?
Residents of DC have to be concerned with two estate tax systems when they pass away. Those are the federal estate tax and the DC estate tax. The federal estate tax system is a system built on a person’s right to leave assets to others at death. The current law is effective for anyone that dies after January 1, 2018 but is set to expire if Congress does not take further action in the year 2025. Given that the estate tax system only affects estates worth millions of dollars, it only affects a very small portion of the country and of DC residents.
If an individual’s estate is over the exemption cut off, they must file a federal estate tax return. They have to pay a 40 percent tax rate for anything over the exemption amount. From the total taxable estate, there also may be deductions, which means there may not actually be any taxes due. An attorney can further explain when federal estate taxes may be applicable.
Benefits of the Federal Estate Tax System
Because the federal estate tax exemption is so high, it is indexed annually for inflation each year. For decedent’s dying after January 1, 2019, it is 11.4 million per person, which means the majority of DC residents need not be concerned with the federal estate tax system. However, DC has its own estate tax system that is for taxing estates up to 5 million, which is indexed for inflation.
There are some benefits built into the federal estate tax system that were a reiteration of the law from 2013. Those include the marital deduction and a concept called portability. The marital deduction allows for a married couple to pass on an unlimited amount of money either during their lifetime or after death as long as both spouses are U.S. citizens and U.S. residents. That means that at the death of the first spouse, if all of the assets are going to the surviving spouse, there is often a deduction for the entirety of the estate, and there are no estate taxes due until the death of the second spouse.
The second concept is a concept called portability. This allows the surviving spouse to use the deceased spouse’s unused exemption. With the concept of portability, the federal estate tax system is moving towards looking at married couples as one financial family unit. This means that when the first spouse dies, the surviving spouse files a timely estate tax return. Timely means that it is filed within nine months to preserve portability and the surviving spouse could use the unused exemption of the spouse who died. With that concept, estates now have a much larger amount of assets that can be passed on estate tax-free. However, DC does not currently follow the federal estate tax system with regard to portability. While it does recognize the marital exemption, it does not recognize portability. Therefore, in DC, each individual in a marriage only has their own exemption to use at their death. There are estate tax planning tools that can be built into documents to be able to utilize both exemptions, but that has to be done while somebody is alive and retains capacity.
Disadvantages to Individuals
Attorneys often tell their clients that an estate tax problem is a good problem to have because it means they have accumulated a relatively large amount of wealth during their lifetime. If they are subject to the estate tax, without any planning, they could have their assets taxed at a relatively high amount.
There are several ways that attorneys can plan around an estate tax problem to minimize estate tax exposure both for the federal estate tax system and the DC estate tax system. However, as stated above, that needs to be done during an individual’s lifetime while they retain capacity.
Another issue with estate federal subject to the estate tax is that there is a nine months’ firm deadline for when the estate taxes have to be paid. For many individuals in DC who may own the majority of their wealth in real estate, this be an issue because they may not have the liquidity to pay the taxes when they are due. However, issues such as liquidity and minimizing taxes can all be planned for in advance by working with a skilled attorney.
An Attorney Can Explain the DC Federal Estate Tax System
Attorneys can work with clients to begin to come up with a strategy to lower the exposure to the DC federal estate tax system. There are several strategies that attorneys can use to either move assets out of the individual’s estate, freeze assets at a lower cost basis and other things to try to minimize the exposure to estate taxes. After death, they can work with clients to make sure they are maximizing any deduction and any ability for a deduction. Also, the attorney can prepare the federal estate tax return to preserve the spouse’s unused exemption amount. Call today to learn more about how an attorney can help.