Legislators in the DC metropolitan area (the District of Columbia, the State of Maryland, and the Commonwealth of Virginia—the DMV) monitoring legal developments in one of those three jurisdictions almost have to have familiarity with the laws of the other two. The proximity of each jurisdiction to the others allows clients to easily change residency from one to another and forces lawmakers to compare new laws and decide whether they need to improve their own laws. This article highlights three recent major developments to trust and estate laws in the DMV that should prompt advisors to determine whether and how to update their clients’ estate plans.
Estate Tax Exclusion Amounts and Portability
Estate taxes continue to affect the DMV, and Maryland residents also face an inheritance tax. Residents of DC and Maryland, which impose estate taxes, often move to Virginia or Florida, which do not. DC and Maryland scheduled increases in their estate tax exclusion amount to equal the federal estate tax exclusion amount. The exclusion was expected to be $5 million (indexed for inflation), per individual. But when the federal estate tax exclusion amount was increased to $11.18 million, legislators in both jurisdictions quickly changed course.
In 2018, DC decided to slow the increase of its estate tax exclusion amount. The DC exclusion amount went up to $5.6 million for 2018. In 2020, with annual inflationary adjustments, DC’s estate tax exclusion amount is $5,762,400, DC Notice 0087824 (Dec. 27, 2019), and the federal amount is $11.58 million.
Similarly, in 2018, Maryland decided not to double its exclusion. Instead, for 2019 and thereafter, it fixed its exclusion amount at $5 million without adjustments for inflation. Md. Code Ann., Tax-Gen. § 7-309(b)(3)(i).
As for portability: Effective January 1, 2019, Maryland allows for portability of the Maryland unused estate tax exclusion amount to the surviving spouse, even allowing a retroactive filing for portability as far back as 2011. Id. § 7-309(b)(9). To obtain this tax benefit, both federal and Maryland estate tax returns must be filed for the first spouse to die to transfer the unused exclusion amount to the surviving spouse. The District of Columbia, however, has not adopted portability.
Elective Share Laws
Another recent major change for residents of the DMV is Maryland’s elective share law, matching Virginia’s while remaining at variance with DC’s laws. The elective share is the amount that a spouse may take from a deceased spouse’s estate. The share is typically either one-third of the value of the estate (if the spouses have children) or one-half (if they do not).
The property subject to the elective share (the augmented estate) may be just the probate estate or may also include non-probate assets, such as assets in a revocable trust. Historically, Virginia’s statute included probate and non-probate assets in the augmented estate. Va. Code Ann. § 64.2-300. In Maryland, until this year, it was unclear whether the augmented estate included non-probate assets. Effective October 1, 2020, it is clear that the augmented estate in Maryland now includes both probate and non-probate assets. Interestingly, unlike Virginia law, the Maryland statute provides that the amount of the elective share does not depend on the length of the marriage. Both states’ elective share laws include many other intricacies that warrant in-depth examination to determine a spouse’s rights and responsibilities.
The District of Columbia still computes a surviving spouse’s elective share based on the probate estate, but the recent legal updates by Virginia and Maryland may lead DC to change its statute.
Protection of Tenants by the Entirety within Trusts
Similarly, DC may choose to follow Maryland’s and Virginia’s lead of allowing the creditor protection of tenants by the entirety (TBE) ownership to carry over into trusts. Each jurisdiction in the DMV allows for TBE ownership between spouses (and only between spouses). On one spouse’s death, property owned as TBE passes to the surviving spouse. Meanwhile, while both spouses are alive, the property they own as TBE and the funds from any sale of that property are protected from the creditors of an individual spouse.
Maryland (Md. Est. & Trusts Code § 14.5-511) and Virginia (Va. Code Ann. § 55.1-136) allow this spousal protection from creditors to carry over to a joint revocable trust created by both spouses or separate revocable trusts created by each spouse, although TBE ownership is theoretically severed once a transfer to a trust is made by either spouse. Though these laws are not new (Virginia passed its statute in 2006 and Maryland in 2010), increased use of revocable trusts for estate planning purposes and increased exposure to litigation has increased spouses’ wishes to protect their assets from creditors’ claims. Spouses in Maryland and Virginia thus often own property as TBE before transferring the property to their separate revocable trusts to obtain this creditor protection. The District of Columbia does not have a similar statute.
These relatively recent developments to the trust and estate planning of the DMV affect three major concerns for most clients: taxes, spousal inheritance rights, and ownership of property. For practitioners, the importance of these changes provides the opportunity to determine how estate plans may be improved and to discuss these improvements with clients.