CLIENT ALERT—2025 Estate and Gift Tax Exemptions

We expect contrasting changes to federal and state estate and gift tax laws in 2025. With a new year and a Republican sweep of Congress and the White House, we expect the federal estate tax exemptions will stay the same or increase. But given the economic and political landscapes closer to home, we are preparing for the possibility of a reduced estate tax exemption in the State of Maryland.

What is the “estate tax exemption,” and where is it going in 2025?

The estate tax exemption refers to the dollar value of non-charitable bequests that can pass tax-free to someone other than your spouse upon your death, reduced by the cumulative amount of lifetime gifts you have reported to the IRS. For 2025, the federal estate tax exemption will increase from $13,610,000 to $13,990,000. This increase is tied to inflation.

A married individual has an unlimited exemption to a surviving spouse, and, under certain conditions, upon the surviving spouse’s death, he/she can combine his/her exemption with whatever unused exemption remains from his/her predeceased spouse (called “portability”).

It is critical to note that the federal estate tax exemption is set to undergo some massive changes in the next 12 months. Under the laws as presently written, the Tax Cuts and Jobs Act (the “TCJA”) will sunset effective December 31, 2025, after which, absent changes to the law before then, would essentially halve the federal estate tax exemption from $13,990,000 to approximately $7,500,000. Portability will remain available.

However, with a Republican sweep of the White House and Congress, we now predict that many provisions of the TCJA Act will be extended, including the federal estate tax exemption. Indeed, some prognosticators believe that, under a Republican-controlled White House and Congress, a federal estate tax may be abolished. Therefore, what seemed like a potentially urgent need for high-net-worth clients to use strategic gifting and transfers to trusts to minimize exposure to estate tax has abated.

What about state estate tax exemptions?

Maryland and DC residents should bear in mind that although the federal estate tax exemption is extraordinarily high, both Maryland and the District of Columbia assess state estate tax.

Maryland

Maryland’s estate tax exemption is $5,000,000. This means that non-charitable bequests to non-spouses above $5,000,000 will be taxed at the State level, even if they are exempt from federal tax. Like federal estate tax, under certain circumstances, a surviving spouse can “port” their deceased spouse’s unused exemption to increase their estate tax exemption. In Maryland, this is true up to $10,000,000.

Unlike the federal estate tax exemption, in Maryland, the “political football” nature of the estate tax exemption seems like it may be very much alive in the coming legislative session. Maryland is facing bleak economic conditions, the likes of which the state hasn’t seen for several decades. Maryland’s Senate President has recently gone on record that “everything is on the table” to address a significant budget deficit. During the 2024 legislative session, for the first time in many years, there was some appetite for lawmakers in the House of Delegates to reduce the estate tax exemption and/or remove portability. This was ultimately rejected by the State Senate and the Governor.

Will bleaker economic forecasts cause a stronger movement to reduce the estate tax exemption? If so, Maryland could fairly expect an exodus of high net-worth residents, as the state is surrounded by jurisdictions that do not assess state estate tax. Indeed, many of our firm’s lifelong Maryland resident clients with a taxable estate over $10 Million (but below the federal exemption) have already—or are strongly considering—a change of residency to Virginia, Delaware, Florida, or other jurisdictions which do not assess a state estate tax. Our clients love their crabs and state flag, but the prospect of paying hundreds of thousands (if not millions) in estate tax is not appealing.

The District of Columbia

The District of Columbia estate tax exclusion will increase from $4,710,800.00 to a yet-to-be-determined amount because it, too, is tied to the rate of inflation. However, the District of Columbia does not recognize the doctrine of “portability.” Therefore, a surviving spouse will only receive his/her exemption without having available their deceased spouse’s unused exemption. It may be important from an estate planning perspective to make sure that each spouse has a plan to utilize his/her full exemption upon his/her death.

What about gifts?

For 2025, the federal gift tax exemption will increase from $18,000.00 to $19,000.00. This means that individuals may gift up to $19,000.00 to as many recipients as he/she would like without the gift reducing their lifetime estate tax exemption (and without reporting the gift by filing a gift tax return with the IRS).

Many couples utilize their annual gift exemption amount to make yearly tax-free gifts to children and grandchildren (or to 529 plans or trusts for their benefit) without reducing their estate tax exemption.

Remember that only reported lifetime gifts reduce the estate tax exemption and a gift that is $18,000.00 or under in 2025 need not be reported.

What is the impact of lifetime gifts on your estate tax exemption?

Your federal estate tax exemption will be limited by the cumulative amount of annual lifetime gifts that you have made. However, the “gift exemption” is the amount you can gift annually (to someone besides a spouse or charity) without reporting the gift to the Internal Revenue Service.  Importantly, it is only these reported gifts that reduce your estate tax exclusion.

For example, if you have reported $100,000.00 in lifetime gifts to the IRS, your available federal estate tax exemption will be reduced by $100,000.00. However, if you have carefully plotted your cumulative gifting so that each annual gift comprising the cumulative $100,000.00 in lifetime gifts was under the annual exemption and you were not required to report the gift, your federal exemption would not be reduced by your lifetime gifting.

What are the takeaways?

• Given the Republican sweep of the House, Senate, and White House, we do not expect our high net worth clients will need to take significant estate planning action to reduce exposure to federal estate tax.
• Maryland residents should pay close attention to any move in the 2025 legislative session to reduce Maryland’s estate tax exemption and/or remove portability.
• Estate tax seems to be stable in the District of Columbia, but the District is still the most aggressive of DMV jurisdictions insofar as it has the lowest estate tax exemption and does not offer portability to spouses.

If you’d like to chat about your estate plan, please contact Jeremy Rachlin at (301) 656-1177, or jrachlin@bulmandunie.com or Elizabeth Farley at (301) 656-1177 or lfarley@bulmandunie.com to schedule a discussion.