Navigating DC Estate Taxes: A Comprehensive Guide

Find out how DC estate taxes are calculated, exemptions, and recent changes from Kevin C. Martin, Attorney at Law, PLLC. Call us.

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The DC Estate Tax Law: What You Need to Know

When planning for the future of your loved ones, making wills and trusts often comes to mind. Any experienced estate planning attorney would suggest wills and trusts so you can minimize estate taxes.

Understanding estate taxes in DC is crucial because you cannot transfer properties to your heirs without paying the estate tax. You want to avoid overpaying or underpaying the state because each has consequences. Most importantly, you want to ensure that the money you worked hard for goes to your loved ones, certainly not in the hands of the crooked and the corrupt.

This article will provide the information you need to navigate estate taxes in DC. We talk about how estate taxes are calculated, who can avail of tax exemption, and the recent legislation related to state death taxes and federal estate taxes.

Kevin C. Martin, Attorney at Law, PLLC, is here to help protect you from excessive estate tax by strategizing ways to protect your assets now that you’re living and after you’re gone.

Basics of DC Estate Taxes

What Are Estate Taxes?

Estate tax is the tax imposed on the right of a person to leave and distribute assets upon his death. Depending on the value of the assets and where they are located, the estate may be subject to state estate tax only or both state and federal estate tax.

You may also encounter two other types of taxes when a person dies. These are usually inheritance tax and income tax.

An inheritance tax is a tax on the right of a person to inherit property upon another person’s death. In DC, inheritance tax is no longer imposed. However, it may be an issue for those inheriting a property located in another state that imposes an inheritance tax like Maryland. Inheritance tax only applies once the beneficiaries receive assets.

Income tax is the tax that is generally imposed on a person’s income, whether the person is living or has died. In DC, when a person dies, tax on final income is imposed for income accrued from January 1 until the date the death occurs. The estate gets a new tax ID. Income accrued under that new tax ID is filed using Form 1041 or the fiduciary income tax return.

It can be challenging to navigate estate taxes, inheritance taxes, and final income taxes. An asset preservation attorney in DC can help you navigate estate taxes, inheritance taxes, and final income taxes.

How Estate Taxes Work

When you die, all your assets will be collated and inventoried by your executor (if you have a will) or personal representative (if you have no will). Your assets before tax are collectively called gross estate or taxable estate.

It includes all the property you own at the time of your death that has a taxable situs in DC, such as:

  • Real estate
  • Personal property, such as vehicles
  • Bank accounts, investment accounts, and retirement accounts
  • Stocks and bonds
  • Life insurance policies on your life
  • Business shares or interests
  • Property in a revocable living trust

Properties you co-own with someone, except when there is a right of survivorship, will also form part of your gross estate.

In the District of Columbia, if the taxable estate exceeds $4.528 million (and the deceased died in 2023), you will be subject to estate tax on that portion. The executor or personal representative will need to file an estate tax return. An estate with a gross value under $4.528 million is tax-exempt.

Strategic Tax Planning to Minimize Estate Taxes

Estate planning in Washington D.C. can significantly benefit from strategic tax planning to mitigate estate taxes. A key strategy is the creation of irrevocable trusts, which can shield assets from being subject to estate tax upon death. Additionally, gifting assets during one’s lifetime is an effective method to reduce estate size; the IRS allows an annual gift tax exclusion of $16,000 per recipient for 2023, a figure subject to periodic adjustments for inflation.

Another proactive measure includes investing in life insurance policies. The proceeds from these policies are often exempt from estate taxes when structured properly, such as being owned by an irrevocable life insurance trust. This not only provides liquidity to pay any arising estate taxes but also ensures that beneficiaries receive the benefits without a significant tax burden.

Implementing these strategies requires careful consideration and professional advice to align with individual circumstances and legal requirements, thereby optimizing tax benefits and ensuring financial security for heirs.

 

Exemptions and Deductions to the Gross Estate

Among the allowable deductions to the decedent’s gross estate are bequests to the surviving spouse and charitable, public, and similar bequests and gifts. Other items that can be deducted from the gross estate are funeral expenses and expenses incurred in administering properties subject to claims, debts of the decedent, and mortgages and liens, among others.

If your entire estate will pass to your surviving spouse or will be donated to a charitable, tax-exempt, or public organization under Section 501 (c) of the Internal Revenue Code, then your taxable estate will result in “0.”

An estate tax protection attorney can take advantage of the tax exemption rules to minimize your taxes. Some ways to do so is by gifting portions of your property or putting them in a trust.

Washington, D.C. Estate Tax Rate and Estate Tax Exemption

In DC, the estate tax rate is 11.2% to 16% for those who die on or after January 1, 2023. The estate tax is progressive, which means the higher the estate’s value, the higher the tax rate.

The estate tax rate in DC was previously 12% to 16% (for those who died from 2018 to 2020), although the tax exemption amount then was higher. In 2017, the tax rate was 8% to 16%, and the tax exemption amount was only $2 million.

Deadlines for Filing the D.C. Estate Tax Return

The estate tax return must be filed ten (10) months after the person’s death. However, an extension of six (6) months may be requested by filing a Form D-77. If the executor is outside the United States, he may be given an additional six (6) months extension.

If you fail to file the estate tax within the deadline (or extension), it will incur an interest of 10% per year, which is compounded daily.

You want to make sure that this duty is well embedded in your estate plan and that your executor or estate administrator understands this duty. Otherwise, you’d be paying avoidable and unnecessary taxes.

Recent Changes and Updates

Tax laws, including tax exemptions and rates, are amended to reflect the current circumstances and the government’s goals.

The District’s tax exemption increased from $4,254,800 in 2022 to $4,528,800 in 2023. It was a result of the annually adjusted cost of living adjustments.

If your taxable estate exceeds $12.92 million, you are also subject to federal estate tax (for those who died in 2023). The federal estate tax exemption gets adjusted for inflation annually.

Tax laws change constantly, but you can trust Kevin C. Martin, Attorney at Law, PLLC, to keep abreast of developments and be able to explain to you any changes that could affect your current estate plan. As your trusted estate tax protection attorneys, we will suggest amendments, if necessary, to reflect your goals and aspirations.

Taking Care of Your Estate Planning Needs With Kevin C. Martin, Attorney at Law, PLLC

Estate planning is about minimizing taxes and maximizing property values. If you would like to protect your wealth from excessive taxes, fees, and costs associated with distributing your estate after your death, contact Kevin C. Martin, Attorney at Law, PLLC.

Our team is committed to getting successful outcomes for our clients in Washington, DC. You may have seen other firms offering the same service, but our high standards, professionalism, and dedication to transparency distinguish us from our competitors.

With our knowledge of the updated laws, our past experiences, and your future goals for loved ones, we make recommendations based on what we know.

Contact our law firm today to schedule a consultation.