As we close the book on 2025 and look ahead to 2026, we are on substantially firmer territory than we were at this same time last year when it comes to the federal estate tax.
In our local jurisdictions (MD and DC), in December 2024, we noted, “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.” While 2025 has indeed brought to bear the reality of economic pain to the State of Maryland, given political realities, we do not anticipate substantial Maryland estate tax changes in 2026 (but we are monitoring). On the other hand, we are monitoring the shifting political landscape in the District of Columbia, mindful that the 2026 elections may shape tax policy.
Read on for much more detail:
What is the federal “estate tax exemption” and where is it going in 2026?
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.
With the passage of the One Big Beautiful Bill for 2026, the federal estate tax exemption will increase from $13,990,000.00 to $15,000,000.00. This amount will increase annually, 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”).
What about state estate tax exemptions in 2026?
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 state estate tax exemption is presently $5,000,000.00. This means that non-charitable bequests to non-spouses exceeding $5,000,000.00 will be subject to state estate tax, even if they are exempt from federal tax.
Like the 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 $10,000,000.00.
Maryland is facing a significant budget shortfall. Last legislative session, in the wake of a similar budget shortfall, Governor Wes Moore proposed reducing Maryland’s estate tax exemption from $5,000,000.00 to $2,000,000.00. While receiving an initially favorable response in the House of Delegates, the State Senate roundly rejected this measure, and ultimately the proposal was scrapped.
Numerous members of the Maryland legislature have noted that, with 2026 being an election year, the state will focus on spending cuts rather than raising taxes in an attempt to pass the statutorily-required balanced budget. Time will tell. When the legislative session begins in January, we will share any proposals that may bear upon Maryland’s estate tax in this space.
The District of Columbia
The District of Columbia estate tax exclusion will increase from $4,873,200.00 to a yet-to-be-determined amount because it, too, is tied to the rate of inflation.
Unlike the State of Maryland and the federal Internal Revenue Code, the District of Columbia does not recognize the doctrine of “portability”.
Therefore, a surviving spouse will only receive his/her exemption without having access to their deceased spouse’s unused exemption. Thus, each spouse effectively has a “use or lose” exemption upon the first death. It may be important from an estate planning perspective to consider the asset availability to a surviving spouse and to consider utilizing all or part of the exemption upon the first spouse’s death.
Moreover, with the recent announcement by Mayor Muriel Bowser that she would not seek reelection and several D.C. councilmembers intending to challenge Congresswoman Eleanor Holmes Norton, change is likely to come to the Wilson Building. This will likely shape up to be a battle between the more progressive wing and the more centrist wing of the Democratic Party. It is unlikely, however, that any tax implications from the shifting political landscape will arrive until late 2026, at the earliest.
What about gifts in 2026?
For 2025, the federal gift tax exemption will remain at $19,000.00. This means that individuals may gift up to $19,000.00 to as many recipients as they wish without 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 $19,000.00 or under in 2026 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.
Notably, neither Maryland nor the District of Columbia assesses a gift tax. Put another way, the state estate tax exemption is not reduced by the cumulative value of gifts you have made during your lifetime. As such, a common planning tool for clients who are exposed to state estate tax but are not exposed to federal estate tax is to consider lifetime gifting to reduce their taxable estate.
What are my takeaways for 2026?
- A significantly smaller percentage of our clients face exposure to federal estate tax, given the passage of the One Big Beautiful Bill. However, many of our clients who might not need to plan for federal estate tax do need to consider state estate tax planning.
- Even though Maryland legislators are giving preliminary signs that they will not again seek a reduction to the state estate tax, Maryland residents should pay close attention to any move in the 2026 legislative session to reduce Maryland’s estate tax exemption, change state estate tax rates, and/or remove portability.
- 2026 will bring both a mayoral and congressional race to the District of Columbia, which will likely cause a significant change to political leadership and the composition of the D.C. City Council. Again, any changes to D.C. tax policy would not likely arrive until late 2026, at the earliest.
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.
