Estate Tax Planning
Minimize Your Massachusetts Estate Taxes with Fisher Law LLC
If you live in Massachusetts, you happen to reside in one of the few states that collect a state estate tax. The Massachusetts estate tax laws apply to nonresidents who own real estate or tangible personal property in the Commonwealth too. We help you navigate the complex estate tax rules by designing estate plans that minimize these taxes due on your death, as well as prepare your estate tax return as part of your estate administration after your death.
Massachusetts Estate Taxes
For Massachusetts residents, if your estate is worth more than $1 million, money must first be paid to the Commonwealth before any assets are passed on. The estate tax has a range of 0.8 percent to 16 percent and is levied on the entire value of the estate, not just the amount that exceeds the $1 million exemption level. Your estate consists of all of the assets you owned at your death, such as your primary residence, vacation home, life insurance, retirement accounts, bank accounts, brokerage accounts, and stocks. Home prices in Massachusetts are among the highest in the nation. As home values throughout the Greater Boston area continue to climb, the prospects of being subject to the state’s estate tax becomes more probable than not. It isn’t just a concern for the rich anymore.
Federal Estate Taxes
Historically speaking, the federal estate tax is an excise tax levied on the transfer of a person’s assets after death. In actuality, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax. There are three distinct aspects to federal wealth transfer taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal planning to avoid or minimize these transfer taxes is both a prudent and an important aspect of comprehensive estate planning.
The most recent iteration of the federal estate, gift, and generation-skipping transfer tax was signed into law by President Trump on December 22, 2017, as part of the Tax Cuts and Jobs Act of 2017 (TCJA 2017). There are a few things you ought to know about this law which took effect on January 1, 2018. Specifically, you should know the “numbers” governing transfers subject to estate, gift, and generation-skipping transfer taxation.
Federal Estate Tax Exemption
A $5 million exemption, as indexed for inflation, was signed into law on December 17, 2010, under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010). By 2017, the federal estate tax exemption had risen to $5.49 million per individual due to the inflation feature (and a nearly “automatic”* $10.98 million for married couples who follow very specific requirements at the death of the first spouse). With the stroke of his pen on December 22, 2017, President Donald Trump increased this exemption to $11,200,000 per individual (and $22,400,000 for married couples). The tax rate for amounts above what can be exempted remains at 40%.
*See “Portability” below for more on this.
Lifetime Gift Tax Exemption and Annual Gift Tax Exclusion
The TCJA 2017 continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. Your unified lifetime gift and estate tax exemption in 2017 was $5.49 million and is now the same as the federal estate tax exemption of $11,200,000 per individual (and $22,400,000 for married couples). Likewise, the top tax rate is 40%. Note: Gifts made within your annual gift exclusion amount do not count against your unified lifetime gift and estate tax exemption.
So, how much is this annual gift exclusion?
The annual gift exclusion has increased to $15,000 due to its inflation adjustment. This is up from $14,000 for 2017. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $30,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect “gift-splitting” for the tax year in which such gift was made.
Generation-Skipping Transfer Tax Exemption
So, what is this GSTT? Basically, it is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the transferor.
Properly done, this can transfer significant wealth between generations.
The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT) is unified with the federal estate tax exemption and the lifetime gift tax exemption at $11,200,000 per individual (and $22,400,000 for married couples, subject to certain specific requirements). As with estate and gift taxes, the top GSTT tax rate is 40%.
The American Taxpayer Relief Act of 2012 (ATRA 2012), made “permanent” a new concept in estate planning for married couples, ostensibly rendering traditional estate tax planning unnecessary. This concept, called “portability,” means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without use of “A-B Trust” planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 709 Estate Tax Return and complies with other requirements, the portability may be unavailable.
In addition, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use “portability” as the means to secure their respective estate tax exemptions. Furthermore, reliance on “portability” in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.
If you are concerned about Massachusetts estate taxes or how your current estate and gift planning may function in light of ATRA 2012, and thereafter, then we encourage you to schedule a consultation.