(Saving Your Heirs Money with Proper Estate Planning)

As Estate Planning Attorneys we often get questions about Estate Taxes. The Estate Tax, often called ‘the Death Tax’, is a tax on the value of assets owned at the time of death. The Estate Tax is completely separate from the income tax and it is little understood by most people because it is usually not encountered until it is too late to do anything about it. Understanding the Estate Tax is an important element of Inheritance Planning. Here are five things to know about the Estate Tax.

1. There is both a federal and a Massachusetts Estate Tax. The Federal Estate Tax is imposed at the rate of 40% which seems quite harsh.  However, the Federal Estate Tax law gives each person a ‘freebie’ of $11.2 million.  This means that if the value of all of the assets you own is less than $11.2 million, your estate will not owe any federal Estate Tax.  Because of this very large exemption, the federal Estate Tax applies to very few estates unless they are high net worth estates.  Massachusetts has its own Estate Tax system and allows for an exemption (‘freebie’) of $1 million.

 

2. Life insurance IS taxable in your estate. This is both confusing and surprising to many people because they have always heard that life insurance is not taxable.  The non-taxability of life insurance refers to the income tax, not the Estate Tax.  For example, if my aunt had a $50,000 life insurance policy on which she named me as the beneficiary, the life insurance proceeds are not taxable income to me and I do not need to report that money on my income tax return.  However, those life insurance proceeds are part of my aunt’s taxable estate along with her other assets such as her home, bank accounts, and retirement assets.

 

3. A surviving spouse will not pay any federal or Massachusetts Estate Tax. Both the federal and Massachusetts Estate Tax systems include a 100% deduction for assets passing to a spouse.  This means that a surviving spouse need never pay Estate Tax if all of the assets belonging to the first spouse to die are left to the surviving spouse.  However, without planning there could be significant Estate Tax payable at the death of the surviving spouse.

 

4. Married couples who create Trusts can save their families about $100,000 in Massachusetts Estate Tax. Estate Tax planning in Massachusetts is all about making sure that each spouse takes full advantage of the $1 million ‘freebie’ which Massachusetts allows.  If a married couple has an estate valued at more than $1 million and they have a simple ‘I love you’ estate plan which passes all of the assets directly to the surviving spouse at the death of the first spouse then that spouse’s $1 million freebie is wasted.  Trusts can be used to ‘shelter’ the $1 million exemption while permitting the surviving spouse to have the use and benefit of the deceased spouse’s $1 million freebie.  The Estate Tax savings increases the larger the estate.  For example, a married couple with a $1.5 million estate can save $64,400 in Massachusetts Estate Taxes by creating Trusts, while a couple with a $2 million estate can save their family about $100,000.

 

5. Giving away assets can be a good Estate Tax planning strategy… but there’s a catch. There is a federal gift tax which many people believe restricts the amount that can be gifted each year to $15,000. While it is true that $15,000 is the amount of the so-called ‘annual exclusion’, there is a ‘lifetime exclusion’ which permits each person to give away $11.2 million before there is any federal gift tax payable.  Since more than 99% of the people in the U.S. do not have $11.2 million to give away, this is not really an issue.  The consequence of giving away more than the annual exclusion amount (an “excess gift”) is that: 1) the giver is required to file a gift tax return reporting the gift: and, 2) the excess gift is added to the value of the giver’s estate at death for purposes of determining the amount of the federal taxable estate.  Again, this is not an issue for most people since there is no federal Estate Tax payable until the taxable estate exceeds $11.2 million.  There is no Massachusetts gift tax.  That means a Massachusetts resident may make unlimited gifts to family and friends and there will never be any gift tax payable to the Commonwealth.  Further, excess gifts made during lifetime are not added back in to the giver’s taxable estate at death.  However, the amount of any excess gifts made during a lifetime must be added to the value of the assets owned by the giver at death for the purpose of determining if a Massachusetts Estate Tax return must be filed.  If the value of the assets owned at death, plus the amount of excess gifts made during lifetime exceeds $1 million, then a Massachusetts Estate Tax return must be filed. And, here’s the catch – in this scenario Massachusetts Estate Tax may be due even if the Massachusetts taxable estate is less than $1 million.

 

Although the amount a person may pass on free of any federal Estate Tax has increased significantly over the past few years such that very few people need to be concerned about planning for the federal Estate Tax, such is not the case for Massachusetts residents and residents of other states that have their own Estate Tax systems.  If you are wondering about how the Massachusetts Estate Tax may impact the amount you will leave to your beneficiaries and if there is anything you can do about it, then as you can see from the complexities with the Massachusetts Estate Tax detailed in this article, it is important to contact an experienced estate planning attorney based in Massachusetts to discuss your situation.

Attorney Suzanne R. Sayward is a partner with the Dedham firm of Samuel, Sayward & Baler LLC which focuses on advising its clients in the areas of estate planning, estate settlement and elder law matters. She is certified as an Elder Law Attorney by the National Elder Law Foundation, a private organization whose standards for certification are not regulated by the Commonwealth of Massachusetts.  This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit www.ssbllc.com or call 781/461-1020.

October, 2018

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